AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1998
SECURITIES ACT FILE NO. 333-60019
INVESTMENT COMPANY ACT FILE NO. 811-6669
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
[X] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
---------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
---------------
ARTHUR ZEIKEL
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
FRANK P. BRUNO, ESQ. MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NY 10048-0557 PLAINSBORO, NJ 08536
</TABLE>
---------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the Registration Statement becomes effective under
the Securities Act of 1933.
---------------
TITLE OF SECURITIES BEING REGISTERED: Common Stock, Par Value $.10 per share.
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROXY STATEMENT AND PROSPECTUS CAPTION
- ---------- ---------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of Prospectus ...... Registration Statement Cover Page; Proxy Statement and
Prospectus Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus .................................. Table of Contents
Item 3. Fee Table, Synopsis Information and Risk
Factors ..................................... Summary; Risk Factors and Special Considerations
Item 4. Information about the Transaction ........... Summary; The Reorganization -- Agreement and Plan of
Reorganization
Item 5. Information about the Registrant ............ Proxy Statement and Prospectus Cover Page; Summary;
Comparison of the Funds; Additional Information
Item 6. Information about the Company Being
Acquired .................................... Proxy Statement and Prospectus Cover Page; Summary;
Comparison of the Funds; Additional Information
Item 7. Voting Information .......................... Notice of Special Meeting of Stockholders; Introduction;
Summary; Comparison of the Funds; Information Concerning
the Special Meeting; Additional Information
Item 8. Interest of Certain Persons and Experts ..... Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters ................................ Not Applicable
PART B
Item 10. Cover Page .................................. Cover Page
Item 11. Table of Contents ........................... Table of Contents
Item 12. Additional Information about the
Registrant .................................. General Information
Item 13. Additional Information about the Company
Being Acquired .............................. General Information
Item 14. Financial Statements ........................ Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
---------------
TO BE HELD ON OCTOBER 13, 1998
TO THE STOCKHOLDERS OF
MERRILL LYNCH FUND FOR TOMORROW, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Merrill Lynch Fund For Tomorrow, Inc. ("Fund For Tomorrow") will
be held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders
Mill Road, Plainsboro, New Jersey on October 13, 1998 at 9:00 a.m., New York
time, for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Reorganization (the
"Agreement and Plan of Reorganization") providing for the acquisition of
substantially all of the assets of Fund For Tomorrow by Merrill Lynch
Fundamental Growth Fund, Inc. ("Fundamental Growth Fund"), and the assumption
of substantially all of the liabilities of Fund For Tomorrow by Fundamental
Growth Fund, in exchange solely for an equal aggregate value of newly-issued
shares of Fundamental Growth Fund. The Agreement and Plan of Reorganization
also provides for distribution of such shares of Fundamental Growth Fund to
stockholders of Fund For Tomorrow in liquidation of Fund For Tomorrow. A vote
in favor of this proposal will constitute a vote in favor of the liquidation
and dissolution of Fund For Tomorrow and the termination of its registration
under the Investment Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
The Board of Directors of Fund For Tomorrow has fixed the close of
business on August 25, 1998 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the stockholders of Fund For Tomorrow entitled to vote
at the Meeting will be available and open to the examination of any
stockholders of Fund For Tomorrow for any purpose germane to the Meeting during
ordinary business hours from and after September 29, 1998 at the offices of
Fund For Tomorrow, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders who do not
expect to attend the Meeting in person are requested to complete, date and sign
the enclosed form of proxy and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Board of
Directors of Fund For Tomorrow.
By Order of the Board of Directors,
SUSAN B. BAKER
SECRETARY
Plainsboro, New Jersey
Dated: September 8, 1998
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
---------------
SPECIAL MEETING OF STOCKHOLDERS OF
MERRILL LYNCH FUND FOR TOMORROW, INC.
---------------
OCTOBER 13, 1998
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Merrill Lynch
Fund For Tomorrow, Inc., a Maryland corporation ("Fund For Tomorrow"), for use
at the Special Meeting of Stockholders of Fund For Tomorrow (the "Meeting")
called to approve or disapprove the proposed reorganization whereby Merrill
Lynch Fundamental Growth Fund, Inc., a Maryland corporation ("Fundamental
Growth Fund"), will acquire substantially all of the assets, and will assume
substantially all of the liabilities, of Fund For Tomorrow, in exchange solely
for an equal aggregate value of newly-issued shares of Fundamental Growth Fund
(the "Reorganization"). Immediately upon the receipt by Fundamental Growth Fund
of the assets of Fund For Tomorrow and the assumption by Fundamental Growth
Fund of the liabilities of Fund For Tomorrow, Fund For Tomorrow will distribute
the shares of Fundamental Growth Fund received in the Reorganization to the
stockholders of Fund For Tomorrow. Thereafter, Fund For Tomorrow will terminate
its registration under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and will dissolve in accordance with the laws of the
State of Maryland.
Holders of shares of Fund For Tomorrow will receive that class of shares
of Fundamental Growth Fund having the same letter designation (I.E., Class A,
Class B, Class C or Class D) and the same distribution fees, account
maintenance fees, and sales charges (including contingent deferred sales
charges ("CDSCs")), if any (the "Corresponding Shares"), as the shares of Fund
For Tomorrow held by them immediately prior to the Reorganization. The
aggregate net asset value of the Corresponding Shares of Fundamental Growth
Fund to be issued to the stockholders of Fund For Tomorrow will equal the
aggregate net asset value of the outstanding shares of Fund For Tomorrow as set
forth in the Agreement and Plan of Reorganization. Fund For Tomorrow and
Fundamental Growth Fund sometimes are referred to herein collectively as the
"Funds" and individually as a "Fund," as the context requires. Fundamental
Growth Fund following the Reorganization is sometimes referred to herein as the
"Combined Fund."
This Proxy Statement and Prospectus serves as a prospectus of Fundamental
Growth Fund under the Securities Act of 1933, as amended (the "Securities
Act"), in connection with the issuance of shares of Fundamental Growth Fund to
Fund For Tomorrow pursuant to the terms of the Reorganization.
Both Fund For Tomorrow and Fundamental Growth Fund are open-end management
investment companies that seek to provide stockholders with long-term growth of
capital. Fundamental Growth Fund seeks to invest in a diversified portfolio of
equity securities, placing particular emphasis on companies that have exhibited
above-average growth rates in earnings. Fund For Tomorrow invests in a
quality-oriented portfolio of securities, primarily common stock. Using a
thematic approach of investing in long-term trends, management of Fund For
Tomorrow seeks to identify companies whose products and services are believed
to represent attractive investment opportunities. There can be no assurance
that, after the Reorganization, Fundamental Growth Fund will achieve its
investment objective.
The current prospectus relating to Fundamental Growth Fund, dated November
26, 1997 (the "Fundamental Growth Fund Prospectus"), accompanies this Proxy
Statement and Prospectus and is incorporated herein by reference. The Annual
Report to Shareholders of Fundamental Growth Fund for the year ended August 31,
1997 and the Semi-Annual Report to Shareholders of Fundamental Growth Fund for
the six months ended February 28, 1998 also accompany this Proxy Statement and
Prospectus. A statement of additional information relating to Fundamental
Growth Fund, dated November 26, 1997 (the "Fundamental Growth Fund Statement"),
a prospectus of Fund For Tomorrow dated April 30, 1998 (the "Fund For Tomorrow
Prospectus") and a statement of additional information relating to Fund For
Tomorrow, dated April 30, 1998 (the "Fund For Tomorrow Statement"), have been
filed with the Securities and Exchange Commission (the "Commission"). Such
documents may be obtained, without charge, by writing either Fund For Tomorrow
or Fundamental Growth Fund at the address above, or by calling 1-800-456-4587,
ext. 123.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
This Proxy Statement and Prospectus sets forth concisely the information
about Fundamental Growth Fund that stockholders of Fund For Tomorrow should
know before considering the Reorganization and should be retained for future
reference. Fund For Tomorrow has authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Proxy Statement
and Prospectus and the accompanying documents.
A statement of additional information relating to the Reorganization (the
"Statement of Additional Information"), including pro forma financial
statements of Fund For Tomorrow and Fundamental Growth Fund, is on file with
the Commission. It is available from Fundamental Growth Fund without charge,
upon request by calling the toll free telephone number set forth above or by
writing Fundamental Growth Fund at its principal executive offices. The
Statement of Additional Information, dated September 8, 1998 is incorporated by
reference into this Proxy Statement and Prospectus. The Commission maintains a
web site (http://www.sec.gov) that contains the Statement of Additional
Information, the Fundamental Growth Fund Prospectus, the Fund For Tomorrow
Prospectus, the Fundamental Growth Fund Statement, the Fund For Tomorrow
Statement, other material incorporated by reference and other information
regarding the Funds.
The address of the principal executive offices of both Fund For Tomorrow
and Fundamental Growth Fund is 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and the telephone number is (609) 282-2800.
---------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS SEPTEMBER 8, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION ............................................................................. 1
SUMMARY .................................................................................. 2
THE REORGANIZATION ...................................................................... 2
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF FUND FOR TOMORROW,
FUNDAMENTAL GROWTH FUND AND THE COMBINED FUND AS OF JUNE 30, 1998 (UNAUDITED) ......... 3
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF FUND FOR TOMORROW,
FUNDAMENTAL GROWTH FUND AND THE COMBINED FUND AS OF JUNE 30, 1998 (UNAUDITED) ......... 4
RISK FACTORS AND SPECIAL CONSIDERATIONS .................................................. 10
COMPARISON OF THE FUNDS .................................................................. 12
FINANCIAL HIGHLIGHTS .................................................................... 12
INVESTMENT OBJECTIVES AND POLICIES ...................................................... 17
OTHER INVESTMENT POLICIES ............................................................... 18
INVESTMENT RESTRICTIONS ................................................................. 18
MANAGEMENT .............................................................................. 18
PURCHASE OF SHARES ...................................................................... 19
REDEMPTION OF SHARES .................................................................... 19
PERFORMANCE ............................................................................. 20
SHAREHOLDER RIGHTS ...................................................................... 20
DIVIDENDS AND DISTRIBUTIONS ............................................................. 21
TAX INFORMATION ......................................................................... 21
PORTFOLIO TRANSACTIONS .................................................................. 21
PORTFOLIO TURNOVER ...................................................................... 21
ADDITIONAL INFORMATION .................................................................. 21
THE REORGANIZATION ....................................................................... 22
GENERAL ................................................................................. 22
PROCEDURE ............................................................................... 23
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION ....................................... 23
POTENTIAL BENEFITS TO STOCKHOLDERS AS A RESULT OF THE REORGANIZATION .................... 24
TAX CONSEQUENCES OF THE REORGANIZATION .................................................. 24
CAPITALIZATION .......................................................................... 25
INFORMATION CONCERNING THE SPECIAL MEETING ............................................... 26
DATE, TIME AND PLACE OF MEETING ......................................................... 26
SOLICITATION, REVOCATION AND USE OF PROXIES ............................................. 26
RECORD DATE AND OUTSTANDING SHARES ...................................................... 26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FUND FOR TOMORROW AND
FUNDAMENTAL GROWTH FUND ................................................................. 27
VOTING RIGHTS AND REQUIRED VOTE ......................................................... 27
ADDITIONAL INFORMATION ................................................................... 27
LEGAL PROCEEDINGS ........................................................................ 28
LEGAL OPINIONS ........................................................................... 28
EXPERTS .................................................................................. 28
STOCKHOLDER PROPOSALS .................................................................... 28
EXHIBIT I ................................................................................ I-1
</TABLE>
i
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Fund For
Tomorrow for use at the Meeting to be held at the offices of Merrill Lynch
Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey
on October 13, 1998, at 9:00 a.m., New York time. The mailing address for Fund
For Tomorrow is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
approximate mailing date of this Proxy Statement and Prospectus is September
11, 1998.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of Fund For Tomorrow at the address indicated above or by voting
in person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions marked
thereon or otherwise as provided therein. Unless instructions to the contrary
are marked, properly executed proxies will be voted "FOR" the proposal to
approve the Agreement and Plan of Reorganization between Fund For Tomorrow and
Fundamental Growth Fund (the "Agreement and Plan of Reorganization").
Approval of the Agreement and Plan of Reorganization will require the
affirmative vote of Fund For Tomorrow stockholders representing a majority of
the total number of votes entitled to be cast thereon. Stockholders will vote
as a single class on the proposal to approve the Agreement and Plan of
Reorganization. See "Information Concerning the Special Meeting."
The Board of Directors of Fund For Tomorrow knows of no business other
than that discussed above that will be presented for consideration at the
Meeting. If any other matter is properly presented, it is the intention of the
persons named in the enclosed proxy to vote in accordance with their best
judgment.
1
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND PROSPECTUS (INCLUDING DOCUMENTS INCORPORATED BY
REFERENCE) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE COMPLETE
INFORMATION CONTAINED IN THIS PROXY STATEMENT AND PROSPECTUS AND IN THE
AGREEMENT AND PLAN OF REORGANIZATION, ATTACHED HERETO AS EXHIBIT I.
IN THIS PROXY STATEMENT AND PROSPECTUS, THE TERM "REORGANIZATION" REFERS
COLLECTIVELY TO (I) THE ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS AND THE
ASSUMPTION OF SUBSTANTIALLY ALL OF THE LIABILITIES OF FUND FOR TOMORROW BY
FUNDAMENTAL GROWTH FUND IN EXCHANGE FOR THE CORRESPONDING SHARES AND THE
SUBSEQUENT DISTRIBUTION OF CORRESPONDING SHARES OF FUNDAMENTAL GROWTH FUND TO
THE STOCKHOLDERS OF FUND FOR TOMORROW; AND (II) THE SUBSEQUENT DEREGISTRATION
AND DISSOLUTION OF FUND FOR TOMORROW.
THE REORGANIZATION
At a meeting of the Board of Directors of Fund For Tomorrow held on July
27, 1998, the Board of Directors of Fund For Tomorrow approved a proposal that
Fundamental Growth Fund acquire substantially all of the assets, and assume
substantially all of the liabilities, of Fund For Tomorrow in exchange solely
for shares of Fundamental Growth Fund to be distributed to the stockholders of
Fund For Tomorrow.
Based upon their evaluation of all relevant information, the Directors of
Fund For Tomorrow have determined that the Reorganization will potentially
benefit the stockholders of Fund For Tomorrow. Specifically, after the
Reorganization, Fund For Tomorrow stockholders will remain invested in a
diversified open-end fund, which, like Fund For Tomorrow, seeks long-term
growth of capital. Moreover, since the net assets of Fundamental Growth Fund as
of June 30, 1998 were $1,061,566,810 and will increase by approximately
$311,611,903 (the net asset value of Fund For Tomorrow as of June 30, 1998) as
a result of the Reorganization, Fund For Tomorrow stockholders are likely to
experience certain additional benefits, including without limitation, lower
expenses per share and potential economies of scale. See "Summary -- Pro Forma
Fee Tables" and "The Reorganization -- Potential Benefits to Stockholders as a
Result of the Reorganization."
The Board of Directors of Fund For Tomorrow, including all of the
Directors who are not "interested persons," as defined in the Investment
Company Act, has determined that the Reorganization is in the best interests of
Fund For Tomorrow and that the interests of existing Fund For Tomorrow
stockholders will not be diluted as a result of effecting the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approvals, provided
that Fund For Tomorrow and Fundamental Growth Fund have obtained prior to that
time a favorable private letter ruling from the Internal Revenue Service (the
"IRS") concerning the tax consequences of the Reorganization as set forth in
the Agreement and Plan of Reorganization. The Agreement and Plan of
Reorganization may be terminated, and the Reorganization abandoned, whether
before or after approval by the stockholders of Fund For Tomorrow, at any time
prior to the Exchange Date (as defined below), (i) by mutual consent of the
Board of Directors of Fund For Tomorrow and the Board of Directors of
Fundamental Growth Fund; (ii) by the Board of Directors of Fund For Tomorrow if
any condition to Fund For Tomorrow's obligations has not been fulfilled or
waived by such Board; or (iii) by the Board of Directors of Fundamental Growth
Fund if any condition to Fundamental Growth Fund's obligations has not been
fulfilled or waived by such Board.
2
<PAGE>
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF FUND FOR TOMORROW,
FUNDAMENTAL GROWTH FUND
AND THE COMBINED FUND AS OF JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A SHARES (a)
-----------------------------------------------
ACTUAL
-------------------------------
FUND FOR FUNDAMENTAL PRO FORMA
TOMORROW GROWTH FUND COMBINED
--------------- --------------- ---------------
<S> <C> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a percentage of
offering price) ....................... 5.25%(c) 5.25%(c) 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments ......................... None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) ................... None(d) None(d) None(d)
Exchange Fee ........................... None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF TOTAL NET
ASSETS):
Investment Advisory Fees(f) ............ 0.65% 0.65% 0.65%
12b-1-Fees(g):
Account Maintenance Fees .............. None None None
Distribution Fees ..................... None None None
Other Expenses:
Stockholder Servicing Costs(h) ........ 0.15% 0.11% 0.11%
Other ................................. 0.13% 0.07% 0.06%
---- ---- ----
Total Other Expenses ................. 0.28% 0.18% 0.17%
---- ---- ----
TOTAL FUND OPERATING EXPENSES ........... 0.93% 0.83% 0.82%
==== ==== ====
<CAPTION>
CLASS B SHARES (b)
-------------------------------------------------------------------
ACTUAL
-------------------------------------------------------------------
FUNDAMENTAL
FUND FOR TOMORROW GROWTH FUND
--------------------------------- ---------------------------------
<S> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a percentage of
offering price) .................... None None
Sales Charge Imposed on Dividend
Reinvestments ...................... None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) ................ 4.0% during the first year, 4.0% during the first year,
decreasing 1.0% annually decreasing 1.0% annually
thereafter to 0.0% after the thereafter to 0.0% after the
fourth year(e) fourth year(e)
Exchange Fee ........................ None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF TOTAL NET
ASSETS):
Investment Advisory Fees(f) ......... 0.65% 0.65%
12b-1-Fees(g):
Account Maintenance Fees ........... 0.25% 0.25%
Distribution Fees .................. 0.75% 0.75%
(CLASS B SHARES CONVERT TO (CLASS B SHARES CONVERT TO
CLASS D SHARES AUTOMATICALLY CLASS D SHARES AUTOMATICALLY
AFTER APPROXIMATELY EIGHT YEARS AFTER APPROXIMATELY EIGHT YEARS
AND CEASE BEING SUBJECT TO AND CEASE BEING SUBJECT TO
DISTRIBUTION FEES) DISTRIBUTION FEES)
Other Expenses:
Stockholder Servicing Costs(h) ..... 0.15% 0.11%
Other .............................. 0.13% 0.07%
---- ----
Total Other Expenses .............. 0.28% 0.18%
---- ----
TOTAL FUND OPERATING EXPENSES ........ 1.93% 1.83%
==== ====
<CAPTION>
CLASS B SHARES (b)
----------------------------------
PRO FORMA
COMBINED
----------------------------------
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a percentage of
offering price) .................... None
Sales Charge Imposed on Dividend
Reinvestments ...................... None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) ................ 4.0% during the first year,
decreasing 1.0% annually
thereafter to 0.0% after the
fourth year(e)
Exchange Fee ........................ None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF TOTAL NET
ASSETS):
Investment Advisory Fees(f) ......... 0.65%
12b-1-Fees(g):
Account Maintenance Fees ........... 0.25%
Distribution Fees .................. 0.75%
(CLASS B SHARES CONVERT TO
CLASS D SHARES AUTOMATICALLY
AFTER APPROXIMATELY EIGHT YEARS
AND CEASE BEING SUBJECT TO
DISTRIBUTION FEES)
Other Expenses:
Stockholder Servicing Costs(h) ..... 0.11%
Other .............................. 0.06%
----
Total Other Expenses .............. 0.17%
----
TOTAL FUND OPERATING EXPENSES ........ 1.82%
====
</TABLE>
- -------
(a) Class A shares are sold to a limited group of investors including existing
Class A stockholders, certain retirement plans and participants in certain
fee-based programs. See "Comparison of the Funds -- Purchase of Shares."
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Comparison of the Funds -- Purchase of
Shares."
(c) Reduced for Class A purchases of $25,000 and over, and waived for purchases
by certain retirement plans and in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Comparison of the Funds -- Purchase of Shares."
(d) Class A shares are not subject to a CDSC, except that certain purchases of
$1,000,000 or more that are not subject to an initial sales charge may
instead be subject to a CDSC of 1.0% of amounts redeemed within the first
year of purchase. Such CDSC may be waived in connection with certain
fee-based programs.
(e) The CDSC may be modified in connection with certain fee-based programs.
(f) See "Comparison of the Funds -- Management."
(g) See "Comparison of the Funds -- Purchase of Shares."
(h) See "Comparison of the Funds -- Additional Information -- Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent."
3
<PAGE>
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF FUND FOR TOMORROW,
FUNDAMENTAL GROWTH FUND
AND THE COMBINED FUND AS OF JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------------------------
ACTUAL
---------------------------------
FUND FOR FUNDAMENTAL PRO FORMA
TOMORROW GROWTH FUND COMBINED
---------------- ---------------- ----------------
<S> <C> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ................................................... None None None
Sales Charge Imposed on Dividend Reinvestments ..................... None None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) .......................... 1.0% for one 1.0% for one 1.0% for one
year(b) year(b) year(b)
Exchange Fee ....................................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF TOTAL NET
ASSETS):
Investment Advisory Fees(d) ........................................ 0.65% 0.65% 0.65%
12b-1-Fees(e):
Account Maintenance Fees .......................................... 0.25% 0.25% 0.25%
Distribution Fees ................................................. 0.75% 0.75% 0.75%
Other Expenses:
Stockholder Servicing Costs(f) .................................... 0.15% 0.11% 0.11%
Other ............................................................. 0.13% 0.07% 0.06%
---- ---- ----
Total Other Expenses ............................................. 0.28% 0.18% 0.17%
---- ---- ----
TOTAL FUND OPERATING EXPENSES ...................................... 1.93% 1.83% 1.82%
==== ==== ====
<CAPTION>
CLASS D SHARES
-----------------------------------------------
ACTUAL
-------------------------------
FUND FOR FUNDAMENTAL PRO FORMA
TOMORROW GROWTH FUND COMBINED
--------------- --------------- ---------------
<S> <C> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ................................................... 5.25%(a) 5.25%(a) 5.25%(a)
Sales Charge Imposed on Dividend Reinvestments ..................... None None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) .......................... None(c) None(c) None(c)
Exchange Fee ....................................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF TOTAL NET
ASSETS):
Investment Advisory Fees(d) ........................................ 0.65% 0.65% 0.65%
12b-1-Fees(e):
Account Maintenance Fees .......................................... 0.25% 0.25% 0.25%
Distribution Fees ................................................. None None None
Other Expenses:
Stockholder Servicing Costs(f) .................................... 0.15% 0.11% 0.11%
Other ............................................................. 0.13% 0.07% 0.06%
------ ------ ------
Total Other Expenses ............................................. 0.28% 0.18% 0.17%
------ ------ ------
TOTAL FUND OPERATING EXPENSES ...................................... 1.18% 1.08% 1.07%
====== ====== ======
</TABLE>
- -------
(a) Reduced for Class D purchases of $25,000 and over. Like Class A purchases,
certain Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See "Comparison of the Funds -- Purchase of Shares."
(b) The CDSC may be waived in connection with certain fee-based programs.
(c) Like Class A shares, Class D shares are not subject to a CDSC, except that
purchases of $1,000,000 or more that are not subject to an initial sales
charge may instead be subject to a CDSC of 1.0% of amounts redeemed within
the first year after purchase. Such CDSC may be waived in connection with
certain fee-based programs.
(d) See "Comparison of the Funds -- Management."
(e) See "Comparison of the Funds -- Purchase of Shares."
(f) See "Comparison of the Funds -- Additional Information -- Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent."
4
<PAGE>
EXAMPLES:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID ON CLASS A AND
CLASS B SHARES FOR THE PERIOD OF:
---------------------------------------
CLASS A SHARES
---------------------------------------
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 sales load of $52.50 (Class A shares only) and assuming (1) the Total
Fund Operating Expenses set forth on page 3 for the relevant Fund, (2) a 5%
annual return throughout the periods and (3) redemption at the end of the period
(including any applicable CDSC for Class B shares):
Fund For Tomorrow .............................................................. $61 $81 $101 $161
Fundamental Growth Fund ........................................................ 61 78 96 150
Combined Fund+ ................................................................. 60 77 96 149
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Fund For Tomorrow .............................................................. $61 $81 $101 $161
Fundamental Growth Fund ........................................................ 61 78 96 150
Combined Fund+ ................................................................. 60 77 96 149
<CAPTION>
CUMULATIVE EXPENSES PAID ON CLASS A AND
CLASS B
SHARES FOR THE PERIOD OF:
--------------------------------------
CLASS B SHARES
--------------------------------------
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 sales load of $52.50 (Class A shares only) and assuming (1) the Total
Fund Operating Expenses set forth on page 3 for the relevant Fund, (2) a 5%
annual return throughout the periods and (3) redemption at the end of the period
(including any applicable CDSC for Class B shares):
Fund For Tomorrow .............................................................. $60 $81 $104 $ 206*
Fundamental Growth Fund ........................................................ 59 78 99 195*
Combined Fund+ ................................................................. 58 77 99 194*
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Fund For Tomorrow .............................................................. $20 $61 $104 $ 206*
Fundamental Growth Fund ........................................................ 19 58 99 195*
Combined Fund+ ................................................................. 18 57 99 194*
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID ON CLASS C AND
CLASS D SHARES FOR THE PERIOD OF:
---------------------------------------
CLASS C SHARES
---------------------------------------
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 sales load of $52.50 (Class D shares only) and assuming (1) the Total
Fund Operating Expenses set forth on page 4 for the relevant Fund, (2) a 5%
annual return throughout the periods and (3) redemption at the end of the period
(including any applicable CDSC for Class C shares):
Fund For Tomorrow .............................................................. $30 $61 $104 $225
Fundamental Growth Fund ........................................................ 29 58 99 215
Combined Fund+ ................................................................. 28 57 99 214
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Fund For Tomorrow .............................................................. $20 $61 $104 $225
Fundamental Growth Fund ........................................................ 19 58 99 215
Combined Fund+ ................................................................. 18 57 99 214
<CAPTION>
CUMULATIVE EXPENSES PAID ON CLASS C AND
CLASS D
SHARES FOR THE PERIOD OF:
--------------------------------------
CLASS D SHARES
--------------------------------------
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 sales load of $52.50 (Class D shares only) and assuming (1) the Total
Fund Operating Expenses set forth on page 4 for the relevant Fund, (2) a 5%
annual return throughout the periods and (3) redemption at the end of the period
(including any applicable CDSC for Class C shares):
Fund For Tomorrow .............................................................. $64 $88 $114 $188
Fundamental Growth Fund ........................................................ 63 85 109 177
Combined Fund+ ................................................................. 63 85 108 176
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Fund For Tomorrow .............................................................. $64 $88 $114 $188
Fundamental Growth Fund ........................................................ 63 85 109 177
Combined Fund+ ................................................................. 63 85 108 176
</TABLE>
- -------
* Assumes conversion of Class B shares to Class D shares approximately eight
years after initial purchase.
+ Assuming the Reorganization had taken place on June 30, 1998.
5
<PAGE>
The foregoing Fee Tables are intended to assist investors in understanding
the costs and expenses that a Fund For Tomorrow or Fundamental Growth Fund
stockholder bears directly or indirectly as compared to the costs and expenses
that would be borne by such investors on a pro forma basis taking into account
the Reorganization. The Examples set forth above assume reinvestment of all
dividends and distributions and utilize a 5% annual rate of return as mandated
by Commission regulations. THE EXAMPLES 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 EXAMPLES. See "Summary," "The Reorganization -- Potential
Benefits to Stockholders as a Result of the Reorganization," "Comparison of the
Funds -- Management," " -- Purchase of Shares" and " -- Redemption of Shares."
BUSINESS OF FUND FOR TOMORROW... Fund For Tomorrow was incorporated under
the laws of the State of Maryland on October
5, 1983 and commenced operations on March 5,
1984. Fund For Tomorrow is a diversified,
open-end management investment company.
As of June 30, 1998, Fund For Tomorrow had
net assets of approximately $311,611,903.
BUSINESS OF FUNDAMENTAL
GROWTH FUND..................... Fundamental Growth Fund was incorporated
under the laws of the State of Maryland on
April 30, 1992, and commenced operations on
December 24, 1992. Fundamental Growth Fund is
a diversified, open-end management
investment company.
As of June 30, 1998, Fundamental Growth Fund
had net assets of approximately
$1,061,566,810.
COMPARISON OF THE FUNDS......... INVESTMENT OBJECTIVES. Both Fund For
Tomorrow and Fundamental Growth Fund seek to
provide stockholders with long-term growth of
capital by investing primarily in equity
securities.
INVESTMENT POLICIES. Fund For Tomorrow seeks
to invest in a quality-oriented portfolio of
securities, primarily common stock. In
pursuing this objective, Fund For Tomorrow
uses a thematic approach of investing in
long-term trends, seeking to identify
important investment concepts of the future
and reviewing existing concepts to confirm
their validity in meeting the Fund's
objective. As part of this thematic
approach, Fund For Tomorrow seeks to
identify companies whose products and
services are believed to represent
attractive investment opportunities. It is
anticipated that Fund For Tomorrow will
invest primarily in common stocks of such
companies. However, when Fund For Tomorrow
believes it is advisable to do so, it may
invest in other securities, including, but
not limited to, convertible securities,
preferred stocks and bonds. Fund For
Tomorrow does not presently intend to
purchase bonds rated lower than BBB by
Standard & Poor's ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's"). Fund
For Tomorrow may invest in securities issued
by large, medium and small capitalized
companies.
Fundamental Growth Fund seeks to invest in a
diversified portfolio of equity securities
placing particular emphasis on companies
that have exhibited above-average growth
rates in earnings, resulting from a variety
of factors including, but not limited to,
above-average growth rates in sales, profit
margin improvement, proprietary or niche
products or services, leading market shares,
and underlying strong industry growth.
Fundamental Growth Fund will also emphasize
companies having medium to large stock
market capitalizations ($500 million or
more). Fundamental Growth Fund invests
primarily in common stock, and to a lesser
extent, securities convertible into common
stock and rights to subscribe for common
stock.
6
<PAGE>
Fund For Tomorrow may invest up to 25% of
its assets in the securities of foreign
issuers, including issuers in foreign
countries with smaller capital markets. Fund
For Tomorrow has reserved the right to
invest, temporarily, all or a portion of its
assets in high quality money market
securities (such as U.S. Treasury bills,
bank certificates of deposit, commercial
paper and repurchase agreements) for
purposes of enhancing liquidity and avoiding
the effects of declining stock prices when
it seems advisable to do so in light of
prevailing market or economic conditions.
The proportion of Fund For Tomorrow's assets
that are invested in money market securities
will vary from time to time.
Fundamental Growth Fund may invest up to 10%
of its total assets in equity securities of
foreign issuers (purchases of American
Depositary Receipts ("ADRs"), however, are
not subject to this restriction).
Fundamental Growth Fund may invest in
securities of foreign issuers in the form of
ADRs, European Depositary Receipts ("EDRs")
or other securities convertible into
securities of foreign issuers. Fundamental
Growth Fund maintains at least 65% of its
total assets invested in equity securities
except during defensive periods. Fundamental
Growth Fund may, as a defensive measure and
to provide for redemptions, hold other types
of securities, including non-convertible
preferred stocks and debt securities rated
investment grade by a nationally recognized
statistical rating organization. Fundamental
Growth Fund may invest in government and
money market securities, including
repurchase agreements, or cash, in such
proportions as, in the opinion of
management, prevailing market or economic
conditions warrant.
Fundamental Growth Fund may use certain
techniques to hedge its portfolio or enhance
its return that Fund For Tomorrow does not
use. Specifically, Fundamental Growth Fund
may purchase put and call options on
securities and securities indices, write put
options on securities and securities
indices, engage in transactions in financial
futures contracts and related options, and
purchase securities on a when issued or
delayed delivery basis. Both Funds may write
covered call options; however, Fund For
Tomorrow may not write covered call options
on underlying securities having a value
exceeding 15% of the value of its total
assets. Fundamental Growth Fund is not
subject to a similar restriction.
Fundamental Growth Fund and Fund For
Tomorrow are each subject to a fundamental
investment restriction, which provides that
the Fund may borrow from banks in amounts up
to 33 1/3% of its total assets taken at
market value and may borrow an additional 5%
of its total assets for temporary purposes.
As a non-fundamental restriction,
Fundamental Growth Fund may not borrow
amounts in excess of 20% of its assets, and
then only from banks as a temporary measure
for extraordinary or emergency purposes.
Additionally, Fundamental Growth Fund will
not purchase securities while borrowings are
outstanding. As a non-fundamental
restriction Fund For Tomorrow may not borrow
amounts in excess of 5% of its assets.
Additionally, neither Fund may pledge any of
its respective assets other than to secure
permitted borrowings. Fund For Tomorrow's
ability to pledge its assets is further
limited and it may not pledge securities
having a value of more than 10% of the
Fund's assets to secure permitted
borrowings.
ADVISORY FEES. The investment adviser for
both Fund For Tomorrow and Fundamental
Growth Fund is MLAM. MLAM is responsible for
7
<PAGE>
the management of each Fund's investment
portfolio and for providing administrative
services to each Fund.
Lawrence R. Fuller serves as portfolio
manager for each Fund. Mr. Fuller has served
as Portfolio Manager of Fundamental Growth
Fund since its commencement of operations
and of Fund For Tomorrow since June 1998.
Mr. Fuller was appointed First Vice
President of MLAM in 1997; prior to that he
was a Vice President of MLAM or its
predecessors since 1992.
Pursuant to a separate management agreement
between each Fund and MLAM, Fundamental
Growth Fund pays MLAM a monthly fee at the
annual rate of 0.65% of the average daily
net assets of the Fund; Fund For Tomorrow
pays MLAM a monthly fee based upon the
average daily value of the Fund's net assets
at the following annual rates: 0.65% of the
average daily net assets not exceeding $750
million; 0.60% of the average daily net
assets exceeding $750 million but not
exceeding $1 billion; and 0.55% of the
average daily net assets exceeding $1
billion. If these asset levels were met,
Fund For Tomorrow would pay advisory fees at
a lower rate than Fundamental Growth Fund.
Unlike Fund For Tomorrow's advisory fee
schedule, Fundamental Growth Fund's advisory
fee schedule does not have any breakpoints.
However, because Fund For Tomorrow's assets,
as of June 30, 1998, were approximately
$311.6 million, the first breakpoint was not
reached and both Funds had the same
effective annual fee rate of 0.65% of
average daily net assets. Assuming the total
net assets after the Reorganization were
approximately $1.4 billion, the effective
fee rate applicable to the Combined Fund
would be 0.65%. See "Summary -- Pro Forma
Fee Tables" and "Comparison of the Funds --
Management."
MLAM has retained Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K.") as
sub-adviser to each of the Funds. Pursuant
to a separate sub-advisory agreement between
MLAM and MLAM U.K. with respect to each
Fund, MLAM pays MLAM U.K. a fee for
providing investment advisory services to
MLAM with respect to each Fund, in an amount
to be determined from time to time by MLAM
and MLAM U.K. but in no event in excess of
the amount MLAM actually receives for
providing services to each Fund pursuant to
each management agreement.
CLASS STRUCTURE. Each Fund offers four
classes of shares under the Merrill Lynch
Select Pricing(SM) System. The Class A, Class
B, Class C and Class D shares issued by
Fundamental Growth Fund are identical in all
respects to the Class A, Class B, Class C
and Class D shares issued by Fund For
Tomorrow, except that they represent
ownership interests in a different
investment portfolio. See "Comparison of the
Funds -- Purchase of Shares."
OVERALL EXPENSE RATIO. The overall operating
expense ratio for Class A shares as of June
30, 1998 was 0.93% for Fund For Tomorrow and
0.83% for Fundamental Growth Fund. If the
Reorganization had taken place on that date,
the overall operating expense ratio for
Class A shares of the Combined Fund on a pro
forma basis would have been 0.82%.
The foregoing expense ratios are for Class A
shares. Such ratios would differ for Class
B, Class C and Class D shares as a result of
class
8
<PAGE>
specific distribution and account
maintenance expenditures. See "Summary --
Pro Forma Fee Tables."
PURCHASE OF SHARES. Shares of Fundamental
Growth Fund are offered continuously for
sale to the public in substantially the same
manner as shares of Fund For Tomorrow. See
"Comparison of the Funds -- Purchase of
Shares."
REDEMPTION OF SHARES. The redemption
procedures for shares of Fundamental Growth
Fund are substantially the same as the
redemption procedures for shares of Fund For
Tomorrow. For purposes of computing any CDSC
that may be payable upon disposition of
Corresponding Shares of Fundamental Growth
Fund acquired by Fund For Tomorrow
stockholders in the Reorganization, the
holding period of Fund For Tomorrow shares
outstanding on the date the Reorganization
takes place will be "tacked" onto the
holding period of the Corresponding Shares
of Fundamental Growth Fund acquired in the
Reorganization. See "Comparison of the Funds
-- Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS. Fund For
Tomorrow's policies with respect to
dividends and distributions are
substantially the same as those of
Fundamental Growth Fund. See "Comparison of
the Funds -- Dividends and Distributions."
NET ASSET VALUE. Both Fund For Tomorrow and
Fundamental Growth Fund determine net asset
value of each class of shares once daily 15
minutes after the close of business on the
New York Stock Exchange (the "NYSE")
(generally, 4:00 p.m. New York time), on
each day during which the NYSE is open for
trading. Both Funds compute net asset value
per share in the same manner. See
"Comparison of the Funds -- Additional
Information -- Net Asset Value."
VOTING RIGHTS. The corresponding voting
rights of the holders of shares of common
stock of each Fund are substantially the
same. See "The Reorganization -- Comparison
of the Funds -- Capital Stock."
OTHER SIGNIFICANT CONSIDERATIONS.
Stockholder services, including exchange
privileges, available to Fund For Tomorrow
and Fundamental Growth Fund stockholders are
substantially the same. See "Comparison of
the Funds -- Additional Information --
Stockholder Services." An automatic dividend
reinvestment plan is available to
stockholders of both Funds. The plans are
identical. See "Comparison of the Funds --
Automatic Dividend Reinvestment Plan." Other
stockholder services, including the
provision of annual and semi-annual reports,
are the same for both Funds. See "Comparison
of the Funds -- Stockholder Services."
TAX CONSIDERATIONS.............. Fund For Tomorrow and Fundamental Growth
Fund jointly have requested a private letter
ruling from the Internal Revenue Service
("IRS") with respect to the Reorganization to
the effect that, among other things, neither
Fund For Tomorrow nor Fundamental Growth Fund
will recognize gain or loss on the
transaction, and Fund For Tomorrow
stockholders will not recognize gain or loss
on the exchange of their shares of Fund For
Tomorrow for Corresponding Shares of
Fundamental Growth Fund. The consummation of
the Reorganization is subject to the receipt
of such ruling or receipt of an opinion of
counsel to the same effect. The
Reorganization will not affect the status of
Fundamental Growth Fund as a regulated
investment company. See "The Reorganization
-- Tax Consequences of the Reorganization."
9
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in Fundamental
Growth Fund are substantially the same as those of Fund For Tomorrow. A
discussion of certain principal differences in risks, as a result of the
differing techniques utilized by the Funds follows.
INVESTING IN SMALLER CAPITALIZED COMPANIES. Each Fund may invest in small
capitalization stocks, although Fundamental Growth Fund invests primarily in
medium to large capitalization stocks. Investments in securities of smaller
capitalized companies involve special considerations and risks, including risks
associated with limited product lines, markets or financial and management
resources; risks associated with less frequency and volume of trading of stocks
of smaller capitalized issuers as compared to larger capitalized issuers and
the greater effect of abrupt or erratic price movements on smaller capitalized
issuers; and risks associated with the greater sensitivity of smaller
capitalized issuers to market changes.
INVESTING ON AN INTERNATIONAL BASIS. Because up to 10% of Fundamental
Growth Fund's total assets and 25% of Fund For Tomorrow's assets may be
invested in securities of non-U.S. issuers, investors should be aware of
certain risk factors and special considerations relating to international
investing, which may involve risks that are not typically associated with
investments in securities of U.S. issuers, including fluctuations in foreign
exchange rates, future political and economic developments, different legal
systems and the possible imposition of economic sanctions, exchange controls or
other foreign governmental laws or restrictions. Securities prices in different
countries are subject to different economic, financial, political and social
factors. Since both Funds invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the value of securities in each Fund and the unrealized
appreciation or depreciation of investments. Currencies of certain countries
may be volatile and, therefore, may affect the value of securities denominated
in such currencies. In addition, with respect to certain foreign countries,
there is the possibility of expropriation of assets, confiscatory taxation,
difficulty in obtaining or enforcing a court judgment, economic, political or
social instability or diplomatic developments that could affect investments in
those countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Income and capital gains on securities held
by the Funds may be subject to withholding and other taxes imposed by certain
jurisdictions, which would reduce the return to the respective Fund on those
securities. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes.
As a result of these potential risks, MLAM may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Funds may
invest in countries in which foreign investors, including MLAM, have had no or
limited prior experience.
Many of the foreign securities held by the Funds will not be registered
with the Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S. issuers. As a result,
traditional investment measurements, such as price/earnings ratios, as used in
the United States, may not be applicable to certain foreign capital markets.
Foreign financial markets, while often growing in trading volume, have,
for the most part, substantially less volume than U.S. markets, and securities
of many foreign companies are less liquid and their prices may be more volatile
than securities of comparable domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries, which may result in the Funds incurring additional
costs and delays in transporting and custodying such securities outside such
countries. Delays in settlement could result in periods when assets of the
Funds are uninvested and no return is earned thereon. The inability of the
Funds to make intended security purchases due to settlement problems or the
risk of intermediary counterparty failures could cause the Funds to miss
attractive investment opportunities. The inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Funds
due to subsequent declines in the value of such portfolio security or, if a
contract to sell the security has been entered, could result in possible
liability to the purchaser.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain
foreign laws to insider trading and similar investor protection securities laws
that apply with respect to securities transactions consummated in the United
States. Further, brokerage commissions and other transaction costs on foreign
securities exchanges generally are higher than in the United States.
10
<PAGE>
Some countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign
entities such as Fundamental Growth Fund. As illustrations, certain countries
require governmental approval prior to investments by foreign persons, or limit
the amount of investment by foreign persons in a company to only a specific
class of securities that may have less advantageous terms than securities of
the company available for purchase by nationals. Certain countries may restrict
investment opportunities in issuers or industries deemed important to national
interests.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act limits a Fund's ability to invest
in any security of an issuer which, in its most recent fiscal year, derived
more than 15% of its revenues from "securities related activities," as defined
by the rules thereunder. These provisions may also restrict a Fund's
investments in certain foreign banks and other financial institutions.
HEDGING. Both Funds may write covered call options, however Fund For
Tomorrow is limited to writing covered call options on underlying securities
with a value not to exceed 15% of the value of its total assets. In addition,
Fundamental Growth Fund may utilize certain hedging techniques which Fund For
Tomorrow does not use. See "Investment Objectives and Policies -- Hedging
Techniques; Investment Practices Involving the Use of Options, Futures and
Other Portfolio Strategies" herein. Transactions involving options, futures,
options on futures or currencies may involve the loss of an opportunity to
profit from a price movement in the underlying asset beyond certain levels or a
price increase on other portfolio assets (in the case of transactions for
hedging purposes) or expose the Funds to potential losses that exceed the
amount originally invested in such instruments.
ILLIQUID SECURITIES. Fundamental Growth Fund and Fund For Tomorrow may
each invest up to 15% of their respective total assets in securities that lack
an established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the
security and the price to be obtained upon disposition of the security, which
may be less than would be obtained for a comparable more liquid security.
Investment of a Fund's assets in illiquid securities may restrict the ability
of a Fund to dispose of its investments in a timely fashion and for a fair
price as well as its ability to take advantage of market opportunities. The
risks associated with illiquidity will be particularly acute in situations in
which a Fund's operations require cash, such as when a Fund redeems shares or
pays dividends, and could result in a Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid investments.
Further, issuers whose securities are not publicly traded are not subject to
the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. In making investments in
such securities, a Fund may obtain access to material nonpublic information
which may restrict the Fund's ability to conduct portfolio transactions in such
securities. In addition, each of the Funds may invest in privately placed
securities that may or may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale.
11
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
FUNDAMENTAL GROWTH FUND. The financial information in the table below,
except for the six months ended February 28, 1998, which is unaudited, has been
audited in conjunction with the annual audits of the financial statements by
Ernst & Young LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in the Fundamental Growth Fund's financial statements.
<TABLE>
<CAPTION>
CLASS A++
-------------------------------------------------------
FOR THE YEAR
FOR THE SIX ENDED FOR THE PERIOD
MONTHS ENDED AUGUST 31, OCT. 21, 1994+
FEB. 28, ----------------------- TO AUG. 31,
1998 1997 1996 1995
-------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........ $ 17.37 $ 13.60 $ 11.66 $ 9.99
------- -------- -------- --------
Investment income (loss) -- net ............ .04 .07 .07 --+++
Realized and unrealized gain on
investments -- net ........................ 2.38 4.95 2.13 1.98
------- -------- -------- --------
Total from investment operations ............ 2.42 5.02 2.20 1.98
------- -------- -------- --------
Less distributions from realized gain on
investments -- net ......................... (2.34) (1.25) (.26) (.31)
-------- --------- --------- ---------
Net asset value, end of period .............. $ 17.45 $ 17.37 $ 13.60 $ 11.66
======== ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......... 14.65%# 39.24% 19.02% 20.55%#
======== ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................... .86%* .99% 1.12% 1.46%*
======== ========= ========= =========
Investment income (loss) -- net ............. .49%* .47% .51% .02%*
======== ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 98,908 $ 62,049 $ 47,048 $ 21,288
========== ========= ========= =========
Portfolio turnover .......................... 23.53% 94.38% 82.10% 80.41%
========== ========= ========= =========
Average commission rate paid## .............. $ .0630 $ .0628 $ .0623 --
========== ========= ========= =========
<CAPTION>
CLASS B++
----------------------------------------------------------
FOR THE YEAR
FOR THE SIX ENDED FOR THE PERIOD
MONTHS ENDED AUGUST 31, OCT. 21, 1994+
FEB. 28, --------------------------- TO AUG. 31,
1998 1997 1996 1995
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........ $ 16.69 $ 13.14 $ 11.40 $ 9.85
--------- -------- -------- --------
Investment income (loss) -- net ............ (.04) (.09) (.07) (.09)
Realized and unrealized gain on
investments -- net ........................ 2.26 4.79 2.07 1.95
---------- -------- -------- ----------
Total from investment operations ............ 2.22 4.70 2.00 1.86
---------- -------- -------- ----------
Less distributions from realized gain on
investments -- net ......................... (2.24) (1.15) (.26) (.31)
---------- -------- -------- ----------
Net asset value, end of period .............. $ 16.67 $ 16.69 $ 13.14 $ 11.40
========== ======== ======== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share .......... 13.97%# 37.95% 17.68% 19.60%#
========== ======== ======== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................... 1.88%* 2.02% 2.16% 2.48%*
========== ======== ======== ==========
Investment income (loss) -- net ............. (.54)%* (.59)% (.54)% (.95)%*
========== ======== ======== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $386,248 $216,636 $116,641 $ 63,748
========== ======== ======== ==========
Portfolio turnover .......................... 23.53% 94.38% 82.10% 80.41%
========== ======== ======== ==========
Average commission rate paid## .............. $ .0630 $ .0628 $ .0623 --
========== ========= ========= ==========
</TABLE>
- ---------
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
12
<PAGE>
FUNDAMENTAL GROWTH FUND -- FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C++
------------------------------------------------------------------------------------
FOR THE FOR THE
SIX PERIOD
MONTHS FOR THE YEAR ENDED DEC. 24,
ENDED AUGUST 31, 1992+
FEB. 28, ----------------------------------------------------- TO AUG. 31,
1998 1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ........ $ 16.72 $ 13.14 $ 11.40 $ 9.96 $ 9.86 $ 10.00
--------- ------- ------- ------- ------- --------
Investment income
(loss) -- net ............. (.04) (.09) (.07) (.09) (.05) (.05)
Realized and
unrealized gain
(loss) on
investments -- net ........ 2.27 4.79 2.07 1.84 .15 (.09)
---------- -------- -------- ------- ------- ----------
Total from investment
operations ................. 2.23 4.70 2.00 1.75 .10 (.14)
---------- -------- -------- ------- ------- ----------
Less distributions from
realized gain on
investments -- net ......... (2.21) (1.12) (.26) (.31) -- --
---------- -------- -------- ------- ------- ----------
Net asset value, end of
period ..................... $ 16.74 $ 16.72 $ 13.14 $ 11.40 $ 9.96 $ 9.86
========== ======== ======== ======= ======= ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share .................. 13.97%# 37.90% 17.68% 18.28% 1.01% (1.40)%#
========== ======== ======== ======= ======= ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses .................... 1.88%* 2.02% 2.15% 2.44% 2.35% 2.79%*
========== ======== ======== ======= ======= ==========
Investment income
(loss) -- net .............. (.54)%* (.58)% (.57)% (.88)% (.52)% (.83)%*
========== ======== ======== ======= ======= ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ............. $103,879 $ 74,732 $ 54,052 $44,220 $47,263 $ 45,736
========== ======== ======== ======= ======= ==========
Portfolio turnover .......... 23.53% 94.38% 82.10% 80.41% 112.68% 64.09%
========== ======== ======== ======= ======= ==========
Average commission rate
paid## ..................... $ .0630 $ .0628 $ .0623 -- -- --
========== ========= ========= ======= ======= ==========
<CAPTION>
CLASS D++
---------------------------------------------------------------------------
FOR THE FOR THE
SIX PERIOD
MONTHS FOR THE YEAR ENDED DEC. 24,
ENDED AUGUST 31, 1992+
FEB. 28, ----------------------------------------------- TO AUG. 31,
1998 1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ........ $ 17.27 $ 13.54 $ 11.64 $ 10.09 $ 9.91 $ 10.00
------- -------- -------- ------- -------- --------
Investment income
(loss) -- net ............. .02 .03 .03 (.01) .03 --+++
Realized and
unrealized gain
(loss) on
investments -- net ........ 2.36 4.93 2.13 1.87 .15 (.09)
------- -------- -------- ------- -------- ----------
Total from investment
operations ................. 2.38 4.96 2.16 1.86 .18 (.09)
------- -------- -------- ------- -------- ----------
Less distributions from
realized gain on
investments -- net ......... (2.32) (1.23) (.26) (.31) -- --
-------- --------- --------- ------- --------- ----------
Net asset value, end of
period ..................... $ 17.33 $ 17.27 $ 13.54 $ 11.64 $ 10.09 $ 9.91
======== ========= ========= ======= ========= ==========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share .................. 14.47%# 38.90% 18.70% 19.15% 1.82% (.90)%#
======== ========= ========= ======= ========= ==========
RATIOS TO AVERAGE NET
ASSETS:
Expenses .................... 1.11%* 1.24% 1.37% 1.65% 1.58% 2.03%*
======== ========= ========= ======= ========= ==========
Investment income
(loss) -- net .............. .23%* .17% .24% (.10)% .31% (.04)%*
======== ========= ========= ======= ========= ==========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ............. $ 88,201 $ 53,101 $22,892 $13,231 $ 8,623 $ 6,930
========== ========= ========= ======= ========= ==========
Portfolio turnover .......... 23.53% 94.38% 82.10% 80.41% 112.68% 64.09%
========== ========= ========= ======= ========= ==========
Average commission rate
paid## ..................... $ .0630 $ .0628 $ .0623 -- -- --
========== ========= ========= ======= ========= ==========
</TABLE>
- ---------
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
13
<PAGE>
FUND FOR TOMORROW. The financial information in the table below has been
audited in conjunction with the annual audits of the financial statements of
Fund For Tomorrow by Deloitte & Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in Fund For Tomorrow's audited Financial Statements:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
-------------------------------------------------
1998++ 1997++ 1996++ 1995++
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 17.16 $ 16.26 $ 13.55 $ 16.39
-------- -------- ------- ---------
Investment income -- net ................ .07 .08 .07 .09
Realized and unrealized gain (loss)
on investments and foreign
currency transactions -- net ........... 1.99 3.04 4.19 ( 1.97)
-------- -------- ------- ---------
Total from investment operations ........ 2.06 3.12 4.26 ( 1.88)
-------- -------- ------- ---------
Less dividends and distributions:
Investment income -- net ............... -- -- -- --
Realized gain on investments --
net ................................... (3.61) (2.22) (1.55) (.96)
--------- --------- ------- ---------
Total dividends and distributions ....... (3.61) (2.22) (1.55) (.96)
--------- --------- ------- ---------
Net asset value, end of period .......... $ 15.61 $ 17.16 $ 16.26 $ 13.55
========= ========= ======= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ...... 12.43% 19.99% 31.82% (11.23)%
========= ========= ======= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................ .99% 1.00% 1.07% .98%
========= ========= ======= =========
Investment income -- net ................ .40% .46% .44% .59%
========= ========= ======= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ............................. $ 13,552 $ 39,605 $34,231 $ 8,665
========= ========= ======= =========
Portfolio turnover ...................... 17.63% 39.96% 67.38% 45.86%
========= ========= ======= =========
Average commission rate paid## .......... $ .0003 $ .0277 -- --
========= ========= ======= =========
<CAPTION>
CLASS A
-------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989+
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 16.29 $ 16.84 $ 15.49 $ 15.26 $ 14.96 $ 16.05
------- ------- ------- ------- ------- --------
Investment income -- net ................ .15 .25 .36 .41 .30 .08
Realized and unrealized gain (loss)
on investments and foreign
currency transactions -- net ........... 2.18 .49 3.74 .59 1.45 .43
------- ------- ------- ------- ------- --------
Total from investment operations ........ 2.33 .74 4.10 1.00 1.75 .51
------- ------- ------- ------- ------- --------
Less dividends and distributions:
Investment income -- net ............... -- (.23) (.35) (.40) (.41) (.13)
Realized gain on investments --
net ................................... (2.23) (1.06) (2.40) (.37) (1.04) (1.47)
------- ------- -------- -------- -------- ---------
Total dividends and distributions ....... (2.23) (1.29) (2.75) (.77) (1.45) (1.60)
------- ------- -------- -------- -------- ---------
Net asset value, end of period .......... $ 16.39 $ 16.29 $ 16.84 $ 15.49 $ 15.26 $ 14.96
======= ======= ======== ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ...... 15.78% 4.79% 28.35% 6.64% 10.92% 3.90%#
======= ======= ======== ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................ .88% .90% .95% .96% .89% .91%*
======= ======= ======== ======== ======== =========
Investment income -- net ................ .95% 1.35% 1.81% 2.58% 2.20% 1.87%*
======= ======= ======== ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ............................. $10,942 $11,394 $ 8,846 $ 5,478 $ 4,466 $ 476
======= ======= ======== ======== ======== =========
Portfolio turnover ...................... 48.63% 40.58% 48.28% 25.57% 15.23% 10.26%
======= ======= ======== ======== ======== =========
Average commission rate paid## .......... -- -- -- -- -- --
======= ======= ======== ======== ======== =========
</TABLE>
- ---------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on October 26, 1988.
++ Based on average shares outstanding.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
14
<PAGE>
FUND FOR TOMORROW -- FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
-------------------------------------------------------
1998+ 1997+ 1996+ 1995+
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ............................. $ 16.59 $ 15.79 $ 13.33 $ 16.30
------- -------- ------- --------
Investment income (loss) -- net...... (.13) (.10) (.08) (.06)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net ................ 1.92 2.95 4.09 (1.96)
-------- -------- ------- --------
Total from investment
operations ......................... 1.79 2.85 4.01 (2.02)
-------- -------- ------- --------
Less dividends and distributions:
Investment income -- net ........... -- -- -- --
Realized gain on
investments -- net ................ (3.37) (2.05) (1.55) (.95)
-------- -------- ------- --------
Total dividends and
distributions ...................... (3.37) (2.05) (1.55) (.95)
-------- -------- ------- --------
Net asset value, end of period ...... $ 15.01 $ 16.59 $ 15.79 $ 13.33
======== ======== ======= ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per
share .............................. 11.20% 18.80% 30.43% (12.22)%
======== ======== ======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 2.03% 2.06% 2.13% 1.99%
======== ======== ======= ========
Investment income (loss) -- net...... (.74)% (.58)% (.55)% (.38)%
======== ======== ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ......................... $ 60,646 $104,828 $112,239 $119,186
======== ======== ======== ========
Portfolio turnover .................. 17.63% 39.96% 67.38% 45.86%
======== ======== ======== ========
Average commission rate paid# ....... $ .0003 $ .0277 -- --
========= ========= ======== ========
<CAPTION>
CLASS B
-----------------------------------------------------------------------------
FOR THE YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ............................. $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94 $ 13.78
------- ------- ------- ------- ------- --------
Investment income (loss) -- net...... (.01) .06 .14 .24 .21 .20
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net ................ 2.17 .52 3.77 .60 1.36 2.72
------- ------- ------- ------- ------- --------
Total from investment
operations ......................... 2.16 .58 3.91 .84 1.57 2.92
------- ------- ------- ------- ------- --------
Less dividends and distributions:
Investment income -- net ........... -- (.06) (.17) (.23) (.23) (.20)
Realized gain on
investments -- net ................ ( 2.14) ( 1.06) ( 2.40) (.37) ( 1.04) ( 1.56)
------- -------- -------- -------- -------- --------
Total dividends and
distributions ...................... ( 2.14) ( 1.12) ( 2.57) (.60) ( 1.27) ( 1.76)
------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 16.30 $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94
======= ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per
share .............................. 14.60% 3.75% 26.96% 5.59% 9.77% 22.11%
======= ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 1.91% 1.92% 1.98% 2.00% 1.93% 1.96%
======= ======== ======== ======== ======== ========
Investment income (loss) -- net...... ( .07)% .36% .83% 1.53% 1.20% 1.18%
======= ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ......................... $396,424 $447,186 $476,106 $442,944 $516,402 $562,899
======== ======== ======== ======== ======== ========
Portfolio turnover .................. 48.63% 40.58% 48.28% 25.57% 15.23% 10.26%
======== ======== ======== ======== ======== ========
Average commission rate paid# ....... -- -- -- -- -- --
======== ======== ======== ======== ======== ========
</TABLE>
- ---------
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
# For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
15
<PAGE>
FUND FOR TOMORROW -- FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C++
--------------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
JANUARY 31, OCTOBER 21,
--------------------------------------- 1994+ TO
JANUARY 31,
1998 1997 1996 1995
------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ............................ $ 16.47 $ 15.71 $ 13.28 $ 14.08
------- ------- -------- --------
Investment income
(loss) -- net ..................... (.11) (.10) (.10) (.04)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net ............... 1.88 2.94 4.08 (.54)
-------- -------- -------- ----------
Total from investment
operations ......................... 1.77 2.84 3.98 (.58)
-------- -------- -------- ----------
Less distributions from realized
gains on investments -- net ........ ( 3.30) ( 2.08) ( 1.55) (.22)
-------- -------- -------- ----------
Net asset value, end of period ...... $ 14.94 $ 16.47 $ 15.71 $ 13.28
======== ======== ======== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share .............................. 11.15% 18.80% 30.32% ( 4.12)%#
======== ======== ======== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 2.06% 2.07% 2.14% 2.26%*
======== ======== ======== ==========
Investment income (loss) -- net ..... (.68)% (.61)% (.67)% (.87)%*
======== ======== ======== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ......................... $ 2,926 $ 8,430 $ 6,385 $ 80
======== ======== ======== ==========
Portfolio turnover .................. 17.63% 39.96% 67.38% 45.86%
======== ======== ======== ==========
Average commission rate paid##....... $ .0003 $ .0277 -- --
========= ========= ======== ==========
<CAPTION>
CLASS D++
--------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 21,
JANUARY 31, 1994+ TO
---------------------------------------- JANUARY 31,
1998 1997 1996 1995
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period ............................ $ 17.09 $ 16.20 $ 13.54 $ 14.26
--------- -------- ------- --------
Investment income
(loss) -- net ..................... --+++ .04 .03 (.01)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net ............... 1.99 3.03 4.18 (.49)
--------- -------- ------- ----------
Total from investment
operations ......................... 1.99 3.07 4.21 (.50)
--------- -------- ------- ----------
Less distributions from realized
gains on investments -- net ........ ( 3.56) ( 2.18) ( 1.55) (.22)
--------- -------- -------- ----------
Net asset value, end of period ...... $ 15.52 $ 17.09 $ 16.20 $ 13.54
========= ======== ======== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share .............................. 12.07% 19.73% 31.47% (3.50)%#
========= ======== ======== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................ 1.23% 1.25% 1.33% 1.43%*
========= ======== ======== ==========
Investment income (loss) -- net ..... (.01)%+ .22%+ .22% (.23)%*
========= ======== ======== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) ......................... $ 231,695 $ 238,260 $227,908 $ 156,947
========== ========== ======== ==========
Portfolio turnover .................. 17.63% 39.96% 67.38% 45.86%
========== ========== ======== ==========
Average commission rate paid##....... $ .0003 $ .0277 -- --
========== ========== ======== ==========
</TABLE>
- ---------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
+++ Amount is less than $(.01) per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES. The investment objective of Fundamental Growth Fund
and Fund For Tomorrow is to provide stockholders with long-term growth of
capital by investing primarily in equity securities.
INVESTMENT POLICIES GENERALLY. Fundamental Growth Fund seeks to invest in
a diversified portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in earnings, resulting
from a variety of factors including, but not limited to, above-average growth
rates in sales, profit margin improvement, proprietary or niche products or
services, leading market shares, and underlying strong industry growth. Fund
For Tomorrow seeks to invest in a quality-oriented portfolio of securities,
primarily common stock. In pursuing this objective, Fund For Tomorrow uses a
thematic approach of investing in long-term trends, seeking to identify
important investment concepts of the future and reviewing existing concepts to
confirm their validity in meeting the Fund's objective. As part of this
thematic approach, Fund For Tomorrow seeks to identify companies whose products
and services are believed to represent attractive investment opportunities.
There can be no assurance that, after the Reorganization, Fundamental
Growth Fund will achieve its investment objective.
Fundamental Growth Fund seeks to invest in a diversified portfolio of
equity securities placing particular emphasis on companies that have exhibited
above-average growth rates in earnings. Emphasis will be given to companies
having stock market capitalizations of $500 million or more. Fundamental Growth
Fund invests primarily in common stock, and to a lesser extent, securities
convertible into common stock and rights to subscribe for common stock.
Fundamental Growth Fund will maintain at least 65% of its total assets invested
in equity securities, except during defensive periods. Fundamental Growth Fund
reserves the right as a defensive measure and to provide for redemptions to
hold other types of securities, including non-convertible preferred stocks and
debt securities rated investment grade by a nationally recognized statistical
rating organization, U. S. Government and money market securities, including
repurchase agreements or cash, in such proportions as, in the opinion of
management, prevailing market or economic conditions warrant.
Fund For Tomorrow invests primarily in common stocks of companies whose
products and services are believed to represent attractive investment
opportunities in accordance with Fund For Tomorrow's thematic approach of
investing in long-term trends. Fund For Tomorrow may invest in securities
issued by companies of any size, without regard to capitalization. When
management deems it advisable to do so, Fund For Tomorrow may invest in
securities other than common stocks, including but not limited to convertible
securities, preferred stocks and bonds. Fund For Tomorrow does not presently
intend to purchase bonds rated lower than BBB by S&P or Baa by Moody's. Fund
For Tomorrow reserves the right to invest, temporarily, all or a portion of its
assets in high quality money market securities for purposes of enhancing
liquidity and avoiding the effects of declining stock prices when it seems
advisable to do so in light of prevailing market or economic conditions. The
proportion of Fund For Tomorrow's assets that is invested in money market
securities will vary from time to time.
MLAM believes that the securities currently held in the Fund For Tomorrow
portfolio are consistent with the investment objectives and policies of
Fundamental Growth Fund and are not prohibited by the investment restrictions
of Fundamental Growth Fund. Fundamental Growth Fund has no plan or intention to
sell or otherwise dispose of any of the assets of Fund For Tomorrow acquired in
the Reorganization, except for dispositions made in the ordinary course of
business.
A more specific comparison of the investment policies of Fund For Tomorrow
and Fundamental Growth Fund follows.
FOREIGN SECURITIES. Each Fund may invest in foreign securities. Fund For
Tomorrow may invest up to 25% of total assets in securities of foreign issuers,
including issuers in foreign countries with smaller capital markets.
Fundamental Growth Fund may invest up to 10% of its assets in the securities of
foreign issuers (this limitation does not apply to ADRs). See "Risk Factors and
Special Considerations -- Investing on an International Basis."
HEDGING TECHNIQUES; INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS,
FUTURES AND OTHER PORTFOLIO STRATEGIES. Fundamental Growth Fund may use certain
techniques to hedge its portfolio or enhance its return that Fund For Tomorrow
does not use. Specifically, Fundamental Growth Fund may purchase put and call
options on securities and securities indices, write put options on securities
and securities indices, engage in transactions in financial futures contracts
and related options, and purchase securities on a when issued or delayed
delivery basis. Other than with respect to closing transactions, Fundamental
Growth Fund will only write call or put options that are "covered." Fund For
Tomorrow may write covered call options, however, the underlying securities may
not exceed 15% of the value of its total assets. Fundamental Growth Fund is not
subject to a similar restriction. For a more detailed description of hedging
instruments and risks associated with investment therein, see "Investment
Objective and Policies -- Other Investment Policies and Practices" in the
Fundamental Growth Fund Prospectus. Also see "Risk Factors and Special
Considerations -- Hedging" herein.
17
<PAGE>
CONVERTIBLE SECURITIES. Each of the Funds may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security entitles
the holder to receive interest generally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities have several unique
investment characteristics such as (i) higher yields than common stocks, but
lower yields than comparable nonconvertible securities, (ii) a lesser degree of
fluctuation in value than the underlying stock since they have fixed-income
characteristics, and (iii) the potential for capital appreciation if the market
price of the underlying common stock increases. A convertible security might be
subject to redemption at the option of the issuer at a price established in the
convertible security's governing instrument. If a convertible security held by
one of the Funds is called for redemption, the Fund may be required to permit
the issuer to redeem the security, convert it into the underlying common stock
or sell it to a third party.
OTHER INVESTMENT POLICIES
Both Fund For Tomorrow and Fundamental Growth Fund have adopted certain
other investment policies as set forth below:
BORROWINGS. Fund For Tomorrow and Fundamental Growth Fund, as a
fundamental restriction, may each borrow amounts not in excess of 33 1/3% of
its total assets from banks. As a non-fundamental restriction, however, Fund
For Tomorrow may not borrow amounts in excess of 5% of the value of the Fund's
total assets and Fundamental Growth Fund may not borrow amounts in excess of
20% of its total assets. Under the applicable non-fundamental restriction,
Fundamental Growth Fund may borrow only from banks as a temporary measure for
extraordinary or emergency purposes. Additionally, neither Fund may pledge any
of its respective assets other than to secure permitted borrowings. Fund For
Tomorrow's ability to pledge its assets is further limited to pledging
securities having a value of not more than 10% of the Fund's assets to secure
permitted borrowings.
LENDING OF PORTFOLIO SECURITIES. Each Fund may from time to time lend
securities from its portfolio to banks, brokers and other financial
institutions and receive collateral in cash or securities issued or guaranteed
by the U.S. Government.
INVESTMENT RESTRICTIONS
Other than as noted above under "Comparison of the Funds -- Investment
Objectives and Policies," Fund For Tomorrow and Fundamental Growth Fund have
identical investment restrictions. See, "Investment Objective and Policies --
Investment Restrictions" in the Fundamental Growth Fund Statement and
"Investment Practices and Restrictions -- Investment Restrictions" in the Fund
For Tomorrow Statement.
MANAGEMENT
DIRECTORS. The Board of Directors of each of Fundamental Growth Fund and
Fund For Tomorrow consists of six individuals, five of whom are not "interested
persons" as defined in the Investment Company Act. One individual, Arthur
Zeikel, serves on both Boards. After the Reorganization, the Board of Directors
of Fundamental Growth Fund will serve as the Board of Directors of the Combined
Fund. The Directors are responsible for the overall supervision of the
operation of each Fund and perform the various duties imposed on the directors
of investment companies by the Investment Company Act.
The Directors of Fundamental Growth Fund are:
ARTHUR ZEIKEL* -- Chairman of the Investment Adviser and Fund Asset
Management, L.P. ("FAM") (which terms as used herein include their corporate
predecessors) since 1997; President of the Investment Adviser and FAM from 1977
to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") since 1997
and Director thereof since 1993; President of Princeton Services from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990.
JOE GRILLS -- Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA") since 1986; Member of
CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992;
Assistant Treasurer of International Business Machines Corporation ("IBM") and
Chief Investment Officer of IBM Retirement Funds 1986 to 1993; Member of the
Investment Advisory Committees of the State of New York Common Retirement Fund
and the Howard Hughes Medical Institute since 1997; Director, Duke Management
Company since 1992, elected Vice Chairman in 1998; Director, LaSalle Street
Fund since 1995; Director, Hotchkis and Wiley Mutual Funds since 1996;
Director, Kimco Realty Corporation since 1997; Member of the Investment
Advisory Committee of the Virginia Retirement System since 1998.
18
<PAGE>
WALTER MINTZ -- Special Limited Partner of Cumberland Associates
(investment partnership) since 1982.
ROBERT S. SALOMON, JR. -- Principal of STI Management (investment
adviser); Chairman and CEO of Salomon Brothers Asset Management Inc. from 1992
to 1995; Chairman of Salomon Brothers equity mutual funds from 1992 to 1995;
monthly columnist with FORBES magazine since 1992; Director of Stock Research
and U.S. Equity Strategist at Salomon Brothers from 1975 to 1991; Trustee of
The Common Fund since 1980.
MELVIN R. SEIDEN -- Director of Silbanc Properties, Ltd. (real estate,
investments and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD -- Chairman, Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
- ---------
* Interested person, as defined by the Investment Company Act, of each of the
Funds.
MANAGEMENT AND ADVISORY ARRANGEMENTS. MLAM serves as the investment
adviser for Fund For Tomorrow and as the manager for Fundamental Growth Fund
pursuant to an investment advisory agreement or a management agreement, as the
case may be (each, a "Management Agreement"). Except for different fee
structures and certain other minor differences, the agreements are identical.
Pursuant to the Management Agreement between Fundamental Growth Fund and
MLAM, Fundamental Growth Fund pays MLAM a monthly fee at the annual rate of
0.65% of the average daily net assets of the Fund. Pursuant to the Management
Agreement between Fund For Tomorrow and MLAM, Fund For Tomorrow pays MLAM a
monthly fee based upon the average daily value of the Fund's net assets at the
following annual rates: 0.65% of the average daily net assets not exceeding
$750 million; 0.60% of the average daily net assets exceeding $750 million but
not exceeding $1 billion; and 0.55% of the average daily net assets exceeding
$1 billion. The pro forma effective fee rate of the Combined Fund would be
0.65%.
MLAM has retained MLAM U.K. as sub-adviser to each of Fund For Tomorrow
and Fundamental Growth Fund. Pursuant to a separate sub-advisory agreement
between MLAM and MLAM U.K. with respect to each Fund, MLAM pays MLAM U.K. a fee
for providing investment advisory services to MLAM with respect to each Fund,
in an amount to be determined from time to time by MLAM and MLAM U.K. but in no
event in excess of the amount MLAM actually receives for providing services to
each Fund pursuant to each Management Agreement. The address of MLAM U.K. is
Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
After the Reorganization, on a pro forma combined basis as of June 30,
1998, the total operating expenses of Fundamental Growth Fund, as a percent of
net assets, would be less than the current operating expenses for Fund For
Tomorrow. In addition, certain fixed costs, such as costs of printing
stockholder reports and proxy statements, legal expenses, audit fees,
registration fees, mailing costs and other expenses would be spread across a
larger asset base, thereby lowering the expense ratio borne by Fund For
Tomorrow stockholders. MLAM believes that the Reorganization is in the best
interest of both Fundamental Growth Fund and Fund For Tomorrow stockholders.
See "The Reorganization -- Potential Benefits to Stockholders as a Result of
the Reorganization" and "Summary -- Pro Forma Fee Tables."
PURCHASE OF SHARES
The class structure and purchase and distribution procedures for shares of
Fund For Tomorrow are identical to those of Fundamental Growth Fund. For a
complete discussion of the four classes of shares and the purchase and
distribution procedures related thereto, see "Merrill Lynch Select Pricing(SM)
System" and "Purchase of Shares" in either the Fundamental Growth Fund
Prospectus or the Fund For Tomorrow Prospectus.
REDEMPTION OF SHARES
The procedure for redeeming shares of Fundamental Growth Fund is identical
to the procedure for redeeming shares of Fund For Tomorrow. For purposes of
computing any CDSC that may be payable upon disposition of Corresponding Shares
of Fundamental Growth Fund acquired by Fund For Tomorrow stockholders in the
Reorganization, the holding period of Fund For Tomorrow shares outstanding on
the date the Reorganization takes place will be tacked onto the holding period
of the Corresponding Shares of Fundamental Growth Fund acquired in the
Reorganization.
19
<PAGE>
PERFORMANCE
GENERAL. The following tables provide performance information for each
class of shares of Fund For Tomorrow and Fundamental Growth Fund, including and
excluding maximum applicable sales charges, for the periods indicated. Past
performance is not indicative of future performance.
FUNDAMENTAL GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------------------------ ------------------------ ------------------------ -----------------------
WITHOUT WITHOUT WITHOUT WITHOUT
SALES WITH SALES SALES WITH SALES SALES WITH SALES SALES WITH SALES
PERIOD CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%)
- ------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10 months ended
6/30/98+ ......... 26.61 19.96 25.45 21.45 25.48 24.48 26.29 19.66
Year Ended
8/31/97 .......... 39.24 31.93 37.95 33.95 37.90 36.90 38.90 31.61
Inception** through
8/31/97 .......... 27.37 24.99 26.10 25.65 14.83 14.83 15.73 14.40
</TABLE>
- ---------
* Assumes the maximum applicable sales charge. The maximum initial sales charge
on Class A and Class D shares is 5.25%. The maximum contingent deferred
sales charge ("CDSC") on Class B shares is 4.0% and is reduced to 0% after
four years. Class C shares are subject to a 1.0% CDSC for one year.
+ Aggregate total returns.
** Class A and Class B shares commenced operations on October 21, 1994. Class C
and Class D shares commenced operations on December 24, 1992.
FUND FOR TOMORROW
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------------------------ ------------------------ ------------------------ -----------------------
WITHOUT WITHOUT WITHOUT WITHOUT
SALES WITH SALES SALES WITH SALES SALES WITH SALES SALES WITH SALES
PERIOD CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%) CHARGE(%) CHARGE*(%)
- ---------------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 months ended
6/30/98+ .................. 13.07 7.13 12.66 8.66 12.58 11.58 13.02 7.08
Year Ended
1/31/98 ................... 12.43 6.53 11.20 7.58 11.15 10.24 12.07 6.19
Five Years Ended
1/31/98 ................... 12.82 11.61 11.63 11.63 N/A N/A N/A N/A
Ten years or inception**
through 1/31/98 ........... 12.67 12.02 12.45 12.45 16.50 16.50 17.61 15.70
</TABLE>
- ---------
* Assumes the maximum applicable sales charge. The maximum initial sales charge
on Class A and Class D shares is 5.25%. The maximum CDSC on Class B shares
is 4.0% and is reduced to 0% after four years. Class C shares are subject
to a 1.0% CDSC for one year.
** Class A shares commenced operations on October 26, 1988. Performance of
Class B shares is for the ten year period ended January 31, 1998. Class C
and Class D shares commenced operations on October 21, 1994.
+ Aggregate total returns.
SHAREHOLDER RIGHTS
Stockholders of Fundamental Growth Fund 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 stockholder vote.
Fundamental Growth Fund does not intend to hold meetings of stockholders in any
year in which the Investment Company Act does not require stockholders to act
upon any of the following matters: (i) election of Directors; (ii) approval of
an investment advisory agreement; (iii) approval of distribution arrangements;
and (iv) ratification of selection of independent accountants. Voting rights
for Directors are not cumulative. Shares of Fundamental Growth Fund to be
issued to Fund For Tomorrow stockholders in the Reorganization will be fully
paid and non-assessable, will have no preemptive rights, and will have the
conversion rights described in this Prospectus and Proxy Statement and in the
Fundamental Growth Fund Prospectus. Each share of Fundamental Growth Fund
common stock is entitled to participate equally in dividends and distributions
20
<PAGE>
declared by the Fund and in the net assets of the Fund on liquidation or
dissolution after satisfaction of outstanding liabilities, except that Class B,
Class C and Class D shares bear certain additional expenses. Rights
attributable to shares of Fund For Tomorrow are identical to those described
above.
DIVIDENDS AND DISTRIBUTIONS
The current policy of Fund For Tomorrow with respect to dividends and
distributions is substantially the same as the policy of Fundamental Growth
Fund. It is each Fund's intention to distribute all of its net investment
income, if any. In addition, each Fund distributes all net realized capital
gains, if any, to stockholders at least annually.
TAX INFORMATION
The tax consequences associated with investment in shares of Fund For
Tomorrow are substantially the same as the tax consequences associated with
investment in shares of Fundamental Growth Fund. See "Additional Information --
Taxes" in the Fundamental Growth Fund Prospectus.
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are generally the
same for both Fund For Tomorrow and Fundamental Growth Fund. For a discussion
of these procedures, see "Investment Objective and Policies -- Other Investment
Policies and Practices" in the Fundamental Growth Fund Prospectus and
"Portfolio Transactions and Brokerage" in the Fundamental Growth Fund
Statement.
Each Fund may effect portfolio transactions on foreign securities
exchanges and may incur settlement delays on certain of such exchanges. In
addition, costs associated with transactions in foreign securities are
generally higher than such costs associated with transactions in U.S.
securities.
PORTFOLIO TURNOVER
Generally, neither Fund For Tomorrow nor Fundamental Growth Fund purchases
securities for short-term trading profits. However, either Fund may dispose of
securities without regard to the time that they have been held when such
action, for defensive or other reasons, appears advisable to MLAM. Neither Fund
has any limit on its rate of portfolio turnover. The portfolio turnover rates
for Fund For Tomorrow for its fiscal years ended January 31, 1998 and 1997 were
17.63% and 39.96%, respectively. The portfolio turnover rates for Fundamental
Growth Fund for its fiscal years ended August 31, 1997 and 1996 were 94.38% and
82.10%, respectively. Higher portfolio turnover may contribute to higher
transactional costs and negative tax consequences, such as an increase in
capital gain dividends or in ordinary income dividends of accrued market
discount.
ADDITIONAL INFORMATION
NET ASSET VALUE. Both Fund For Tomorrow and Fundamental Growth Fund
determine the net asset value of each class of its shares once daily 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. Net asset value is
computed by dividing the value of the securities held by the Fund plus any cash
or other assets (including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of
shares outstanding at such time.
STOCKHOLDER SERVICES. Fundamental Growth Fund offers a number of
stockholder services and investment plans designed to facilitate investment in
shares of the Fund. In addition, U.S. stockholders of each class of shares of
Fundamental Growth Fund have an exchange privilege with certain other
MLAM-advised mutual funds. Stockholder services, including exchange privileges,
available to stockholders of Fund For Tomorrow and Fundamental Growth Fund are
virtually identical. For a description of these services, see "Shareholder
Services" in the Fundamental Growth Fund Prospectus.
INDEPENDENT AUDITORS. Currently Ernst & Young LLP serves as the
independent auditors of Fundamental Growth Fund and Deloitte & Touche LLP
serves as the independent auditors of Fund For Tomorrow. If the Reorganization
is approved, it is anticipated that Ernst & Young LLP will serve as the
independent auditors of the Combined Fund. See "Experts."
CUSTODIAN. The Chase Manhattan Bank, Global Securities Services ("Chase
Manhattan") acts as custodian of the cash and securities of Fundamental Growth
Fund. The principal business address of Chase Manhattan is Chase MetroTech
Center, 18th Floor, Brooklyn, New York 11245. The Bank of New York ("BONY")
acts as custodian for Fund For Tomorrow.
21
<PAGE>
BONY's principal business address is 90 Washington Street, 12th Floor, New
York, New York 10286. It is presently anticipated that Chase Manhattan will
serve as the custodian of the Combined Fund.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND SHAREHOLDER SERVICING AGENT.
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, serves as the transfer agent, dividend disbursing agent and
shareholder servicing agent with respect to each Fund (the "Transfer Agent"),
at the same fee schedule, pursuant to separate transfer agency, dividend
disbursing agency and shareholder servicing agency agreements with each of the
Funds.
CAPITAL STOCK. Fund For Tomorrow has an authorized capital of 400,000,000
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, each of which
consists of 100,000,000 shares. Fundamental Growth Fund has an authorized
capital of 400,000,000 shares of common stock, par value $0.10 per share,
divided into four classes, also designated Class A, Class B, Class C and Class
D common stock, each of which consists of 100,000,000 shares. The rights,
preferences and expenses attributable to the Class A, Class B, Class C and
Class D shares of Fund For Tomorrow are identical in all respects to those of
the Class A, Class B, Class C and Class D shares of Fundamental Growth Fund.
STOCKHOLDER INQUIRIES. Stockholder inquiries with respect to Fund For
Tomorrow and Fundamental Growth Fund may be addressed to either Fund by
telephone at (609) 282-2800 or at the address set forth on the cover page of
this Proxy Statement and Prospectus.
THE REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Fundamental Growth Fund will acquire substantially all of the assets, and
will assume substantially all of the liabilities, of Fund For Tomorrow, in
exchange solely for an equal aggregate value of shares to be issued by
Fundamental Growth Fund. Upon receipt by Fund For Tomorrow of such shares, Fund
For Tomorrow will distribute the shares to the holders of shares of Fund For
Tomorrow, as described below.
Generally, the assets transferred by Fund For Tomorrow to Fundamental
Growth Fund will include all investments of Fund For Tomorrow held in its
portfolio as of the Valuation Time (as defined in the Agreement and Plan of
Reorganization) and all other assets of Fund For Tomorrow as of such time.
Fund For Tomorrow will distribute the shares of Fundamental Growth Fund
received by it pro rata to its stockholders in exchange for such stockholders'
proportional interests in Fund For Tomorrow. The shares of Fundamental Growth
Fund received by Fund For Tomorrow stockholders will be of the same class and
have the same aggregate net asset value as each such stockholder's interest in
Fund For Tomorrow as of the Valuation Time (previously defined as the
"Corresponding Shares"). (See, "The Agreement and Plan of Reorganization --
Valuation of Assets and Liabilities" for information concerning the calculation
of net asset value.) The distribution will be accomplished by opening new
accounts on the books of Fundamental Growth Fund in the names of all
stockholders of Fund For Tomorrow, including stockholders holding Fund For
Tomorrow shares in certificate form, and transferring to each stockholder's
account the Corresponding Shares of Fundamental Growth Fund representing such
stockholder's interest previously credited to the account of Fund For Tomorrow.
Stockholders holding Fund For Tomorrow shares in certificate form may receive
certificates representing the Corresponding Shares of Fundamental Growth Fund
credited to their account in respect of such Fund For Tomorrow shares by
sending the certificates to the Transfer Agent accompanied by a written request
for such exchange.
Since the Corresponding Shares of Fundamental Growth Fund would be issued
at net asset value in exchange for the net assets of Fund For Tomorrow having a
value equal to the aggregate net asset value of those shares of Fund For
Tomorrow, the net asset value per share of Fundamental Growth Fund should
remain virtually unchanged solely as a result of the Reorganization. Thus, the
Reorganization should not result in dilution of net asset value of Fundamental
Growth Fund immediately following consummation of the Reorganization. However,
as a result of the Reorganization, a stockholder of Fund For Tomorrow would
hold a smaller percentage of ownership in Fundamental Growth Fund than he or
she did in Fund For Tomorrow prior to the Reorganization.
22
<PAGE>
PROCEDURE
On July 27, 1998, the Board of Directors of Fund For Tomorrow, including
all of the Directors who are not "interested persons,"as defined by the
Investment Company Act, approved the Agreement and Plan of Reorganization and
the submission of such Agreement and Plan to Fund For Tomorrow stockholders for
approval. The Board of Directors of Fundamental Growth Fund, including all of
the Directors who are not interested persons, also approved the Agreement and
Plan of Reorganization on July 8, 1998.
If the stockholders of Fund For Tomorrow approve the Reorganization at the
Meeting, all required regulatory approvals are obtained, and certain conditions
are either met or waived, the Reorganization will take place during the fourth
calendar quarter of 1998.
THE BOARD OF DIRECTORS OF FUND FOR TOMORROW RECOMMENDS THAT FUND FOR
TOMORROW STOCKHOLDERS APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT TERMS OF THE AGREEMENT AND
PLAN OF REORGANIZATION. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE AGREEMENT AND PLAN OF REORGANIZATION, ATTACHED HERETO AS EXHIBIT I.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of Fund For
Tomorrow and Fundamental Growth Fund will be valued as of the Valuation Time.
The assets in each Fund will be valued according to the procedures set forth
under "Additional Information -- Determination of Net Asset Value" in the
Fundamental Growth Fund Prospectus. Purchase orders for Fund For Tomorrow
shares which have not been confirmed as of the Valuation Time will be treated
as assets of Fund For Tomorrow for purposes of the Reorganization; redemption
requests with respect to Fund For Tomorrow shares which have not settled as of
the Valuation Time will be treated as liabilities of Fund For Tomorrow for
purposes of the Reorganization.
DISTRIBUTION OF FUNDAMENTAL GROWTH FUND SHARES. On the next full business
day following the Valuation Time (the "Exchange Date"), Fundamental Growth Fund
will issue to Fund For Tomorrow a number of shares the aggregate net asset
value of which will equal the aggregate net asset value of shares of Fund For
Tomorrow as of the Valuation Time. Each holder of Fund For Tomorrow shares will
receive, in exchange for his or her proportionate interest in Fund For
Tomorrow, Corresponding Shares of Fundamental Growth Fund of the same class and
having the same aggregate net asset value as the Fund For Tomorrow shares held
by such stockholder as of the Valuation Time.
EXPENSES. The expenses of the Reorganization that are directly
attributable to each Fund and the conduct of its business will be deducted from
the assets of that Fund as of the Valuation Time. These expenses are expected
to include the expenses incurred in preparing materials to be distributed to
each Fund's board, legal fees incurred in preparing each Fund's board
materials, attending each Fund's board meetings and preparing the minutes, and
accounting fees associated with each Fund's financial statements. The expenses
of the Reorganization that are attributable to the transaction itself,
including expenses in connection with obtaining the IRS private letter ruling,
will be borne pro rata by each Fund according to its net assets as of the
Valuation Time. These expenses are expected to include expenses incurred in
connection with the preparation of the Agreement and Plan of Reorganization and
the Registration Statement on Form N-14 (including the Prospectus and Proxy
Statement), Commission and other filing fees and legal and audit fees in
connection with the Reorganization.
REQUIRED APPROVALS. Under Fund For Tomorrow's Articles of Incorporation
(as amended to date) and relevant Maryland law, stockholder approval of the
Agreement and Plan of Reorganization requires the affirmative vote of Fund For
Tomorrow stockholders representing a majority of the total number of votes
entitled to be cast thereon.
DEREGISTRATION AND DISSOLUTION. Following the transfer of the assets and
liabilities of Fund For Tomorrow to Fundamental Growth Fund and the
distribution of Corresponding Shares of Fundamental Growth Fund to Fund For
Tomorrow stockholders, Fund For Tomorrow will terminate its registration under
the Investment Company Act and its incorporation under Maryland law and will
withdraw its authority to do business in any state where it is required to do
so.
AMENDMENTS AND CONDITIONS. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of Fund For Tomorrow and Fundamental Growth Fund
pursuant to the Agreement and Plan of Reorganization are subject to various
conditions, including a registration statement on Form N-14 being declared
effective by the Commission, approval of the Reorganization by Fund For
Tomorrow stockholders, a favorable IRS private letter ruling or an opinion of
counsel being received as to tax matters, an opinion of counsel being received
as to securities matters and the continuing accuracy of various representations
and warranties of Fund For Tomorrow and Fundamental Growth Fund being confirmed
by the respective parties.
23
<PAGE>
TERMINATION, POSTPONEMENT AND WAIVERS. The Agreement and Plan of
Reorganization may be terminated, and the Reorganization abandoned at any time,
whether before or after adoption thereof by the Fund For Tomorrow stockholders,
prior to the Exchange Date or the Exchange Date may be postponed: (i) by mutual
consent of the Boards of Directors of Fund For Tomorrow and Fundamental Growth
Fund; (ii) by the Board of Directors of Fund For Tomorrow if any condition to
Fund For Tomorrow's obligations has not been fulfilled or waived by such Board;
or (iii) by the Board of Directors of Fundamental Growth Fund if any condition
to Fundamental Growth Fund's obligations has not been fulfilled or waived by
such Board.
POTENTIAL BENEFITS TO STOCKHOLDERS AS A RESULT OF THE REORGANIZATION
MLAM and the Board of Directors of Fund For Tomorrow have identified
certain potential benefits to stockholders that are likely to result from the
Reorganization. First, following the Reorganization, Fund For Tomorrow
stockholders will remain invested in a diversified open-end fund that has an
investment objective of long-term capital growth. In addition, Fund For
Tomorrow stockholders are likely to experience certain additional benefits,
including lower expenses per share and potential economies of scale.
Specifically, as described above under "Comparison of the Funds --
Management -- Management and Advisory Fees," after the Reorganization, on a pro
forma basis, Fundamental Growth Fund will pay an advisory fee to MLAM at the
same annual rate as currently paid by Fund For Tomorrow and the total operating
expenses of Fundamental Growth Fund after the Reorganization, as a percent of
net assets, would be less than the current operating expenses for Fund For
Tomorrow. See "Summary -- Pro Forma Fee Tables." In addition, certain fixed
costs, such as costs of printing stockholder reports and proxy statements,
legal expenses, audit fees, registration fees, mailing costs and other expenses
would be spread across a larger asset base, thereby lowering the expense ratio
borne by Fund For Tomorrow stockholders. To illustrate the potential economies
of scale for Fund For Tomorrow, on June 30, 1998, the total operating expense
ratio for Fund For Tomorrow Class A shares was 0.93% (based on total fund net
assets of approximately $312 million) and the total operating expense ratio for
Fundamental Growth Fund Class A shares was 0.83% (based on total fund net
assets of approximately $1,062 million). If the Reorganization had taken place
on that date, the total operating expense ratio for Fundamental Growth Fund
Class A shares on a pro forma basis would have been 0.82% (based on total fund
net assets of approximately $1.4 billion).
The following table sets forth the net assets of Fund For Tomorrow and the
net assets of Fundamental Growth Fund as of the dates indicated.
<TABLE>
<CAPTION>
FUNDAMENTAL GROWTH FUND FUND FOR TOMORROW
- ----------------------------------- -------------------------------
DATE NET ASSETS DATE NET ASSETS
- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C>
As of 8/31/96 $ 240,632,901 As of 1/31/96 $380,762,715
As of 8/31/97 $ 406,518,289 As of 1/31/97 $391,122,847
As of 2/28/98 $ 677,236,436 As of 1/31/98 $308,818,599
As of 6/30/98 $1,061,566,810 As of 6/30/98 $311,611,903
</TABLE>
The table illustrates that the net assets of Fundamental Growth Fund,
which commenced operations on December 12, 1992, have experienced substantial
increases over the past several years, while the net assets of Fund For
Tomorrow, which commenced operations on March 5, 1984, have generally
decreased. Were these trends to continue, MLAM anticipates that Fundamental
Growth Fund may experience increasing economies of scale which, as a result,
may have the effect of reducing its overall operating expense ratio, while Fund
For Tomorrow may experience the opposite result, that is, a higher operating
expense ratio due to a continuing reduction in assets. Although there can be no
assurance that the foregoing would in fact occur, MLAM believes that the
economies of scale that may be realized as a result of the Reorganization would
be beneficial to Fund For Tomorrow shareholders.
Based on the foregoing, the Board of Directors of Fund For Tomorrow
concluded that the Reorganization presents no significant risks or costs
(including legal, accounting and administrative costs) that would outweigh the
benefits discussed above.
In approving the Reorganization, the Board of Directors of both Funds
determined that the interests of existing stockholders of both Funds would not
be diluted as a result of the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
GENERAL. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Fund For Tomorrow and Fundamental Growth Fund
have
24
<PAGE>
elected and qualified for the special tax treatment afforded "regulated
investment companies" under the Code, and Fundamental Growth Fund intends to
continue to so qualify after the Reorganization. Fund For Tomorrow and
Fundamental Growth Fund have jointly requested a private letter ruling from the
IRS to the effect that for Federal income tax purposes: (i) the Reorganization,
as described, will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code and Fund For Tomorrow and Fundamental Growth Fund will
each be deemed a "party" to the Reorganization within the meaning of Section
368(b); (ii) in accordance with Section 354(a)(1) of the Code, no gain or loss
will be recognized by the stockholders of Fund For Tomorrow upon the receipt of
Corresponding Shares of Fundamental Growth Fund in the Reorganization solely in
exchange for their shares of Fund For Tomorrow; (iii) in accordance with
Section 358 of the Code, immediately after the Reorganization, the tax basis of
the Corresponding Shares of Fundamental Growth Fund received by the
stockholders of Fund For Tomorrow in the Reorganization will be equal, in the
aggregate, to the tax basis of the shares of Fund For Tomorrow surrendered in
exchange; (iv) in accordance with Section 1223 of the Code, the holding period
of the Corresponding Shares of Fundamental Growth Fund received by stockholders
of Fund For Tomorrow in the Reorganization will include the holding period of
the shares of Fund For Tomorrow immediately prior to the Reorganization
(provided that at the time of the Reorganization the shares of Fund For
Tomorrow were held as capital assets); (v) in accordance with Section 361(a) of
the Code, no gain or loss will be recognized by Fund For Tomorrow on the asset
transfer solely in exchange for Fundamental Growth Fund shares or on the
distribution of Fundamental Growth Fund shares to Fund For Tomorrow
stockholders under Section 361(c)(1); (vi) under Section 1032 of the Code, no
gain or loss will be recognized by Fundamental Growth Fund on the exchange of
its shares for Fund For Tomorrow assets; (vii) in accordance with Section
362(b) of the Code, the tax basis of the assets of Fund For Tomorrow in the
hands of Fundamental Growth Fund will be the same as the tax basis of such
assets in the hands of Fund For Tomorrow immediately prior to the
Reorganization; (viii) in accordance with Section 1223 of the Code, the
holding period of the transferred assets in the hands of Fundamental Growth
Fund will include the holding period of such assets in the hands of Fund For
Tomorrow; and (ix) the taxable year of Fund For Tomorrow will end on the
effective date of the Reorganization and pursuant to Section 381(a) of the Code
and regulations thereunder, Fundamental Growth Fund will succeed to and take
into account certain tax attributes of Fund For Tomorrow, such as earnings and
profits, capital loss carryovers and method of accounting. If the IRS does not
issue a favorable private letter ruling in advance of the selected closing
date, the Funds may proceed with the closing of the Reorganization upon receipt
of an opinion of counsel regarding the tax matters covered by the ruling
request.
To the extent Fundamental Growth Fund has unrealized capital gains at the
time of the Reorganization, Fund For Tomorrow stockholders may incur taxable
gains in the year that Fundamental Growth Fund realizes and distributes those
gains. This will be true notwithstanding that the unrealized gains were
reflected in the price of Fundamental Growth Fund shares at the time they were
exchanged for assets of Fund For Tomorrow in the Reorganization. Conversely,
stockholders of Fundamental Growth Fund will share in unrealized capital gains
of Fund For Tomorrow after the Reorganization and bear a tax consequence on the
subsequent realization of such gains. Stockholders should consult their tax
advisers regarding the effect of the Reorganization in light of their individual
circumstances. As the foregoing relates only to Federal income tax consequences,
stockholders also should consult their tax advisers as to the foreign, state and
local tax consequences of the Reorganization.
STATUS AS A REGULATED INVESTMENT COMPANY. Both Fund For Tomorrow and
Fundamental Growth Fund have elected and qualified to be taxed as regulated
investment companies under Sections 851-855 of the Code, and after the
Reorganization, Fundamental Growth Fund intends to continue to operate so as to
qualify as a regulated investment company. Following the liquidation and
dissolution of Fund For Tomorrow and distribution of shares of Fundamental
Growth Fund to Fund For Tomorrow stockholders, Fund For Tomorrow will terminate
its registration under the Investment Company Act and its incorporation under
Maryland law.
CAPITALIZATION
The following table sets forth as of June 30, 1998: (i) the capitalization
of Fund For Tomorrow, (ii) the capitalization of Fundamental Growth Fund and
(iii) the pro forma capitalization of the Combined Fund as adjusted to give
effect to the Reorganization.
25
<PAGE>
PRO FORMA CAPITALIZATION OF FUNDAMENTAL GROWTH FUND, FUND FOR TOMORROW AND
COMBINED FUND AS OF JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FUNDAMENTAL GROWTH FUND
-----------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total Net Assets: $172,885,564 $604,496,007 $135,909,704 $148,275,535
Shares Outstanding: 8,970,935 32,949,565 7,375,265 7,755,139
Net Asset Value Per Share: $ 19.27 $ 18.35 $ 18.43 $ 19.12
FUND FOR TOMORROW
--------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
----------------- ----------------- ----------------- -----------------
Total Net Assets: $ 10,819,194 $ 49,899,908 $ 1,780,876 $249,111,925
Shares Outstanding: 612,910 2,951,579 105,848 14,201,953
Net Asset Value Per Share: $ 17.65 $ 16.91 $ 16.82 $ 17.54
COMBINED FUND
--------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
----------------- ----------------- ----------------- -----------------
Total Net Assets*: $176,638,105 $628,912,918 $132,566,708 $375,940,282
Shares Outstanding: 9,516,432 35,592,421 7,469,168 20,415,072
Net Asset Value Per Share*: $ 18.56 $ 17.67 $ 17.75 $ 18.41
</TABLE>
- ---------
* Total Net Assets and Net Asset Value Per Share include the aggregate value of
Fund For Tomorrow's net assets which would have been transferred to
Fundamental Growth Fund had the Reorganization been consummated on June 30,
1998. Assumes distribution of undistributed net investment income and
undistributed realized capital gains, and accrual of estimated Reorganization
expenses of $350,000. No assurance can be given as to how many shares of
Fundamental Growth Fund the Fund For Tomorrow stockholders will receive on the
date the Reorganization takes place, and the foregoing should not be relied
upon to reflect the number of shares of Fundamental Growth Fund that actually
will be received on or after such date.
INFORMATION CONCERNING THE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on October 13, 1998, at the offices of Merrill
Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at
9:00 a.m., New York time.
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy or by
submitting a notice of revocation to the Secretary of Fund For Tomorrow.
Although mere attendance at the Meeting will not revoke a proxy, a stockholder
present at the Meeting may withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated on a properly
executed proxy, such shares will be voted "FOR" approval of the Agreement and
Plan of Reorganization.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan of Reorganization will be brought before the Meeting. If,
however, any other business properly is brought before the Meeting, proxies
will be voted in accordance with the judgment of the persons designated on such
proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Fund For Tomorrow at the close of
business on August 25, 1998 (the "Record Date") are entitled to vote at the
Meeting or any adjournment thereof. At the close of business on the Record
Date, there were 17,595,753.43 shares of Fund For Tomorrow common stock issued
and outstanding and entitled to vote.
26
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FUND FOR
TOMORROW AND FUNDAMENTAL GROWTH FUND
To the knowledge of Fund For Tomorrow, as of the Record Date, no person or
entity owned beneficially or of record 5% or more of any class of shares of
Fund For Tomorrow or of all classes of Fund For Tomorrow shares in the
aggregate.
At the Record Date, the Directors and officers of Fund For Tomorrow as a
group (12 persons) owned an aggregate of less than 1% of the outstanding shares
of Fund For Tomorrow and owned an aggregate of less than 1% of the outstanding
shares of common stock of ML & Co.
To the knowledge of Fundamental Growth Fund, as of the Record Date, no
person or entity owned beneficially or of record 5% or more of any class of
shares of Fundamental Growth Fund or of all classes of Fundamental Growth Fund
shares in the aggregate.
As of the Record Date, the Directors and officers of Fundamental Growth
Fund as a group (12 persons) owned an aggregate of less than 1% of the
outstanding shares of Fundamental Growth Fund and owned less than 1% of the
outstanding shares of common stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of each
class of Fund For Tomorrow is entitled to one vote. Approval of the Agreement
and Plan of Reorganization requires the affirmative vote of Fund For Tomorrow
stockholders representing a majority of the total votes entitled to be cast
thereon, with all shares voting as a single class.
Under Maryland law, stockholders of a registered open-end investment
company such as Fund For Tomorrow are not entitled to demand the fair value of
their shares upon a transfer of assets and will be bound by the terms of the
Reorganization if approved at the Meeting. However, any stockholder of Fund For
Tomorrow may redeem his or her Fund For Tomorrow shares prior to the
Reorganization.
A quorum for purposes of the Meeting consists of a majority of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the time
scheduled for the Meeting, a quorum of Fund For Tomorrow's stockholders is not
present or if a quorum is present but sufficient votes in favor of the
Agreement and Plan of Reorganization are not received from the stockholders of
Fund For Tomorrow, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies from
stockholders. Any such adjournment will require the affirmative vote of a
majority of the shares of Fund For Tomorrow present in person or by proxy and
entitled to vote at the session of the Meeting to be adjourned. The persons
named as proxies will vote in favor of any such adjournment if they determine
that adjournment and additional solicitation are reasonable and in the
interests of the stockholders of Fund For Tomorrow.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Fundamental Growth Fund and Fund For Tomorrow pro rata according to
the aggregate net assets of each Fund's portfolio on the date of
Reorganization. Such expenses are currently estimated to be $350,000.
Fund For Tomorrow will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of Fund For Tomorrow and will reimburse certain
persons that Fund For Tomorrow may employ for their reasonable expenses in
assisting in the solicitation of proxies from such beneficial owners of shares
of Fund For Tomorrow.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of Fund For Tomorrow. Fund For Tomorrow has retained Shareholder
Communications Corporation, 17 State Street, 27th Floor, New York, New York
10004, to aid in the solicitation of proxies at a cost to be borne by Fund For
Tomorrow estimated not to exceed $15,000, plus out-of-pocket expenses.
Broker-dealer firms, including Merrill Lynch, holding shares of Fund For
Tomorrow in "street name" for the benefit of their customers and clients will
request the instructions of such customers and clients on how to vote their
shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will
not be permitted to grant voting authority without instructions with respect to
the approval of the Agreement and Plan of Reorganization. Fund For Tomorrow
will include shares held of record by broker-dealers as to which such authority
has been granted in its tabulation of the total number of shares present
27
<PAGE>
for purposes of determining whether the necessary quorum of stockholders
exists. Properly executed proxies that are returned but that are marked
"abstain" or with respect to which a broker-dealer has declined to vote on any
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum. Since approval of the Agreement and Plan of
Reorganization requires the affirmative vote of stockholders representing a
majority of the outstanding shares of Fund For Tomorrow, abstentions and broker
non-votes will have the same effect as a vote against approval of the Agreement
and Plan of Reorganization.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statements and the exhibits relating
thereto which Fund For Tomorrow and Fundamental Growth Fund, respectively, have
filed with the Commission under the Securities Act and the Investment Company
Act, to which reference is hereby made.
Fund For Tomorrow and Fundamental Growth Fund both file reports and other
information with the Commission. Reports, proxy statements, registration
statements and other information filed by Fund For Tomorrow and Fundamental
Growth Fund can be inspected and copied at the public reference facilities of
the Commission in Washington, D.C. and at the New York Regional Office of the
Commission at Seven World Trade Center, New York, New York 10048. Copies of
such materials also can be obtained by mail from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, the Fundamental Growth Fund Prospectus, the Fund For
Tomorrow Prospectus, the Fundamental Growth Fund Statement, the Fund For
Tomorrow Statement, other material incorporated by reference and other
information regarding the Funds.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Fund For Tomorrow or
Fundamental Growth Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Fund For Tomorrow by Swidler Berlin Shereff Friedman, LLP, 919 Third
Avenue, New York, New York and for Fundamental Growth Fund by Brown & Wood LLP,
One World Trade Center, New York, New York. Swidler Berlin Shereff Friedman,
LLP will rely as to matters of Maryland law on the opinion of Brown & Wood LLP,
815 Connecticut Avenue, N.W., Washington, D.C. 20006-4004.
EXPERTS
The financial highlights of Fund For Tomorrow included in this Proxy
Statement and Prospectus have been so included in reliance on the report of
Deloitte & Touche LLP, independent auditors, given on their authority as
experts in auditing and accounting. The principal business address of Deloitte
& Touche LLP is 117 Campus Drive, Princeton, New Jersey 08540.
The statement of assets and liabilities of Fundamental Growth Fund,
including the schedule of investments, as of August 31, 1997 and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended incorporated by
reference in this Proxy Statement and Prospectus and financial highlights for
each of the periods from inception to August 31, 1997, included and
incorporated by reference in this Proxy Statement and Prospectus have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon incorporated herein by reference, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing. The principal business address of Ernst & Young LLP is 202 Carnegie
Center, Princeton, New Jersey 08543.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting
of stockholders of Fund For Tomorrow must be received by Fund For Tomorrow in a
reasonable time before the Board of Directors solicitation relating to such
meeting is to be made in order to be considered in Fund For Tomorrow's proxy
statement and form of proxy relating to the meeting.
By Order of the Board of Directors,
SUSAN B. BAKER
SECRETARY, MERRILL LYNCH FUND FOR
TOMORROW, INC.
28
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 4th day of September, 1998, by and between MERRILL LYNCH FUND FOR TOMORROW,
INC., a Maryland corporation ("FFT"), and MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC., a Maryland corporation ("Fundamental Growth").
PLAN OF REORGANIZATION
The reorganization will consist of the acquisition by Fundamental Growth
of substantially all of the assets, and the assumption of substantially all of
the liabilities, of FFT in exchange solely for an equal aggregate value of
newly issued shares of Fundamental Growth's common stock, with a par value of
$.10 per share, and the subsequent distribution of Corresponding Shares
(defined below) of Fundamental Growth to FFT shareholders in exchange for their
shares of common stock of FFT, with a par value of $.10 per share, in
liquidation of FFT, all upon and subject to the terms hereinafter set forth
(the "Reorganization").
In the course of the Reorganization, shares of Fundamental Growth will be
distributed to FFT shareholders as follows: each holder of FFT shares will be
entitled to receive that class of shares of Fundamental Growth having the same
letter designation (I.E., Class A, Class B, Class C or Class D), and the same
distribution fees, account maintenance fees and sales charges (including
contingent deferred sales charges), if any ("Corresponding Shares"), as the
shares of FFT owned by such shareholder on the Exchange Date (as defined in
Section 7 of this Agreement). The aggregate net asset value of the
Corresponding Shares of Fundamental Growth to be received by each shareholder
of FFT will equal the aggregate net asset value of the FFT shares owned by such
shareholder on the Exchange Date. In consideration therefor, on the Exchange
Date, Fundamental Growth shall acquire substantially all of the assets of FFT
and assume substantially all of FFT's obligations and liabilities then
existing, whether absolute, accrued, contingent or otherwise. It is intended
that the Reorganization described in this Plan shall be a reorganization within
the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"), and any successor provision.
As promptly as practicable after the liquidation of FFT pursuant to the
Reorganization, FFT shall be dissolved in accordance with the laws of the State
of Maryland and will terminate its registration under the Investment Company
Act of 1940, as amended (the "1940 Act").
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, FFT and Fundamental Growth hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF FFT.
FFT represents and warrants to, and agrees with, Fundamental Growth that:
(a) FFT is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland, and has the
power to own all of its assets and to carry out this Agreement. FFT has all
necessary Federal, state and local authorizations to carry on its business as
it is now being conducted and to carry out this Agreement.
(b) FFT is duly registered under the 1940 Act as a diversified, open-end
management investment company (File No. 811-3871), and such registration has
not been revoked or rescinded and is in full force and effect. FFT has elected
and qualified for the special tax treatment afforded regulated investment
companies ("RICs") under Sections 851-855 of the Code at all times since its
inception and intends to continue to so qualify for its taxable year ending
upon the liquidation of FFT.
(c) As used in this Agreement, the term "Investments" shall mean (i) the
investments of FFT shown on the schedule of its investments as of the Valuation
Time (as defined in Section 3(c) of this Agreement) furnished to Fundamental
Growth, with such additions thereto and deletions therefrom as may have arisen
in the course of FFT's business up to the Valuation Time; and (ii) all other
assets owned by FFT or liabilities incurred as of the Valuation Time.
(d) FFT has full power and authority to enter into and perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement has been duly authorized by all necessary action of its Board of
Directors, and,
I-1
<PAGE>
subject to receipt of shareholder approval, this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(e) Fundamental Growth has been furnished with a statement of assets and
liabilities and a schedule of investments of FFT, each as of January 31, 1998,
said financial statements having been examined by Deloitte & Touche LLP,
independent public accountants. An unaudited statement of assets and
liabilities of FFT and an unaudited schedule of investments of FFT, each as of
the Valuation Time, will be furnished to Fundamental Growth at or prior to the
Exchange Date for the purpose of determining the number of shares of
Fundamental Growth to be issued pursuant to Section 4 of this Agreement; and
each will fairly present the financial position of FFT as of the Valuation Time
in conformity with generally accepted accounting principles applied on a
consistent basis.
(f) Fundamental Growth will be furnished with FFT's Semi-Annual Report to
Shareholders for the six months ended July 31, 1998, and the unaudited
financial statements appearing therein will fairly present the financial
position of FFT as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(g) Fundamental Growth has been furnished with the prospectus and
statement of additional information of FFT, dated April 30, 1998, and said
prospectus and statement of additional information do not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(h) There are no material legal, administrative or other proceedings
pending or, to the knowledge of FFT, threatened against FFT that assert
liability on the part of FFT or that materially affect its financial condition
or its ability to consummate the Reorganization. FFT is not charged with or, to
the best of its knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any Federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(i) There are no material contracts outstanding to which FFT is a party
that have not been disclosed in the N-14 Registration Statement (as defined in
subsection (o) below) or will not otherwise be disclosed to Fundamental Growth
prior to the Valuation Time.
(j) FFT is not a party to or obligated under any provision of its Articles
of Incorporation, as amended, or its by-laws, as amended, or any contract or
other commitment or obligation, and is not subject to any order or decree which
would be violated by its execution of or performance under this Agreement.
(k) FFT has no known liabilities of a material amount, contingent or
otherwise, other than those shown on its statements of assets and liabilities
referred to above, those incurred in the ordinary course of its business as an
investment company since January 31, 1998, and those incurred in connection
with the Reorganization. As of the Valuation Time, FFT will advise Fundamental
Growth in writing of all known liabilities, contingent or otherwise, whether or
not incurred in the ordinary course of business, existing or accrued as of such
time.
(l) FFT has filed, or has obtained extensions to file, all Federal, state
and local tax returns which are required to be filed by it, and has paid or has
obtained extensions to pay, all Federal, state and local taxes shown on said
returns to be due and owing and all assessments received by it, up to and
including the taxable year in which the Exchange Date occurs. All tax
liabilities of FFT have been adequately provided for on its books, and no tax
deficiency or liability of FFT has been asserted and no question with respect
thereto has been raised by the Internal Revenue Service or by any state or
local tax authority for taxes in excess of those already paid, up to and
including the taxable year in which the Exchange Date occurs.
(m) At both the Valuation Time and the Exchange Date, FFT will have full
right, power and authority to sell, assign, transfer and deliver the
Investments. At the Exchange Date, subject only to the delivery of the
Investments as contemplated by this Agreement, FFT will have good and
marketable title to all of the Investments, and Fundamental Growth will acquire
all of the Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except those
imposed by the Federal or state securities laws and those imperfections of
title or encumbrances as do not materially detract from the value or use of the
Investments or materially affect title thereto).
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by FFT of the
Reorganization, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and the 1940 Act or state securities laws (which term
as used herein shall include the laws of the District of Columbia and Puerto
Rico).
I-2
<PAGE>
(o) The registration statement filed by Fundamental Growth on Form N-14
relating to the shares of Fundamental Growth to be issued pursuant to this
Agreement, which includes the proxy statement of FFT and the prospectus of
Fundamental Growth with respect to the transaction contemplated herein, and any
supplement or amendment thereto or to the documents therein (as amended, the
"N-14 Registration Statement"), on the effective date of the N-14 Registration
Statement, at the time of the shareholders' meeting referred to in Section 6(a)
of this Agreement and on the Exchange Date, insofar as it relates to FFT (i)
complied or will comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; and the prospectus
included therein did not or will not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by FFT for use in the N-14 Registration Statement as provided in
Section 6(e) of this Agreement.
(p) FFT is authorized to issue 400,000,000 shares of common stock, par
value $.10 per share, divided into four classes, designated Class A, Class B,
Class C and Class D Common Stock, each of which consists of 100,000,000 shares,
each outstanding share of which is fully paid and nonassessable and has full
voting rights.
(q) The books and records of FFT made available to Fundamental Growth
and/or its counsel are substantially true and correct and contain no material
misstatements or omissions with respect to the operations of FFT.
(r) FFT will not sell or otherwise dispose of any of the shares of
Fundamental Growth to be received in the Reorganization, except in distribution
to the shareholders of FFT.
2. REPRESENTATIONS AND WARRANTIES OF FUNDAMENTAL GROWTH.
Fundamental Growth represents and warrants to, and agrees with, FFT that:
(a) Fundamental Growth is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland, and
has the power to own all of its assets and to carry out this Agreement.
Fundamental Growth has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) Fundamental Growth is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-6669), and
such registration has not been revoked or rescinded and is in full force and
effect. Fundamental Growth has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception and intends to continue to so qualify both until consummation of
the Reorganization and thereafter.
(c) Fundamental Growth has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(d) FFT has been furnished with a statement of assets and liabilities and
a schedule of investments of Fundamental Growth, each as of August 31, 1997,
said financial statements having been examined by Ernst & Young LLP,
independent public accountants. An unaudited statement of assets and
liabilities of Fundamental Growth and an unaudited schedule of investments of
Fundamental Growth, each as of the Valuation Time, will be furnished to FFT at
or prior to the Exchange Date for the purpose of determining the number of
shares of Fundamental Growth to be issued pursuant to Section 4 of this
Agreement; and each will fairly present the financial position of Fundamental
Growth as of the Valuation Time in conformity with generally accepted
accounting principles applied on a consistent basis.
(e) FFT has been furnished with Fundamental Growth's Semi-Annual Report to
Shareholders for the six months ended February 28, 1998, and the unaudited
financial statements appearing therein fairly present the financial position of
Fundamental Growth as of the respective dates indicated, in conformity with
generally accepted accounting principles applied on a consistent basis.
(f) FFT has been furnished with the prospectus and statement of additional
information of Fundamental Growth, dated November 26, 1997, and said prospectus
and statement of additional information do not contain any untrue statement of
a
I-3
<PAGE>
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Fundamental Growth, threatened against
Fundamental Growth that assert liability on the part of Fundamental Growth or
that materially affect its financial condition or its ability to consummate the
Reorganization. Fundamental Growth is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which Fundamental
Growth is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to FFT prior to the Valuation
Time.
(i) Fundamental Growth is not a party to or obligated under any provision
of its Articles of Incorporation, as amended, or its by-laws, as amended, or
any contract or other commitment or obligation, and is not subject to any order
or decree which would be violated by its execution of or performance under this
Agreement.
(j) Fundamental Growth has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Fundamental Growth's
statements of assets and liabilities referred to above, those incurred in the
ordinary course of its business as an investment company since February 28,
1998 and those incurred in connection with the Reorganization. As of the
Valuation Time, Fundamental Growth will advise FFT in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the ordinary
course of business, existing or accrued as of such time.
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Fundamental Growth
of the Reorganization, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act or state securities laws.
(l) The N-14 Registration Statement, on its effective date, at the time of
the shareholders' meeting referred to in Section 6(a) of this Agreement and at
the Exchange Date, insofar as it relates to Fundamental Growth (i) complied or
will comply in all material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did
not or will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; and the prospectus included therein did not
or will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Fundamental
Growth for use in the N-14 Registration Statement as provided in Section 6(e)
of this Agreement.
(m) Fundamental Growth is authorized to issue 400,000,000 shares of common
stock, par value $.10 per share, divided into four classes, designated Class A,
Class B, Class C and Class D Common Stock, each of which consists of
100,000,000 shares, each outstanding share of which is fully paid and
nonassessable and has full voting rights.
(n) The Fundamental Growth shares to be issued to FFT pursuant to this
Agreement will have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will be
fully paid and nonassessable and will have full voting rights, and no
shareholder of Fundamental Growth will have any preemptive right of
subscription or purchase in respect thereof.
(o) At or prior to the Exchange Date, the Fundamental Growth shares to be
transferred to FFT on the Exchange Date will be duly qualified for offering to
the public in all states of the United States in which the sale of shares of
Fundamental Growth presently are qualified, and there are a sufficient number
of such shares registered under the 1933 Act and with each pertinent state
securities commission to permit the transfers contemplated by this Agreement to
be consummated.
(p) At or prior to the Exchange Date, Fundamental Growth will have
obtained any and all regulatory, Director and shareholder approvals necessary
to issue the shares of Fundamental Growth to FFT.
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approval of the shareholders of
FFT, and to the other terms and conditions contained herein, FFT agrees to
convey, transfer and deliver to Fundamental Growth for the benefit of
Fundamental Growth, and Fundamental Growth agrees to acquire from FFT for the
benefit of Fundamental Growth, on the Exchange Date all of the Investments
(including interest accrued as of the Valuation Time on debt instruments) of
FFT, and assume substantially all of the liabilities of FFT, in exchange solely
for that number of shares of Fundamental Growth provided in Section 4 of
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this Agreement. Pursuant to this Agreement, as soon as practicable FFT will
distribute all Fundamental Growth shares received by it to its shareholders in
exchange for their corresponding FFT shares. Such distribution shall be
accomplished by the opening of shareholder accounts on the stock ledger records
of Fundamental Growth in the amounts due the shareholders of FFT based on their
respective holdings in FFT as of the Valuation Time.
(b) FFT will pay or cause to be paid to Fundamental Growth any interest it
receives on or after the Exchange Date with respect to the Investments
transferred to Fundamental Growth hereunder.
(c) The Valuation Time shall be 4:00 P.M., New York time, on November 20,
1998, or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
(d) Fundamental Growth will acquire substantially all of the assets of,
and assume substantially all of the known liabilities of, FFT, except that
recourse for such liabilities will be limited to the net assets of FFT acquired
by Fundamental Growth. The known liabilities of FFT as of the Valuation Time
shall be confirmed in writing to Fundamental Growth by FFT pursuant to Section
1(k) of this Agreement.
(e) Fundamental Growth and FFT will jointly file Articles of Transfer with
the State Department of Assessments and Taxation of Maryland and any such other
instrument as may be required by the State of Maryland to effect the transfer
of Investments of FFT to Fundamental Growth.
(f) FFT will be dissolved following the Exchange Date by filing Articles
of Dissolution with the State Department of Assessments and Taxation of
Maryland.
4. ISSUANCE AND VALUATION OF FUNDAMENTAL GROWTH SHARES IN THE REORGANIZATION.
Full Fundamental Growth shares, and to the extent necessary, a fractional
Fundamental Growth share, of an aggregate net asset value equal to the net
asset value of the assets of FFT acquired, determined as hereinafter provided,
reduced by the amount of liabilities of FFT assumed by Fundamental Growth,
shall be issued by Fundamental Growth in exchange for such assets of FFT. The
net asset value of each of FFT and Fundamental Growth shall be determined in
accordance with the procedures described in the then current Fundamental Growth
prospectus as of the Valuation Time. Such valuation and determination shall be
made by Fundamental Growth in cooperation with FFT. Fundamental Growth shall
issue its Class A, Class B, Class C and Class D shares to FFT in one
certificate or share deposit receipt registered in the name of FFT. FFT shall
distribute Corresponding Shares of Fundamental Growth to its shareholders by
redelivering such certificate or receipt to Financial Data Services, Inc.
5. PAYMENT OF EXPENSES.
(a) With respect to expenses incurred in connection with the
Reorganization, (i) Fundamental Growth shall pay all expenses incurred which
are attributable solely to Fundamental Growth and the conduct of its business,
(ii) FFT shall pay all expenses incurred which are attributable solely to FFT
and the conduct of its business, and (iii) FFT and Fundamental Growth shall
pay, subsequent to the Exchange Date and pro rata according to each Fund's net
assets on the Exchange Date, all expenses incurred in connection with the
Reorganization, including, but not limited to, all costs related to the
preparation and distribution of the N-14 Registration Statement. Such fees and
expenses shall include legal and accounting fees, state securities fees (if
any), printing costs, filing fees, portfolio transfer taxes (if any), and any
similar expenses incurred in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom,
including, without limitation, consequential damages.
6. COVENANTS OF FFT AND FUNDAMENTAL GROWTH.
(a) FFT agrees to call a special meeting of its shareholders as soon as is
practicable after the effective date of the N-14 Registration Statement for the
purpose of considering the Reorganization as described in this Agreement, and
it shall be a condition to the obligations of each of the parties hereto that
the holders of a majority of the shares of FFT issued and outstanding and
entitled to vote thereon, shall have approved this Agreement at such a meeting
at or prior to the Valuation Time.
(b) FFT and Fundamental Growth each covenants to operate its respective
business as presently conducted between the date hereof and the Exchange Date.
(c) FFT agrees that following the consummation of the Reorganization, it
will dissolve in accordance with the laws of the State of Maryland and any
other applicable law, it will not make any distributions of any Fundamental
Growth shares
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other than to the shareholders of FFT and without first paying or adequately
providing for the payment of all of FFT's liabilities not assumed by
Fundamental Growth, if any, and on and after the Exchange Date it shall not
conduct any business except in connection with its dissolution and
deregistration.
(d) FFT undertakes that if the Reorganization is consummated, it will file
an application pursuant to Section 8(f) of the 1940 Act for an order declaring
that FFT has ceased to be a registered investment company.
(e) Fundamental Growth will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective as
promptly as practicable. FFT and Fundamental Growth agree to cooperate fully
with each other, and each will furnish to the other the information relating to
itself to be set forth in the N-14 Registration Statement as required by the
1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder
and the state securities or blue sky laws (if applicable).
(f) Fundamental Growth agrees to advise FFT promptly in writing if at any
time prior to the Exchange Date the assets of FFT include any assets which
Fundamental Growth is not permitted, or reasonably believes to be unsuitable
for it, to acquire, including without limitation any security which, prior to
its acquisition by FFT, Fundamental Growth has informed FFT is unsuitable for
Fundamental Growth to acquire. Moreover, Fundamental Growth has no plan or
intention to sell or otherwise dispose of the assets of FFT to be acquired in
the Reorganization, except for dispositions made in the ordinary course of
business.
(g) FFT and Fundamental Growth each agrees that by the Exchange Date all
of its Federal and other tax returns and reports required to be filed on or
before such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been provided
for the payment of such taxes. In connection with this covenant, the Funds
agree to cooperate with each other in filing any tax return, amended return or
claim for refund, determining a liability for taxes or a right to a refund of
taxes or participating in or conducting any audit or other proceeding in
respect of taxes. Fundamental Growth agrees to retain for a period of ten (10)
years following the Exchange Date all returns, schedules and work papers and
all material records or other documents relating to tax matters of FFT for its
taxable period first ending after the Exchange Date and for all prior taxable
periods. Any information obtained under this subsection shall be kept
confidential except as otherwise may be necessary in connection with the filing
of returns or claims for refund or in conducting an audit or other proceeding.
After the Exchange Date, FFT shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by FFT with respect to FFT's final taxable year ending with its complete
liquidation and for any prior periods or taxable years and further shall cause
such tax returns and Forms 1099 to be duly filed with the appropriate taxing
authorities. Notwithstanding the aforementioned provisions of this subsection,
any expenses incurred by FFT (other than for payment of taxes) in connection
with the preparation and filing of said tax returns and Forms 1099 after the
Exchange Date shall be borne by FFT to the extent such expenses have been
accrued by FFT in the ordinary course without regard to the Reorganization; any
excess expenses shall be borne by Merrill Lynch Asset Management, L.P. ("MLAM")
at the time such tax returns and Forms 1099 are prepared.
(h) FFT agrees to mail to its shareholders of record entitled to vote at
the special meeting of shareholders at which action is to be considered
regarding this Agreement, in sufficient time to comply with requirements as to
notice thereof, a combined Proxy Statement and Prospectus which complies in all
material respects with the applicable provisions of Section 14(a) of the 1934
Act and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(i) Following the consummation of the Reorganization, Fundamental Growth
expects to stay in existence and continue its business as an open-end
management investment company registered under the 1940 Act.
7. EXCHANGE DATE.
(a) Delivery of the assets of FFT to be transferred, together with any
other Investments, and the Fundamental Growth shares to be issued, shall be
made at the offices of Swidler Berlin Shereff Friedman, LLP ("SBSF"), 919 Third
Avenue, New York, New York 10022, at 10:00 A.M. on the next full business day
following the Valuation Time, or at such other place, time and date agreed to
by FFT and Fundamental Growth, the date and time upon which such delivery is to
take place being referred to herein as the "Exchange Date." To the extent that
any Investments, for any reason, are not transferable on the Exchange Date, FFT
shall cause such Investments to be transferred to Fundamental Growth's account
with The Chase Manhattan Bank at the earliest practicable date thereafter.
(b) FFT will deliver to Fundamental Growth on the Exchange Date
confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Fundamental Growth hereunder, certified by Deloitte &
Touche LLP.
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(c) As soon as practicable after the close of business on the Exchange
Date, FFT shall deliver to Fundamental Growth a list of the names and addresses
of all of the shareholders of record of FFT on the Exchange Date and the number
of shares of FFT owned by each such shareholder, certified to the best of their
knowledge and belief by the transfer agent for FFT or by its President.
8. FFT CONDITIONS.
The obligations of FFT hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the affirmative vote of the holders of a majority
of the shares of FFT, issued and outstanding and entitled to vote thereon,
voting together as a single class, and by the Board of Directors of Fundamental
Growth; and that Fundamental Growth shall have delivered to FFT a copy of the
resolution approving this Agreement adopted by Fundamental Growth's Board of
Directors, certified by the Secretary of Fundamental Growth.
(b) That Fundamental Growth shall have furnished to FFT a statement of
Fundamental Growth's assets and liabilities, with values determined as provided
in Section 4 of this Agreement, together with a schedule of its investments,
all as of the Valuation Time, certified on Fundamental Growth's behalf by its
President (or any Vice President) and its Treasurer, and a certificate signed
by Fundamental Growth's President (or any Vice President) and its Treasurer,
dated as of the Exchange Date, certifying that as of the Valuation Time and as
of the Exchange Date there has been no material adverse change in the financial
position of Fundamental Growth since February 28, 1998 other than changes in
its portfolio securities since that date or changes in the market value of its
portfolio securities.
(c) That Fundamental Growth shall have furnished to FFT a certificate
signed by Fundamental Growth's President (or any Vice President) and its
Treasurer, dated as of the Exchange Date, certifying that, as of the Valuation
Time and as of the Exchange Date all representations and warranties of
Fundamental Growth made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such dates, and that
Fundamental Growth has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to each of
such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That FFT shall have received an opinion of Brown & Wood LLP, as
counsel to Fundamental Growth, in form and substance satisfactory to FFT and
dated the Exchange Date, to the effect that (i) Fundamental Growth is a
corporation duly organized, validly existing and in good standing in conformity
with the laws of the State of Maryland; (ii) the Corresponding Shares of
Fundamental Growth to be delivered to FFT shareholders as provided for by this
Agreement are duly authorized and, upon delivery, will be validly issued and
outstanding and fully paid and nonassessable by Fundamental Growth, and no
shareholder of Fundamental Growth has any preemptive right to subscription or
purchase in respect thereof (pursuant to the Articles of Incorporation, as
amended, or the by-laws of Fundamental Growth or, to the best of such counsel's
knowledge, otherwise); (iii) this Agreement has been duly authorized, executed
and delivered by Fundamental Growth, and represents a valid and binding
contract, enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto; PROVIDED, that such counsel shall express no opinion with
respect to the application of equitable principles in any proceeding, whether
at law or in equity; (iv) the execution and delivery of this Agreement does
not, and the consummation of the Reorganization will not, violate any material
provisions of the Articles of Incorporation, as amended, the by-laws, as
amended, of Fundamental Growth or any agreement (known to such counsel) to
which Fundamental Growth is a party or by which Fundamental Growth is bound,
except insofar as the parties have agreed to amend such provision as a
condition precedent to the Reorganization, or Maryland law; (v) no consent,
approval, authorization or order of any United States Federal court, Maryland
state court or governmental authority is required for the consummation by
Fundamental Growth of the Reorganization, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act and the published rules and
regulations of the Commission thereunder and under Maryland law and such as may
be required under state securities laws; (vi) the N-14 Registration Statement
has become effective under the 1933 Act, no stop order suspending the
effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and each
amendment or supplement thereto, as of their respective effective dates, appear
on their face to be appropriately responsive in all material respects to the
requirements of the 1933 Act, the 1934 Act and the 1940 Act and the published
rules and regulations of the Commission thereunder; (vii) the descriptions in
the N-14 Registration Statement of statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly present the
information required to be shown;
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(viii) such counsel does not know of any statutes, legal or governmental
proceedings or contracts or other documents related to the Reorganization of a
character required to be described in the N-14 Registration Statement which are
not described therein or, if required to be filed, filed as required; (ix)
Fundamental Growth, to the knowledge of such counsel, is not required to
qualify to do business as a foreign corporation in any jurisdiction except as
may be required by state securities or blue sky laws, and except where
Fundamental Growth has so qualified or the failure so to qualify would not have
a material adverse effect on Fundamental Growth or its shareholders; (x) such
counsel does not have actual knowledge of any material suit, action or legal or
administrative proceeding pending or threatened against Fundamental Growth, the
unfavorable outcome of which would materially and adversely affect Fundamental
Growth; and (xi) all corporate actions required to be taken by Fundamental
Growth to authorize this Agreement and to effect the Reorganization have been
duly authorized by all necessary corporate actions on the part of Fundamental
Growth and (xii) such opinion is solely for the benefit of FFT and its
Directors and officers. Such opinion also shall state that (aa) while such
counsel cannot make any representation as to the accuracy or completeness of
statements of fact in the N-14 Registration Statement or any amendment or
supplement thereto, nothing has come to their attention that would lead them to
believe that, on the respective effective dates of the N-14 Registration
Statement and any amendment or supplement thereto, (1) the N-14 Registration
Statement or any amendment or supplement thereto contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2) the
prospectus included in the N-14 Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and (bb) such counsel does not express any opinion
or belief as to the financial statements or other financial or statistical data
relating to Fundamental Growth contained or incorporated by reference in the
N-14 Registration Statement. In giving the opinion set forth above, Brown &
Wood LLP may state that it is relying on certificates of officers of
Fundamental Growth with regard to matters of fact and certain certificates and
written statements of governmental officials with respect to the good standing
of Fundamental Growth.
(f) That FFT shall have received either (a) a private letter ruling from
the Internal Revenue Service or (b) an opinion of Brown & Wood LLP, to the
effect that for Federal income tax purposes (i) the transfer of substantially
all of the Investments of FFT to Fundamental Growth in exchange solely for
shares of Fundamental Growth and assumption of FFT's liabilities as provided in
this Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and FFT and Fundamental Growth will each be deemed to
be a "party" to the Reorganization within the meaning of Section 368(b); (ii)
in accordance with Section 361(a) of the Code, no gain or loss will be
recognized to FFT as a result of the asset transfer solely in exchange for
Fundamental Growth shares and the assumption of liabilities or on the
distribution of the Fundamental Growth stock to FFT shareholders under Section
361(c)(1); (iii) under Section 1032 of the Code, no gain or loss will be
recognized to Fundamental Growth on the receipt of assets of FFT in exchange
for Fundamental Growth shares; (iv) in accordance with Section 354(a)(1) of the
Code, no gain or loss will be recognized to the shareholders of FFT on the
receipt of Corresponding Shares of Fundamental Growth in exchange for their
shares of FFT; (v) in accordance with Section 362(b) of the Code, the tax basis
of the FFT assets in the hands of Fundamental Growth will be the same as the
tax basis of such assets in the hands of FFT immediately prior to the
consummation of the Reorganization; (vi) in accordance with Section 358 of the
Code, immediately after the Reorganization, the tax basis of the Corresponding
Shares of Fundamental Growth received by the shareholders of FFT in the
Reorganization will be equal, in the aggregate, to the tax basis of the shares
of FFT surrendered in exchange; (vii) in accordance with Section 1223 of the
Code, a shareholder's holding period for the Corresponding Shares of
Fundamental Growth will be determined by including the period for which such
shareholder held the shares of FFT exchanged therefor, PROVIDED, that such FFT
shares were held as a capital asset; (viii) in accordance with Section 1223 of
the Code, Fundamental Growth's holding period with respect to the FFT assets
transferred will include the period for which such assets were held by FFT; and
(ix) the taxable year of FFT will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Fundamental Growth will succeed to and take into account certain
tax attributes of FFT, such as earnings and profits, capital loss carryovers
and method of accounting.
(g) That all proceedings taken by Fundamental Growth and its counsel in
connection with the Reorganization and all documents incidental thereto shall
be satisfactory in form and substance to FFT.
(h) That the N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of Fundamental Growth, contemplated by the
Commission.
(i) That FFT shall have received from Ernst & Young LLP a letter dated as
of the effective date of the N-14 Registration Statement and a similar letter
dated within five days prior to the Exchange Date, in form and substance
satisfactory to FFT, to the effect that (i) they are independent public
accountants with respect to Fundamental Growth within the meaning
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of the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary information
of Fundamental Growth included or incorporated by reference in the N-14
Registration Statement and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder; and (iii) on the basis of
limited procedures agreed upon by FFT and Fundamental Growth and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim financial
statements and unaudited supplementary information of Fundamental Growth
included in the N-14 Registration Statement, and inquiries of certain officials
of Fundamental Growth responsible for financial and accounting matters, nothing
came to their attention that caused them to believe that (a) such unaudited
financial statements and related unaudited supplementary information do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder, (b) such unaudited financial statements are not fairly presented in
conformity with generally accepted accounting principles, applied on a basis
substantially consistent with that of the audited financial statements, or (c)
such unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by FFT and Fundamental
Growth and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to Fundamental
Growth appearing in the N-14 Registration Statement, which information is
expressed in dollars (or percentages derived from such dollars) (with the
exception of performance comparisons, if any), if any, has been obtained from
the accounting records of Fundamental Growth or from schedules prepared by
officials of Fundamental Growth having responsibility for financial and
reporting matters and such information is in agreement with such records,
schedules or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of Fundamental Growth or would prohibit the
Reorganization.
(k) That FFT shall have received from the Commission such orders or
interpretations as SBSF, as counsel to FFT, deems reasonably necessary or
desirable under the 1933 Act and the 1940 Act in connection with the
Reorganization, PROVIDED, that such counsel shall have requested such orders as
promptly as practicable, and all such orders shall be in full force and effect.
9. FUNDAMENTAL GROWTH CONDITIONS.
The obligations of Fundamental Growth hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Directors of FFT and by the
affirmative vote of the holders of a majority of the shares of common stock of
FFT issued and outstanding and entitled to vote thereon, voting together as a
single class; and that FFT shall have delivered to Fundamental Growth a copy of
the resolution approving this Agreement adopted by FFT's Board of Directors,
and a certificate setting forth the vote FFT shareholders obtained, each
certified by the Secretary of FFT.
(b) That FFT shall have furnished to Fundamental Growth a statement of
FFT's assets and liabilities, with values determined as provided in Section 4
of this Agreement, together with a schedule of investments with their
respective dates of acquisition and tax costs, all as of the Valuation Time,
certified on FFT's behalf by its President (or any Vice President) and its
Treasurer, and a certificate of both such officers, dated the Exchange Date,
certifying that as of the Valuation Time and as of the Exchange Date there has
been no material adverse change in the financial position of FFT since January
31, 1998, other than changes in the Investments since that date or changes in
the market value of the Investments.
(c) That FFT shall have furnished to Fundamental Growth a certificate
signed by FFT's President (or any Vice President) and its Treasurer, dated the
Exchange Date, certifying that as of the Valuation Time and as of the Exchange
Date all representations and warranties of FFT made in this Agreement are true
and correct in all material respects with the same effect as if made at and as
of such dates and FFT has complied with all of the agreements and satisfied all
of the conditions on its part to be performed or satisfied at or prior to such
dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That Fundamental Growth shall have received an opinion of Brown & Wood
LLP, as Maryland counsel to FFT, in form and substance satisfactory to
Fundamental Growth and dated the Exchange Date, to the effect that (i) FFT is a
corporation duly organized, validly existing and in good standing in conformity
with the laws of the State of Maryland; (ii) this
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Agreement has been duly authorized, executed and delivered by FFT, and
represents a valid and binding contract, enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto, PROVIDED, that such counsel
shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iii) FFT has the
power to sell, assign, transfer and deliver the assets transferred by it
hereunder and, upon consummation of the Reorganization in accordance with the
terms of this Agreement, FFT will have duly transferred such assets and
liabilities in accordance with this Agreement; (iv) the execution and delivery
of this Agreement does not, and the consummation of the Reorganization will
not, violate any material provisions of the Articles of Incorporation, as
amended, the by-laws of FFT, as amended, or Maryland law; (v) no consent,
approval, authorization or order of any Maryland court or governmental
authority is required for the consummation by FFT of the Reorganization, except
such as have been obtained under Maryland law; and (vi) such opinion is solely
for the benefit of Fundamental Growth and its Directors and officers. In giving
the opinion set forth above, Brown & Wood LLP may state that it is relying on
certificates of officers of FFT with regard to matters of fact and certain
certificates and written statements of government officials with respect to the
good standing of FFT.
(f) That Fundamental Growth shall have received an opinion of SBSF, as
counsel to FFT, in form and substance satisfactory to Fundamental Growth and
dated the Exchange Date, to the effect that (i) no consent, approval,
authorization or order of any United States Federal court or governmental
authority is required for the consummation by FFT of the Reorganization, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder and such
as may be required under state securities laws; (ii) the proxy statement of FFT
contained in the N-14 Registration Statement, and each amendment or supplement
thereto, as of their respective effective dates, appear on their face to be
appropriately responsive in all material respects to the requirements of the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder; (iii) the descriptions in the proxy statement of FFT
contained in the N-14 Registration Statement of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; (iv) such counsel does not
know of any statutes, legal or governmental proceedings or contracts or other
documents related to the Reorganization of a character required to be described
in the N-14 Registration Statement which are not described therein or, if
required to be filed, filed as required; (v) the execution and delivery of this
Agreement does not, and the consummation of the Reorganization will not,
violate any material provisions of any agreement (known to such counsel) to
which FFT is a party or by which FFT is bound, except insofar as the parties
have agreed to amend such provision as a condition precedent to the
Reorganization; (vi) FFT, to the knowledge of such counsel, is not required to
qualify to do business as a foreign corporation in any jurisdiction except as
may be required by state securities or blue sky laws, and except where each has
so qualified or the failure so to qualify would not have a material adverse
effect on FFT or its shareholders; (vii) such counsel does not have actual
knowledge of any material suit, action or legal or administrative proceeding
pending or threatened against FFT, the unfavorable outcome of which would
materially and adversely affect FFT; (viii) all corporate actions required to
be taken by FFT to authorize this Agreement and to effect the Reorganization
have been duly authorized by all necessary corporate actions on the part of
Fund For Tomorrow; and (ix) such opinion is solely for the benefit of
Fundamental Growth and its Directors and officers. Such opinion also shall
state that (aa) while such counsel cannot make any representation as to the
accuracy or completeness of statements of fact in the N-14 Registration
Statement or any amendment or supplement thereto, nothing has come to their
attention that would lead them to believe that, on the respective effective
dates of the N-14 Registration Statement and any amendment or supplement
thereto, (1) the proxy statement of FFT contained in the N-14 Registration
Statement or any amendment or supplement thereto contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (2) the
proxy statement of FFT contained in the N-14 Registration Statement contained
any untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (bb) such counsel does not
express any opinion or belief as to the financial statements or other financial
or statistical data relating to FFT contained or incorporated by reference in
the N-14 Registration Statement. In giving the opinion set forth above, SBSF
may state that it is relying on certificates of officers of FFT with regard to
matters of fact and certain certificates and written statements of governmental
officials with respect to the good standing of FFT and the opinion of Brown &
Wood LLP as to matters of Maryland law.
(g) That Fundamental Growth shall have received a private letter ruling
from the Internal Revenue Service or an opinion of Brown & Wood LLP with
respect to the matters specified in Section 8(f) of this Agreement.
(h) That all proceedings taken by FFT and its counsel in connection with
the Reorganization and all documents incidental thereto shall be satisfactory
in form and substance to Fundamental Growth.
I-10
<PAGE>
(i) That the N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of FFT, contemplated by the Commission.
(j) That Fundamental Growth shall have received from Deloitte & Touche LLP
a letter dated as of the effective date of the N-14 Registration Statement and
a similar letter dated within five days prior to the Exchange Date, in form and
substance satisfactory to Fundamental Growth, to the effect that (i) they are
independent public accountants with respect to FFT within the meaning of the
1933 Act and the applicable published rules and regulations thereunder; (ii) in
their opinion, the financial statements and supplementary information of FFT
included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed upon by
FFT and Fundamental Growth and described in such letter (but not an examination
in accordance with generally accepted auditing standards) consisting of a
reading of any unaudited interim financial statements and unaudited
supplementary information of FFT included in the N-14 Registration Statement,
and inquiries of certain officials of FFT responsible for financial and
accounting matters, nothing came to their attention that caused them to believe
that (a) such unaudited financial statements and related unaudited
supplementary information do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder, (b) such unaudited financial statements are
not fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary information
is not fairly stated in all material respects in relation to the unaudited
financial statements taken as a whole; and (iv) on the basis of limited
procedures agreed upon by Fundamental Growth and FFT and described in such
letter (but not an examination in accordance with generally accepted auditing
standards), the information relating to FFT appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages derived
from such dollars) (with the exception of performance comparisons, if any), if
any, has been obtained from the accounting records of FFT or from schedules
prepared by officials of FFT having responsibility for financial and reporting
matters and such information is in agreement with such records, schedules or
computations made therefrom.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the Reorganization
under Section 25(c) of the 1940 Act, and no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of FFT or would prohibit the Reorganization.
(l) That Fundamental Growth shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as counsel to Fundamental
Growth, deems reasonably necessary or desirable under the 1933 Act and the 1940
Act in connection with the Reorganization, PROVIDED, that such counsel shall
have requested such orders as promptly as practicable, and all such orders
shall be in full force and effect.
(m) That the Investments to be transferred to Fundamental Growth shall not
include any assets or liabilities which Fundamental Growth, by reason of
charter limitations or otherwise, may not properly acquire or assume.
(n) That FFT shall have delivered to Fundamental Growth a letter from
Deloitte & Touche LLP, dated the Exchange Date, stating that such firm has
performed a limited review of the Federal, state and local income tax returns
of FFT for the period ended January 31, 1998 (which returns originally were
prepared and filed by FFT), and that based on such limited review, nothing came
to their attention which caused them to believe that such returns did not
properly reflect, in all material respects, the Federal, state and local income
taxes of FFT for the period covered thereby; and that for the period from
February 1, 1998, to and including the Exchange Date and for any taxable year
of FFT ending upon the liquidation of FFT, such firm has performed a limited
review to ascertain the amount of applicable Federal, state and local taxes,
and has determined that either such amount has been paid or reserves
established for payment of such taxes, this review to be based on unaudited
financial data; and that based on such limited review, nothing has come to
their attention which caused them to believe that the taxes paid or reserves
set aside for payment of such taxes were not adequate in all material respects
for the satisfaction of Federal, state and local taxes for the period from
February 1, 1998, to and including the Exchange Date and for any taxable year
of FFT ending upon the liquidation of FFT or that FFT would not continue to
qualify as a regulated investment company for Federal income tax purposes.
(o) That prior to the Exchange Date, FFT shall have declared a dividend or
dividends which, together with all such previous dividends, shall have the
effect of distributing to its shareholders all of its investment company taxable
income for the period from July 1, 1998 to and including the Exchange Date, if
any (computed without regard to any deduction for dividends paid), and all of
its net capital gain, if any, realized for the period from February 1, 1998 to
and including the Exchange Date.
I-11
<PAGE>
10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the shareholders of FFT) prior to
the Exchange Date, or the Exchange Date may be postponed, (i) by mutual consent
of the Boards of Directors of FFT and Fundamental Growth; (ii) by the Board of
Directors of FFT if any condition of FFT's obligations set forth in Section 8
of this Agreement has not been fulfilled or waived by such Board; or (iii) by
the Board of Directors of Fundamental Growth if any condition of Fundamental
Growth's obligations set forth in Section 9 of this Agreement has not been
fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by June 1, 1999, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Directors
of FFT and Fundamental Growth.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either FFT or Fundamental
Growth or persons who are their directors, trustees, officers, agents or
shareholders in respect of this Agreement.
(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of either FFT or
Fundamental Growth, respectively (whichever is entitled to the benefit
thereof), if, in the judgment of such Board after consultation with its
counsel, such action or waiver will not have a material adverse effect on the
benefits intended under this Agreement to the shareholders of their respective
fund, on behalf of which such action is taken. In addition, the Boards of
Directors of FFT and Fundamental Growth have delegated to MLAM the ability to
make non-material changes to the transaction if it deems it to be in the best
interests of FFT and Fundamental Growth to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither FFT nor Fundamental Growth nor
any of their officers, directors or trustees, agents or shareholders shall have
any liability with respect to such representations or warranties after the
Exchange Date. This provision shall not protect any officer, director or
trustee, agent or shareholder of FFT or Fundamental Growth against any
liability to the entity for which that officer, director or trustee, agent or
shareholder so acts or to its shareholders, to which that officer, director or
trustee, agent or shareholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Exchange Date and shall impose any terms
or conditions which are determined by action of the Boards of Directors of FFT
and Fundamental Growth to be acceptable, such terms and conditions shall be
binding as if a part of this Agreement without further vote or approval of the
shareholders of FFT unless such terms and conditions shall result in a change
in the method of computing the number of shares of Fundamental Growth to be
issued to FFT in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the shareholders of
FFT prior to the meetings at which the Reorganization shall have been approved,
this Agreement shall not be consummated and shall terminate unless FFT promptly
shall call a special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
11. INDEMNIFICATION.
(a) FFT hereby agrees to indemnify and hold Fundamental Growth harmless
from all loss, liability and expense (including reasonable counsel fees and
expenses in connection with the contest of any claim) which Fundamental Growth
may incur or sustain by reason of the fact that (i) Fundamental Growth shall be
required to pay any corporate obligation of FFT, whether consisting of tax
deficiencies or otherwise, based upon a claim or claims against FFT which were
omitted or not fairly reflected in the financial statements to be delivered to
Fundamental Growth in connection with the Reorganization; (ii) any
representations or warranties made by FFT in this Agreement should prove to be
false or erroneous in any material respect; (iii) any covenant of FFT has been
breached in any material respect; or (iv) any claim is made alleging that (a)
the N-14 Registration Statement included any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (b) the Proxy
Statement and Prospectus delivered to the shareholders of FFT and forming a
part of the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such claim is based on written
information furnished by Fundamental Growth to FFT.
I-12
<PAGE>
(b) Fundamental Growth hereby agrees to indemnify and hold FFT harmless
from all loss, liability and expenses (including reasonable counsel fees and
expenses in connection with the contest of any claim) which FFT may incur or
sustain by reason of the fact that (i) any representations or warranties made
by Fundamental Growth in this Agreement should prove false or erroneous in any
material respect, (ii) any covenant of Fundamental Growth has been breached in
any material respect, or (iii) any claim is made alleging that (a) the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, not misleading or (b) the Proxy Statement and
Prospectus delivered to shareholders of FFT and forming a part of the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except insofar as such claim is based on written information furnished by FFT
to Fundamental Growth.
(c) In the event that any claim is made against Fundamental Growth in
respect of which indemnity may be sought by Fundamental Growth from FFT under
Section 11(a) of this Agreement, or in the event that any claim is made against
FFT in respect of which indemnity may be sought by FFT from Fundamental Growth
under Section 11(b) of this Agreement, then the party seeking indemnification
(the "Indemnified Party"), with reasonable promptness and before payment of
such claim, shall give written notice of such claim to the other party (the
"Indemnifying Party"). If no objection as to the validity of the claim is made
in writing to the Indemnified Party by the Indemnifying Party within thirty
(30) days after the giving of notice hereunder, then the Indemnified Party may
pay such claim and shall be entitled to reimbursement therefor, pursuant to
this Agreement. If, prior to the termination of such thirty-day period,
objection in writing as to the validity of such claim is made to the
Indemnified Party, the Indemnified Party shall withhold payment thereof until
the validity of such claim is established (i) to the satisfaction of the
Indemnifying Party, or (ii) by a final determination of a court of competent
jurisdiction, whereupon the Indemnified Party may pay such claim and shall be
entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with
respect to any tax claims, within seven (7) calendar days following the earlier
of (A) an agreement between FFT and Fundamental Growth that an indemnity amount
is payable, (B) an assessment of a tax by a taxing authority, or (C) a
"determination" as defined in Section 1313(a) of the Code. For purposes of this
Section 11, the term "assessment" shall have the same meaning as used in
Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable
provision under the laws of the appropriate taxing authority. In the event of
any objection by the Indemnifying Party, the Indemnifying Party promptly shall
investigate the claim, and if it is not satisfied with the validity thereof,
the Indemnifying Party shall conduct the defense against such claim. All costs
and expenses incurred by the Indemnifying Party in connection with such
investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of, any
other rights the parties may have under applicable law.
12. OTHER MATTERS.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization pursuant to
Rule 145(c), Fundamental Growth will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL
LYNCH FUNDAMENTAL GROWTH FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS
PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Fundamental
Growth's transfer agent with respect to such shares. FFT will provide
Fundamental Growth on the Exchange Date with the name of any FFT shareholder
who is to the knowledge of FFT an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to FFT or Fundamental Growth, in
either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn.:
Arthur Zeikel, President.
I-13
<PAGE>
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes
the only understanding with respect to the Reorganization, may not be changed
except by a letter of agreement signed by each party and shall be governed by
and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, of FFT and
Fundamental Growth are on file with the Department of Assessments and Taxation
of the State of Maryland and notice is hereby given that this instrument is
executed on behalf of the Directors of each fund.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH FUND FOR TOMORROW, INC.
By: /S/ ARTHUR ZEIKEL
-------------------------------------
ARTHUR ZEIKEL, PRESIDENT
Attest:
/S/ SUSAN B. BAKER
- ------------------------------------
SUSAN B. BAKER, SECRETARY
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
By: /S/ ARTHUR ZEIKEL
-------------------------------------
ARTHUR ZEIKEL, PRESIDENT
Attest:
/S/ BARBARA G. FRASER
- ------------------------------------
BARBARA G. FRASER, SECRETARY
I-14
<PAGE>
<TABLE>
<S><C>
MERRILL LYNCH FUND FOR TOMORROW, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
P R O X Y
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Susan B. Baker as proxies, each with the power to
appoint his or her substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of common stock of Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") held of record by the
undersigned on August 25, 1998, at a Special Meeting of Stockholders of the Fund to be held on October 13, 1998, or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
By signing and dating the reverse side of this card, you authorize the proxies to vote each proposal as marked, or if
not marked, to vote "FOR" each proposal, and to use their discretion to vote for any other matter as may properly come
before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and
return this card at once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE>
1. To approve the Agreement and Plan of Reorganization between Merrill Lynch FOR [ ] AGAINST [ ] ABSTAIN [ ]
Fund For Tomorrow, Inc. and Merrill Lynch Fundamental Growth Fund, Inc.
2. To transact such other business as properly may come before the meeting or
any adjournment thereof.
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When
signing as attorney or as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized persons.
Dated: ----------------------- , 1998
X -----------------------------------
Signature
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE X -----------------------------------
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. Signature, if held jointly
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH FUND FOR TOMORROW, INC.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch
Fund For Tomorrow, Inc. ("Fund For Tomorrow") and Merrill Lynch Fundamental
Growth Fund, Inc. ("Fundamental Growth Fund") dated September 8, 1998 (the
"Proxy Statement and Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling Fundamental
Growth Fund at 1-800-456-4587, ext. 123, or by writing to Fundamental Growth
Fund at the above address. This Statement of Additional Information has been
incorporated by reference into the Proxy Statement and Prospectus.
Further information about Fundamental Growth Fund is contained in and
incorporated by reference to its Prospectus, dated November 26, 1997, and its
Statement of Additional Information, dated November 26, 1997, which are
incorporated by reference into this Statement of Additional Information.
Fundamental Growth Fund's Statement of Additional Information accompanies this
Statement of Additional Information.
Further information about Fund For Tomorrow is contained in and
incorporated by reference to its Prospectus, dated April 30, 1998, and its
Statement of Additional Information, dated April 30, 1998, which are
incorporated by reference into this Statement of Additional Information. Fund
For Tomorrow's Statement of Additional Information accompanies this Statement
of Additional Information.
The Commission maintains a web site (http://www.sec.gov) that contains the
prospectus and statement of additional information of each of Fund For Tomorrow
and Fundamental Growth Fund, other material incorporated by reference and other
information regarding Fund For Tomorrow and Fundamental Growth Fund.
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information ...................................................................... 2
Financial Statements ..................................................................... 2
Pro Forma Combined Schedule of Investments for Fundamental Growth Fund and Fund For
Tomorrow as of
June 30, 1998 (unaudited) ............................................................... F-1
Pro Forma Combined Statement of Assets and Liabilities for Fundamental Growth Fund and
Fund For Tomorrow
as of June 30, 1998 (unaudited) ......................................................... F-8
Pro Forma Combined Statement of Operations for Fundamental Growth Fund and Fund For
Tomorrow for the
five months ended June 30, 1998 (unaudited) ............................................. F-10
</TABLE>
The date of this Statement of Additional Information is September 8, 1998.
<PAGE>
GENERAL INFORMATION
The stockholders of Fund For Tomorrow are being asked to approve the
acquisition of substantially all of the assets of Fund For Tomorrow, and the
assumption of substantially all of the liabilities of Fund For Tomorrow by
Fundamental Growth Fund in exchange solely for an equal aggregate value of
shares of Fundamental Growth Fund (the "Reorganization"). Fundamental Growth
Fund is an open-end management investment company organized as a Maryland
corporation. A Special Meeting of Stockholders of Fund For Tomorrow to consider
the Reorganization will be held at 800 Scudders Mill Road, Plainsboro, New
Jersey, on October 13, 1998, at 9:00 a.m., New York time.
For detailed information about the Reorganization, stockholders of Fund
For Tomorrow should refer to the Proxy Statement and Prospectus. For further
information about Fundamental Growth Fund, Fund For Tomorrow stockholders
should refer to Fundamental Growth Fund's Statement of Additional Information,
dated November 24, 1997, which accompanies this Statement of Additional
Information and is incorporated by reference herein. For further information
about Fund For Tomorrow, stockholders should refer to Fund For Tomorrow's
Statement of Additional Information, dated April 30, 1998, which accompanies
this Statement of Additional Information and is incorporated by reference
herein.
FINANCIAL STATEMENTS
Pro forma financial statements reflecting consummation of the
Reorganization are included herein.
FUNDAMENTAL GROWTH FUND
Audited financial statements and accompanying notes for the fiscal year
ended August 31, 1997 and the independent auditor's report thereon, dated
October 3, 1997 of Fundamental Growth Fund are incorporated by reference from
Fundamental Growth Fund's Statement of Additional Information, dated November
26, 1997. Unaudited financial statements and accompanying notes for the six
months ended February 28, 1998 for Fundamental Growth Fund are incorporated by
reference from Fundamental Growth Fund's Semi-Annual Report to Shareholders.
FUND FOR TOMORROW
Audited financial statements and accompanying notes for the fiscal year
ended January 31, 1998, and the independent auditor's report thereon, dated
March 10, 1998, of Fund For Tomorrow are incorporated by reference from the
Fund For Tomorrow Statement of Additional Information dated April 30, 1998.
2
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- -------------------------------- ------------- ------------------------------------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ADVERTISING 132,000 Interpublic Group of Companies, Inc. $ 8,010,750 -- $ 8,010,750
BANKING & FINANCIAL 302,500 Banc One Corp. 16,883,281 -- 16,883,281
82,500 BankAmerica Corp. 7,131,094 -- 7,131,094
44,000 Citicorp 6,567,000 -- 6,567,000
220,000 Mellon Bank Corp. 15,317,500 -- 15,317,500
170,500 State Street Boston Corp. 11,849,750 -- 11,849,750
----------- -----------
57,748,625 57,748,625
BEVERAGES 295,000 Coca-Cola Company (The) 25,222,500 -- 25,222,500
66,000 Seagram Co., Ltd. (The) 2,701,875 -- 2,701,875
----------- -----------
27,924,375 27,924,375
BROADCASTING-RADIO & TELEVISION 220,000 Chancellor Media Corp. 10,917,500 -- 10,917,500
132,000 Clear Channel Communications, Inc. 14,404,500 -- 14,404,500
----------- -----------
25,322,000 25,322,000
BROADCAST SERVICES 200,000 Carlton Communications PLC (ADR)(a) -- $ 9,000,000 9,000,000
BUILDING MATERIALS 100,000 Royal Group Technologies Ltd. -- 2,891,747 2,891,747
CABLE TELEVISION 150,000 Tele-Communications Liberty Media Group -- 5,821,875 5,821,875
CHEMICALS (Series A)
COMMUNICATION EQUIPMENT 165,000 duPont (E.I.) de Nemours & Co. 12,313,125 -- 12,313,125
363,000 Cisco Systems, Inc. 33,418,688 -- 33,418,688
440,000 FORE Systems, Inc. 11,632,500 -- 11,632,500
170,500 Lucent Technologies, Inc. 14,183,469 -- 14,183,469
220,000 Newbridge Networks Corporation 5,266,250 -- 5,266,250
71,500 Northern Telecom Ltd. 4,057,625 -- 4,057,625
176,000 Telefonakliebolaget LM Ericsson (ADR)(a) 5,038,000 -- 5,038,000
COMPONENTS ----------- -----------
73,596,532 73,596,532
150,000 Harman International Industries Inc. -- 5,775,000 5,775,000
200,000 Nokia Corp. AB (ADR)(a) -- 14,512,500 14,512,500
150,000 Voice Control Systems Inc. -- 487,500 487,500
----------- -----------
20,775,000 20,775,000
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONTINUED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- -------------------------- ------------- -------------------------------------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
COMPUTERS 1,368,000 COMPAQ Computer Corp. $27,467,000 $11,350,000 $38,817,000
148,500 Dell Computer Corporation 13,773,375 -- 13,773,375
110,000 Hewlett-Packard Co. 6,586,250 -- 6,586,250
----------- ----------- -----------
47,826,625 11,350,000 59,176,625
CONGLOMERATE 200,000 Quinenco S.A. (ADR)(a) -- 1,800,000 1,800,000
COSMETICS 124,400 Avon Products, Inc. -- 9,641,000 9,641,000
242,000 Gilette Company (The) 13,718,375 -- 13,718,375
22,000 International Flavors & Fragrances Inc. 955,625 -- 955,625
----------- ----------- -----------
14,674,000 9,641,000 24,315,000
ELECTRICAL EQUIPMENT 33,000 Emerson Electric Co. 1,992,375 -- 1,992,375
470,760 General Electric Co. 36,036,000 6,803,160 42,839,160
11,000 Honeywell, Inc. 919,188 -- 919,188
----------- ----------- -----------
38,947,563 6,803,160 45,750,723
ELECTRONICS 302,500 Intel Corp. 22,403,906 -- 22,403,906
100,000 Phillips Electronics N.V. (NY Registered -- 8,500,000 8,500,000
Shares)
50,000 Sony Corp. (ADR)(a) -- 4,303,125 4,303,125
110,000 ST Microelectronics (NY Registered Shares) 7,686,250 -- 7,686,250
302,500 Texas Instruments Inc. 17,639,531 -- 17,639,531
----------- ----------- -----------
47,729,687 12,803,125 60,532,812
ENERGY 176,000 El Paso Natural Gas Co. 6,732,000 -- 6,732,000
82,500 Enron Corp. 4,460,156 -- 4,460,156
----------- -----------
11,192,156 11,192,156
ENTERTAINMENT 110,000 Viacom, Inc. (Class A) 6,435,000 -- 6,435,000
220,000 Walt Disney Company (The) 23,113,750 -- 23,113,750
----------- -----------
29,548,750 29,548,750
ENVIRONMENTAL EQUIPMENT 118,900 Thermo Ecotex Corp. -- 1,857,812 1,857,812
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONTINUED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- ------------------------- ------------- --------------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES 38,500 American Express Company $ 4,389,000 -- $ 4,389,000
104,500 Federal National Mortgage Assocation 6,348,375 -- 6,348,375
165,000 Franklin Resources, Inc. 8,910,000 -- 8,910,000
198,000 Morgan Stanley, Dean Witter, Discover & Co. 18,092,250 -- 18,092,250
132,000 Travelers Group, Inc. 8,002,500 -- 8,002,500
----------- -----------
45,742,125 45,742,125
FOOD 33,000 ConAgra, Inc. 1,045,688 -- 1,045,688
55,000 Wrigley (Wm.) Jr. Co. (Class B) 5,390,000 -- 5,390,000
----------- -----------
6,435,688 6,435,688
FOOD & BEVERAGE 954,900,000 Avipal S.A. -- Avicultura e Agropecuaria -- $1,519,253 1,519,253
160,000 PepsiCo, Inc. -- 6,590,000 6,590,000
---------- -----------
8,109,253 8,109,253
FOOD MERCHANDISING 55,000 Albertson's, Inc. 2,849,688 -- 2,849,688
165,000 Meyer (Fred), Inc. 7,012,500 -- 7,012,500
----------- -----------
9,862,188 9,862,188
HEALTHCARE 200,000 HEALTHSOUTH Corp. -- 5,337,500 5,337,500
HOME FURNISHINGS 291,500 Ethan Allen Interiors, Inc. 14,556,781 -- 14,556,781
50,000 American Woodmark Corporation -- 1,368,750 1,368,750
----------- ---------- -----------
14,556,781 1,368,750 15,925,531
HOTEL 132,000 Marriott International, Inc. 4,273,500 -- 4,273,500
HOUSEHOLD PRODUCTS 38,500 Colgate-Palmolive Co. 3,388,000 -- 3,388,000
88,000 Kimberly-Clark Corporation 4,037,000 -- 4,037,000
297,000 Procter & Gamble Co. 27,045,563 -- 27,045,563
220,000 Unilever N.V. (NY Registered Shares) 17,366,250 -- 17,366,250
----------- -----------
51,836,813 51,836,813
INFORMATION PROCESSING 396,000 First Data Corp. 13,191,750 -- 13,191,750
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONTINUED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- -------------------------- ------------- -------------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
INFORMATION SERVICES 50,000 Ceridian Corp. -- $ 2,937,500 $ 2,937,500
400,000 OzEmail, Ltd. (ADR)(a) -- 9,050,000 9,050,000
----------- -----------
11,987,500 11,987,500
INFORMATION SYSTEMS 100,000 International Business Machines Corp. -- 11,481,250 11,481,250
INSURANCE 11,000 Aetna Inc. $ 837,375 -- 837,375
121,000 American International Group, Inc. 17,666,000 -- 17,666,000
50,000 Chubb Corp. -- 4,018,750 4,018,750
200,000 Torchmark Corp. -- 9,150,000 9,150,000
----------- ----------- -----------
18,503,375 13,168,750 31,672,125
INTERNET SOFTWARE 55,000 America Online, Inc. 5,830,000 -- 5,830,000
LEISURE 230,000 Polygram N.V. (NY Registered Shares) 11,701,250 -- 11,701,250
LEISURE & ENTERTAINMENT 300,000 Galoob (Lewis) Toys, Inc. -- 3,000,000 3,000,000
100,000 Royal Olympic Cruise Lines, Inc. -- 1,000,000 1,000,000
----------- -----------
4,000,000 4,000,000
MEDICAL SERVICES 100,000 Vencor, Inc. -- 725,000 725,000
MEDICAL-TECHNOLOGY 137,500 Boston Scientific Corp. 9,848,438 -- 9,848,438
132,000 Guidant Corp. 9,413,250 -- 9,413,250
22,000 Johnson & Johnson 1,622,500 -- 1,622,500
----------- -----------
20,884,188 20,884,188
MISCELLANEOUS 7,888 Coram Healthcare Corporation (Warrants)(b) -- -- --
MULTI-INDUSTRY 180,000 Thermo Electron Corp. -- 6,153,750 6,153,750
OIL SERVICES 148,500 Baker Hughes, Inc. 5,132,531 -- 5,132,531
88,000 Diamond Offshore Drilling, Inc. 3,520,000 -- 3,520,000
55,000 Schlumberger Ltd. 3,757,187 -- 3,757,187
----------- -----------
12,409,718 12,409,718
PERSONAL COMPUTERS 100,000 Gateway 2000, Inc. -- 5,062,500 5,062,500
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONTINUED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- -------------------------------- ------------- ---------------------------------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
PHARMACEUTICALS 200,000 American Home Products Corp. -- $10,350,000 $ 10,350,000
33,000 Amgen, Inc. $ 2,157,375 -- 2,157,375
133,333 Astra AB (ADR)(a) -- 2,733,327 2,733,327
320,000 Bristol-Myers Squibb Co. 25,286,250 11,493,750 36,780,000
100,000 Lilly (Eli) and Company -- 6,606,250 6,606,250
199,400 Merck & Co. Inc. 19,861,875 6,807,875 26,669,750
50,000 Novartis AG (ADR)(a) -- 4,150,000 4,150,000
286,000 Pfizer, Inc. 31,084,625 -- 31,084,625
100,800 Schering-Plough Corp. -- 9,235,800 9,235,800
----------- ----------- ------------
PHOTOGRAPHY 27,500 Eastman Kodak Co. 78,390,125 51,377,002 129,767,127
POLLUTION CONTROL 22,000 Waste Management Inc. 2,009,219 -- 2,009,219
POLLUTION TECHNOLOGY 400,000 Molten Metal Technology, Inc. 770,000 -- 770,000
396,600 Philip Services Corp. -- 40,000 40,000
-- 1,635,975 1,635,975
----------- ------------
1,675,975 1,675,975
PUBLISHING 44,000 Gannett Co., Inc. 3,126,750 -- 3,126,750
REAL ESTATE DEVELOPMENT 100,000 Ventas, Inc. -- 1,381,250 1,381,250
RESTAURANT 44,000 McDonald's Corp. 3,036,000 -- 3,036,000
RETAIL APPAREL 40,000 The Children's Place Retail Stores, Inc. -- 390,000 390,000
RETAIL SPECIALTY 357,000 CVS Corporation 13,900,688 -- 13,900,688
187,000 Gap, Inc. (The) 11,523,875 -- 11,523,875
75,000 Petco Animal Supplies, Inc. -- 1,495,312 1,495,312
770,000 Staples Inc. 22,281,875 -- 22,281,875
341,000 Walgreen Co. 14,087,562 -- 14,087,562
----------- ----------- ------------
61,794,000 1,495,312 63,289,312
RETAIL STORES 704,000 Wal-Mart Stores, Inc. 42,768,000 -- 42,768,000
236,500 Federated Department Stores, Inc. 12,726,656 -- 12,726,656
----------- ------------
55,494,656 55,494,656
SEMICONDUCTOR CAPITAL EQUIPMENT 352,000 Applied Materials, Inc. 10,384,000 -- 10,384,000
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONTINUED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- ----------------------- ------------- --------------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
SOFTWARE -- COMPUTER 115,500 Baan Company, N.V. (U.S. Registered Shares) $ 4,114,687 -- $ 4,114,687
302,500 Microsoft Corp. 32,783,437 -- 32,783,437
440,000 PeopleSoft, Inc. 20,652,500 -- 20,652,500
165,000 SAP AG (Systeme, Anwendugen, Produkte in 37,288,845 -- 37,288,845
der Datenverarbeitung)(ADR)(a)
50,000 Sterling Commerce, Inc. -- $ 2,425,000 2,425,000
----------- ----------- -----------
94,839,469 2,425,000 97,264,469
SPECIALTY RETAIL 138,900 OfficeMax, Inc. -- 2,291,850 2,291,850
SPECIALTY SERVICES 200,000 Household International, Inc. -- 9,950,000 9,950,000
1,000,000 National Mutual Asia Ltd. -- 638,866 638,866
250,000 Sitel Corporation -- 1,656,250 1,656,250
----------- -----------
12,245,116 12,245,116
SYSTEMS 100,000 Computer Sciences Corporation -- 6,400,000 6,400,000
100,000 Genrad, Inc. -- 1,975,000 1,975,000
75,000 Networks Associates, Inc. -- 3,585,937 3,585,937
300,000 Silicon Graphics, Inc. -- 3,637,500 3,637,500
200,000 Sun Microsystems, Inc. -- 8,687,500 8,687,500
----------- -----------
24,285,937 24,285,937
TELECOMMUNICATIONS 100,000 ADC Telecommunications, Inc. -- 3,650,000 3,650,000
352,000 AT&T Corporation 20,108,000 -- 20,108,000
200,000 Alcatel Alsthom Cie Generale d'Electricite -- 8,137,500 8,137,500
S.A. (ADR)(a)
300,000 Inter-Tel Inc. -- 4,800,000 4,800,000
100,000 RSL Communications, Ltd. (Class A) -- 2,975,000 2,975,000
385,000 Sprint Corporation 27,142,500 -- 27,142,500
242,000 WorldCom, Inc. 11,691,625 -- 11,691,625
----------- ----------- -----------
58,942,125 19,562,500 78,504,625
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
JUNE 30, 1998 (UNAUDITED) (CONCLUDED)
FUNDAMENTAL FUND FOR PRO FORMA FOR
INDUSTRIES SHARES HELD STOCKS GROWTH+ TOMORROW+ COMBINED FUND+
- ------------------- -------------- ------------------------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
100,000 Shaw Industries, Inc. -- $ 1,762,500 $ 1,762,500
TEXTILES
TOYS 275,000 Mattel, Inc. $ 11,635,937 -- 11,635,937
TRAVEL & LODGING 330,000 Carnival Corporation (Class A) 13,076,250 -- 13,076,250
-------------- ------------ --------------
TOTAL STOCKS 1,003,560,095 269,030,414 1,272,590,509
------------- ----------- -------------
FACE AMOUNT SHORT-TERM SECURITIES
---------- ------------------------------------------
COMMERCIAL PAPER* $ 10,000,000 Atlantic Asset Security Corp., 5.62% due -- 9,970,339 9,970,339
7/20/1998
12,673,000 CIT Group Holdings Corp., 6.50% -- 12,673,000 12,673,000
due 7/01/1998
25,000,000 Corporate Asset Funding Corp., 5.55% 24,976,875 -- 24,976,875
due 7/07/1998
10,000,000 Countrywide Home Loan Corp., 5.54% 9,990,767 -- 9,990,767
due 7/07/1998
8,044,000 General Motors Acceptance Corp., 6.50% 8,044,000 -- 8,044,000
due 7/01/1998
7,000,000 International Securitization, 5.57% -- 6,979,422 6,979,422
due 7/20/1998
15,000,000 Lexington Parker Capital Co. LLC, 5.60% 14,962,667 -- 14,962,667
due 7/17/1998
11,433,000 Variable Funding Capital Corp., 5.58% 11,408,190 -- 11,408,190
due 7/15/1998
14,000,000 Variable Funding Capital Corp., 5.57% 3,988,241 9,970,603 13,958,844
-------------- ------------ --------------
due 7/20/1998
TOTAL SHORT-TERM SECURITIES 73,370,740 39,593,364 112,964,104
-------------- ------------ --------------
TOTAL INVESTMENTS (COST $1,076,930,835 $308,623,778 $1,385,554,613
============== ============ ==============
$1,125,656,160)
</TABLE>
- -------
+ Value as discussed in Note 1a of Notes to Pro Forma Financial Statements.
* Commercial Paper is traded on a discount basis, the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) American Depositary Receipts.
(b) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date and are
non-income producing.
F-7
<PAGE>
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Assets and
Liabilities for Merrill Lynch Fundamental Growth Fund, Inc. ("Fundamental
Growth Fund") and Merrill Lynch Fund For Tomorrow, Inc. ("Fund For Tomorrow")
has been derived from the Statements of Assets and Liabilities of Fundamental
Growth Fund and Fund For Tomorrow as of June 30, 1998, and such information has
been adjusted to give effect to the Reorganization as if the Reorganization had
occurred on June 30, 1998. The Pro Forma Statement of Assets and Liabilities is
presented for informational purposes only and does not purport to be indicative
of the financial condition that would have resulted if the Reorganization had
been consummated on June 30, 1998. The Pro Forma Combined Statement of Assets
and Liabilities should be read in conjunction with the financial statements and
related notes from the audited financial statements of Fundamental Growth Fund
included in its Statement of Additional Information dated November 26, 1997 and
from the Fund For Tomorrow audited financial statements and related notes
included in its Statement of Additional Information dated April 30, 1998.
<TABLE>
<CAPTION>
FUNDAMENTAL FUND FOR PRO FORMA FOR
GROWTH FUND TOMORROW ADJUSTMENTS COMBINED FUND
----------------- --------------- -------------------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value*(Note 1a) .......................... $1,076,930,835 $308,623,778 $1,385,554,613
Cash ..................................................... 507,407 12,137 519,544
Foreign Cash (Note 1b) ................................... -- 10,502 10,502
Receivables:
Capital shares sold ..................................... 10,229,919 283,864 10,513,783
Securities sold ......................................... 2,839,000 15,806,020 18,645,020
Dividends ............................................... 714,365 1,428,206 2,142,571
Deferred organization expenses (Note 1f) ................. 5,077 -- 5,077
Prepaid registration fees and other assets (Note 1f) ..... 53,503 10,264 63,767
-------------- ------------ --------------
Total assets ............................................. 1,091,280,106 326,174,771 1,417,454,877
-------------- ------------ --------------
LIABILITIES:
Payables:
Dividends to Shareholders ............................... -- -- $ 58,825,628(1) 58,825,628
Securities purchased .................................... 24,462,322 13,883,212 38,345,534
Capital shares redeemed ................................. 3,865,802 241,208 4,107,010
Distributor (Note 2) .................................... 633,761 92,467 726,228
Investment adviser (Note 2) ............................. 547,034 178,808 725,842
Accrued expenses and other liabilities ................... 204,377 167,173 295,072(2) 666,622
-------------- ------------ -------------- --------------
Total liabilities ........................................ 29,713,296 14,562,868 59,120,700 103,396,864
-------------- ------------ ------------ --------------
NET ASSETS:
Net Assets: .............................................. $1,061,566,810 $311,611,903 ($ 59,120,700) $1,314,058,013
============== ============ ============== ==============
NET ASSETS CONSIST OF:
Class A Common Stock, $0.10 par value,
100,000,000 shares authorized ........................... $ 897,094 $ 61,291 $ (6,742) $ 951,643
Class B Common Stock, $0.10 par value,
100,000,000 shares authorized ........................... 3,294,957 295,158 (30,873) 3,559,242
Class C Common Stock, $0.10 par value,
100,000,000 share authorized ............................ 737,527 10,585 (1,195) 746,917
Class D Common Stock, $0.10 par value,
100,000,000 shares authorized ........................... 775,514 1,420,195 (154,202) 2,041,507
Paid-in capital in excess of par ......................... 851,888,026 195,074,312 (102,060) 1,046,860,278
Accumulated investment income (loss) -- net .............. (1,430,721) 1,555,413 (124,692) 0
Undistributed realized capital gains on investments
and foreign currency transactions -- net ................ 40,331,874 18,369,062 (58,700,936) 0
Unrealized appreciation on investments and foreign
currency transactions -- net ............................ 165,072,539 94,825,887 259,898,426
-------------- ------------ -------------- --------------
Net assets ............................................... $1,061,566,810 $311,611,903 ($ 59,120,700) $1,314,058,013
============== ============ ============== ==============
</TABLE>
F-8
<PAGE>
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
(UNAUDITED) (CONCLUDED)
<TABLE>
<CAPTION>
FUNDAMENTAL FUND FOR PRO FORMA FOR
GROWTH FUND TOMORROW ADJUSTMENTS COMBINED FUND
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Class A:
Net assets ................. $ 172,885,564 $ 10,819,194 ($ 7,066,653) $ 176,638,105
Shares outstanding ......... 8,970,935 612,910 (67,413) 9,516,432
Net asset value ............ $ 19.27 $ 17.65 $ 18.56
Class B:
Net assets ................. $ 604,496,007 $ 49,899,908 ($ 25,482,997) $ 628,912,918
Shares outstanding ......... 32,949,565 2,951,579 (308,723) 35,592,421
Net asset value ............ $ 18.35 $ 16.91 $ 17.67
Class C:
Net assets ................. $ 135,909,704 $ 1,780,876 ($ 5,123,872) $ 132,566,708
Shares outstanding ......... 7,375,265 105,848 (11,945) 7,469,168
Net asset value ............ $ 18.43 $ 16.82 $ 17.75
Class D:
Net assets ................. $ 148,275,535 $249,111,925 ($ 21,447,178) $ 375,940,282
Shares outstanding ......... 7,755,139 14,201,953 (1,542,020) 20,415,072
Net asset value ............ $ 19.12 $ 17.54 $ 18.41
*IDENTIFIED COST ............ $ 911,858,296 $213,797,864 $1,125,656,160
</TABLE>
- ---------
(1) Reflects the payment of undistributed net investment income and
undistributed realized capital gains.
(2) Reflects the charge of estimated Reorganization expenses of $350,000 and
anticipated savings of the Reorganization.
See Notes to Financial Statements.
F-9
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Operations for
Fundamental Growth Fund and Fund For Tomorrow has been derived from the
Statements of Operations of Fundamental Growth Fund and Fund For Tomorrow for
the five months ended June 30, 1998, and such information has been adjusted to
give effect to the Reorganization as if the Reorganization had occurred on
February 1, 1998. The Pro Forma Statement of Operations is presented for
informational purposes only and does not purport to be indicative of the
financial condition that would have resulted if the Reorganization had been
consummated on February 1, 1998. The Pro Forma Combined Statement of Operations
should be read in conjunction with the financial statements and related notes
from the audited financial statements of Fundamental Growth Fund included in
its Statement of Additional Information dated November 26, 1997 and from the
Fund For Tomorrow audited financial statements and related notes included in
its Statement of Additional Information dated April 30, 1998.
<TABLE>
<CAPTION>
FUNDAMENTAL FUND FOR
GROWTH FUND TOMORROW
--------------- --------------
<S> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1A):
Dividends** ....................................................... $ 2,528,384 $ 2,791,920
Interest and discount earned ...................................... 1,955,001 523,182
------------ -----------
Total income ...................................................... 4,483,385 3,315,102
------------ -----------
EXPENSES:
Investment advisory fees .......................................... 2,143,881 853,232
Account maintenance and distribution fees -- Class B (Note 2) ..... 1,877,715 229,598
Account maintenance and distribution fees -- Class C (Note 2) ..... 471,722 9,878
Transfer agent fees -- Class B .................................... 201,576 46,990
Registration fees (Note 1f) ....................................... 168,109 32,968
Account maintenance fees -- Class D (Note 2) ...................... 109,440 255,676
Custodian fees .................................................... 16,821 21,276
Transfer agent fees -- Class C .................................... 52,078 2,153
Transfer agent fees -- Class D .................................... 38,132 166,433
Printing and shareholder reports .................................. 43,000 44,267
Accounting services (Note 2) ...................................... 33,022 33,558
Directors' fees and expenses ...................................... 11,440 11,440
Transfer agent fees -- Class A (Note 2) ........................... 39,011 8,375
Professional fees ................................................. 20,912 31,420
Amortization of organization expenses ............................. 1,053 --
Pricing fees ...................................................... 7 513
Other ............................................................. 4,652 7,929
------------ -----------
Total expenses .................................................... 5,232,571 1,755,706
------------ -----------
Investment income (loss) -- net ................................... (749,186) 1,559,396
------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS -- NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) from:
Investments -- net ............................................... 32,417,078 15,435,072
Foreign currency transactions -- net ............................. -- (4,347)
Change in unrealized appreciation/depreciation on:
Investments -- net ............................................... 100,831,744 22,245,210
Foreign currency transactions -- net ............................. -- (18)
------------ -----------
Net realized and unrealized gain on investments and foreign
currency transactions ............................................ 133,248,822 37,675,917
------------ -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $132,499,636 $39,235,313
============ ===========
**Net foreign withholding tax on dividends ......................... -- $ 144,463
<CAPTION>
PRO FORMA FOR
ADJUSTMENTS COMBINED FUND
------------------ ----------------
<S> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1A):
Dividends** ....................................................... $ 5,320,304
Interest and discount earned ...................................... 2,478,183
------------
Total income ...................................................... 7,798,487
------------
EXPENSES:
Investment advisory fees .......................................... 2,997,113
Account maintenance and distribution fees -- Class B (Note 2) ..... 2,107,313
Account maintenance and distribution fees -- Class C (Note 2) ..... 481,600
Transfer agent fees -- Class B .................................... 248,566
Registration fees (Note 1f) ....................................... 201,077
Account maintenance fees -- Class D (Note 2) ...................... 365,116
Custodian fees .................................................... 38,097
Transfer agent fees -- Class C .................................... 54,231
Transfer agent fees -- Class D .................................... 204,565
Printing and shareholder reports .................................. 87,267
Accounting services (Note 2) ...................................... (27,464)(2) 39,116
Directors' fees and expenses ...................................... (13,732)(2) 9,148
Transfer agent fees -- Class A (Note 2) ........................... 47,386
Professional fees ................................................. (13,732)(2) 38,600
Amortization of organization expenses ............................. 1,053
Pricing fees ...................................................... 520
Other ............................................................. 350,000(1) 362,581
--------- ------------
Total expenses .................................................... 295,072 7,283,349
--------- ------------
Investment income (loss) -- net ................................... (295,072) 515,138
---------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS -- NET (NOTES 1B, 1C, 1E & 3):
Realized gain (loss) from:
Investments -- net ............................................... 47,852,150
Foreign currency transactions -- net ............................. (4,347)
Change in unrealized appreciation/depreciation on:
Investments -- net ............................................... 123,076,954
Foreign currency transactions -- net ............................. (18)
------------
Net realized and unrealized gain on investments and foreign
currency transactions ............................................ 170,924,739
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. ($ 295,072) $171,439,877
============ ============
**Net foreign withholding tax on dividends ......................... $ 144,463
</TABLE>
- ---------
(1) Reflects the charge for estimated Reorganization expenses of $350,000.
(2) Reflects the anticipated savings of the Reorganization.
F-10
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company. These unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and Class D
are sold with a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(A) VALUATION OF INVESTMENTS -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of 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 value quotations are not
available are valued at their fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
(B) DERIVATIVE FINANCIAL INSTRUMENTS -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the equity, 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.
o FINANCIAL FUTURES CONTRACTS -- The Fund may purchase or sell financial
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 Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
o OPTIONS -- The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect
the current 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 Fund enters into a closing transaction),
the Fund 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.
F-11
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
(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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required. Under the
applicable foreign tax law, a withholding tax may be imposed on interest,
dividends, and capital gains at various rates.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (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 period not exceeding five years. Prepaid registration fees are charged
to expense as the related shares are issued.
(G) DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions paid by the
Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, a division of Princeton Funds Distributor, Inc. ("MLFD" or the
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at the annual rate of 0.65% of the average daily value of
the Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance with
Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the
Distributor ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the average daily net
assets of the shares as follows:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE FEE DISTRIBUTION 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., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
F-12
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND
MERRILL LYNCH FUND FOR TOMORROW, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED) (CONCLUDED)
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH
AFFILIATES: -- (CONCLUDED)
For the period February 1, 1998 to June 30, 1998, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D shares as follows:
<TABLE>
<CAPTION>
MERRILL LYNCH FUNDAMENTAL MERRILL LYNCH FUND
GROWTH FUND, INC. FOR TOMORROW, INC.
--------------------------- -------------------
<S> <C> <C>
Class A:
MLFD ........... $ 191 $ 106
MLPF&S ......... $ 2,396 $ 494
Class D:
MLFD ........... $ 17,046 $ 540
MLPF&S ......... $ 244,378 $ 8,995
</TABLE>
For the period February 1, 1998 to June 30, 1998, MLPF&S received
contingent deferred sales charges relating to transactions in Class B and Class
C shares, as follows:
<TABLE>
<CAPTION>
MERRILL LYNCH FUNDAMENTAL MERRILL LYNCH FUND
GROWTH FUND, INC. FOR TOMORROW, INC.
--------------------------- -------------------
<S> <C> <C>
Class B ......... $ 233,187* $ 17,862*
Class C ......... $ 10,517 $ 43
</TABLE>
- ---------
* Additional contingent deferred sales charges payable to the Distributor may
have been waived or converted to a contingent obligation in connection with
a shareholder's participation in certain fee-based programs.
In addition, MLPF&S received $38,436 in commissions on the execution of
portfolio security transactions for the Fund for the period February 1, 1998 to
June 30, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML &
Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, FDS, MLFD, and/or ML & Co.
F-13
<PAGE>
PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Reference is made to Article V of Registrant's Amended and Restated
Articles of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of
the Maryland General Corporation Law and Section 9 of the Class A, Class B,
Class C and Class D Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-Laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Registrant a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Registrant has been met and a
written undertaking to repay any such advance, if it should ultimately be
determined that the standard of conduct has not been met, and provided further
that at least one of the following additional conditions is met: (a) the person
seeking indemnification shall provide a security in form and amount acceptable
to the Registrant for his undertaking; (b) the Registrant is insured against
losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to the
Registrant at the time the advance is proposed to be made, that there is reason
to believe that the person seeking indemnification will ultimately be found to
be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his or her activities as an
officer or director of the Registrant. The Registrant, however, may not
purchase insurance on behalf of any officer or director of the Registrant that
protects or purports to protect such person from liability to the Registrant or
to its stockholders to which such officer or director would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "1933 Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
C-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant, dated April 29, 1992.(a)
(b) -- Articles of Amendment, dated July 7, 1992, to Articles of Incorporation of Registrant. (a)
(c) -- Articles of Amendment, dated October 17, 1994, to Articles of Incorporation of Registrant. (a)
(d) -- Articles of Amendment, dated October 17, 1994, to Articles of Incorporation of Registrant. (a)
(e) -- Articles Supplementary, dated October 17, 1994, to Articles of Incorporation of Registrant. (a)
2 -- By-Laws of the Registrant.(a)
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch Fund For
Tomorrow, Inc. (included in Exhibit I to the Proxy Statement and Prospectus contained in this Registration
Statement)
5 -- Copies of instruments defining the rights of stockholders, including the relevant portions of the Articles of
Incorporation, and the By-Laws of the Registrant.(b)
6 (a) -- Management Agreement between Registrant and Merrill Lynch Asset Management, L.P. (a)
(b) -- Supplement to Management Agreement between Registrant and Merrill Lynch Asset Management, L.P. (c)
(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and Merrill Lynch Asset
Management U.K. Limited. (e)
7 (a) -- Form of Class A Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.
(now known as Princeton Funds Distributor, Inc.) (the "Distributor") (including Selected Dealers
Agreement). (c)
(b) -- Form of Class B Distribution Agreement between Registrant and the Distributor (including Selected
Dealers Agreement). (c)
(c) -- Form of Class C Distribution Agreement between Registrant and the Distributor (including Selected
Dealers Agreement). (c)
(d) -- Form of Class D Distribution Agreement between Registrant and the Distributor (including Selected
Dealers Agreement). (c)
8 -- None.
9 -- Custody Agreement between the Registrant and The Chase Manhattan Bank. (a)
10 (a) -- Form of Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of Registrant. (c)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of Registrant. (c)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of Registrant. (c)
(d) -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(d)
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
12 -- Private Letter Ruling from the Internal Revenue Service.(f)
13 -- Not applicable.
14 (a) -- Consent of Ernst & Young LLP, independent auditors for Registrant.
(b) -- Consent of Deloitte & Touche LLP independent auditors for Merrill Lynch Fund For Tomorrow, Inc.
15 -- Not applicable.
16 -- Power of Attorney. (g)
17 (a) -- Prospectus dated November 26, 1997 and Statement of Additional Information dated November 26, 1997 of
the Registrant.
(b) -- Annual Report to Stockholders of the Registrant for the year ended August 31, 1997.
(c) -- Semi-Annual Report to Stockholders of the Registrant for the six months ended February 28, 1998.
(d) -- Prospectus dated April 30, 1998 and Statement of Additional Information dated April 30, 1998 of Merrill
Lynch Fund For Tomorrow, Inc.
</TABLE>
- ---------
(a) Filed on December 21, 1995 as an Exhibit to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form N-1A (File No.
33-47875) under the Securities Act of 1933 (the "Registration Statement on
Form N-1A").
(b) Reference is made to Article II, Article IV, Article V (sections 2, 3, 4
and 6), Article VI, Article VII and Article IX of the Registrant's
Articles of Incorporation, previously filed as Exhibit (1) to the
Registration Statement on Form N-1A, and to Article II, Article III
(sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws previously filed
as Exhibit (2) to the Registration Statement on Form N-1A.
(c) Filed on October 13, 1994 as an Exhibit to Post-Effective Amendment No. 3
to the Registrant's Registration Statement on Form N-1A.
C-2
<PAGE>
(d) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed
January 25, 1996.
(e) Filed on December 23, 1996 as an Exhibit to Post-Effective Amendment No. 5
to the Registrant's Registration Statement on Form N-1A.
(f) To be filed by post-effective amendment.
(g) Included on the signature page of the Registrant's Registration Statement
on Form N-14 filed on July 28, 1998 and incorporated by reference herein.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as
amended, the reoffering prospectus will contain information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, either
a copy of the Internal Revenue Service private letter ruling applied for or the
opinion of counsel received as to certain tax matters, within a reasonable time
after receipt of such ruling or opinion.
C-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 4th day of September, 1998.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND,
INC.
(Registrant)
By /s/ ARTHUR ZEIKEL
-------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- -------------------------------- -------------------
<S> <C> <C>
ARTHUR ZEIKEL * President and Director
- ---------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)
GERALD M. RICHARD * Treasurer (Principal Financial
- ----------------------------------
(GERALD M. RICHARD) and Accounting Officer)
JOE GRILLS * Director
- ----------------------------------
(JOE GRILLS)
WALTER MINTZ * Director
- ----------------------------------
(WALTER MINTZ)
ROBERT S. SALOMON, JR. * Director
- ----------------------------------
(ROBERT S. SALOMON, JR.)
MELVIN R. SEIDEN * Director
- ----------------------------------
(MELVIN R. SEIDEN)
Director
- ----------------------------------
(STEPHEN B. SWENSRUD)
*By /s/ ARTHUR ZEIKEL September 4, 1998
------------------------------
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT )
</TABLE>
C-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- ------------
<S> <C>
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
14 (a) -- Consent of Ernst & Young LLP, independent auditors for Registrant.
(b) -- Consent of Deloitte & Touche LLP independent auditors for Merrill Lynch Fund For Tomorrow,
Inc.
17 (a) -- Prospectus dated November 26, 1997 and Statement of Additional Information dated
November 26, 1997 of the Registrant.
(b) -- Annual Report to Stockholders of the Registrant for the year ended August 31, 1997.
(c) -- Semi-Annual Report to Stockholders of the Registrant for the six months ended February 28,
1998.
(d) -- Prospectus dated April 30, 1998 and Statement of Additional Information dated April 30, 1998
of Merrill Lynch Fund For Tomorrow, Inc.
</TABLE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
September 4, 1998
Merrill Lynch Fundamental Growth Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Fundamental Growth Fund, Inc.
(the "Fund") in connection with the proposed acquisition by the Fund of
substantially all of the assets and the assumption of substantially all of the
liabilities of Merrill Lynch Fund For Tomorrow, Inc. ("FFT"), in exchange for
newly-issued shares of common stock of the Fund (the "Reorganization"). This
opinion is furnished in connection with the Fund's Registration Statement on
Form N-14 under the Securities Act of 1933, as amended (the "Registration
Statement"), relating to shares of common stock, par value $0.10 per share, of
the Fund (the "Shares"), to be issued in the Reorganization.
As counsel for the Fund, we are familiar with the proceedings taken by it
and to be taken by it in connection with the authorization, issuance and sale of
the Shares. In addition, we have examined and are familiar with the Articles of
Incorporation of the Fund, as amended and restated, the By-Laws of the Fund and
such other documents as we have deemed relevant to the matters referred to in
this opinion.
Based upon the foregoing, we are of the opinion that subsequent to the
approval of the Agreement and Plan of Reorganization between the Fund and FFT
set forth in the proxy statement and prospectus constituting a part of the
Registration Statement (the "Proxy Statement and Prospectus"), the Shares, upon
issuance in the manner referred to in the Registration Statement, for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock of the Fund.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Proxy Statement and
Prospectus constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Comparison of the
Funds-Financial Highlights," "Additional Information-Independent Auditors" and
"Experts" in Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-14 under the Securities Act of 1933 (File No. 333-60019) and under the
Investment Company Act of 1940 (File No. 811-6669) of Merrill Lynch Fundamental
Growth Fund, Inc. and to the incorporation by reference therein of our report
dated October 3, 1997, with respect to the financial statements of Merrill Lynch
Fundamental Growth Fund, Inc. for the year ended August 31, 1997.
/s/ Ernst & Young LLP
Princeton, New Jersey
September 2, 1998
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Fundamental Growth Fund, Inc.:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated March 10, 1998 appearing in the Statement of
Additional Information dated April 30, 1998 of Merrill Lynch Fund For Tomorrow,
Inc., and to the references to us under the captions "Comparison of the
Funds-Financial Highlights" and "Experts" appearing in the Proxy Statement and
Prospectus, which is part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
September 4, 1998
PROSPECTUS
November 26, 1997
Merrill Lynch Fundamental Growth Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
------------------------
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with long-term growth of capital. The Fund will
seek to achieve its investment objective by investing in a diversified portfolio
of equity securities placing particular emphasis on companies that have
exhibited above-average growth rates in earnings. There can be no assurance that
the Fund's investment objective will be realized. 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 Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1, and
for participants in certain fee-based programs the minimum initial purchase is
$500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "Transfer Agent") are not subject to the
processing fee. See "Purchase of Shares" on page 17 and "Redemption of Shares"
on page 27.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated November 26, 1997 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission (the "Commission") and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information about the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
<S> <C>
Class A(a) Class B(b) Class C Class D
---------- ---------- ------- -------
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 one None(d)
year, decreasing 1.0% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee.................................. None None None None
Annual Fund Operating Expenses (as a percentage of
average net assets):
Investment Advisory Fees(g)................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance Fees.................... None 0.25% 0.25% 0.25%
Distribution Fees........................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees............................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)............ 0.19% 0.22% 0.23% 0.19%
Other..................................... 0.14% 0.14% 0.13% 0.14%
-------- ----- ----- ------
Total Other Expenses.................. 0.34% 0.37% 0.37% 0.34%
-------- ----- ----- ------
Total Fund Operating Expenses................. 0.99% 2.02% 2.02% 1.24%
======== ===== ===== ======
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 20 and "Shareholder
Services--Fee-Based Programs"--page 31.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares"--page 22.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 20.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page 15.
(h) See "Purchase of Shares--Distribution Plans"--page 25.
(i) See "Management of the Fund--Transfer Agency Services"--page 17.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Example:
Cumulative Expenses Paid for the Period of:
--------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period:
Class A............................................ $62 $82 $104 $167
Class B............................................ $61 $83 $109 $215*
Class C............................................ $31 $63 $109 $235
Class D............................................ $64 $90 $117 $195
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................ $62 $82 $104 $167
Class B............................................ $21 $63 $109 $215*
Class C............................................ $21 $63 $109 $235
Class D............................................ $64 $90 $117 $195
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation of
past or future expenses or annual rates of return, and actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
example. Class B and Class C shareholders who 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 Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. (the "Manager" or "MLAM") or its affiliate, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM that use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on the
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System that the investor believes
is most beneficial under his or her particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
<S> <C>
=================================================================================================================
Account
Maintenance Distribution
Clas 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 4 years, at a
rate of 4.0% during the first B shares convert to D shares
year, decreasing 1.0% annually to automatically after
0.0%(4) 0.25% 0.75% approximately eight years(5)
- ---------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
======================================================================================================================
</TABLE>
(Footnotes on following page)
4
<PAGE>
(Footnotes for preceding page)
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans 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 Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares of the Fund. Other eligible investors include certain retirement
plans and participants in certain fee-based programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries",
when used herein with respect to ML & Co., includes the Manager, FAM
and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge of 5.25%, is reduced for
purchases of $25,000 and over and waived for purchases by certain
retirement plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with redemptions to fund participation in certain fee-based programs.
Sales charges also are reduced under a right of accumulation that takes
into account the investor's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares-- Initial Sales Charge
Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for
5
<PAGE>
Federal income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares, and the
conversion and holding periods for certain retirement plans are
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund'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
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases may be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his or her
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. Class A, Class B, Class C and Class D share
holdings will count toward a right of accumulation that 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
6
<PAGE>
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all of their assets invested initially and they are
uncertain as to the length of time they intend to hold their assets in
MLAM-advised mutual funds. Although Class C shareholders are subject to a
shorter CDSC period at a lower rate, they forgo the Class B conversion feature,
making their investment subject to account maintenance and distribution fees for
an indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of Shares --
Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The financial highlights should be read
in conjunction with the financial statements for the fiscal year ended August
31, 1997, and the independent auditors' report thereon which are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Class A++ Class B++
---------------------------------- ------------------------------------
For the Year
Ended For the Period For the Year Ended For the Period
August 31, Oct. 21, 1994+ August 31, Oct. 21, 1994+
----------------- to Aug. 31, ------------------- to Aug. 31,
1997 1996 1995 1997 1996 1995
------- ------- -------------- -------- -------- --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.................. $ 13.60 $ 11.66 $ 9.99 $ 13.14 $ 11.40 $ 9.85
------- ------- -------- -------- -------- -------
Investment income (loss)--net...................... .07 .07 -- (.09) (.07) (.09)
Realized and unrealized gain on investments--net... 4.95 2.13 1.98 4.79 2.07 1.95
------- ------- -------- -------- -------- -------
Total from investment operations...................... 5.02 2.20 1.98 4.70 2.00 1.86
------- ------- -------- -------- -------- -------
Less distributions from realized gain on
investments--net..................................... (1.25) (.26) (.31) (1.15) (.26) (.31)
------- ------- -------- -------- -------- -------
Net asset value, end of period........................ $ 17.37 $ 13.60 $ 11.66 $ 16.69 $ 13.14 $ 11.40
======= ======= ======== ======== ======== =======
Total Investment Return:**
Based on net asset value per share.................... 39.24% 19.02% 20.55%# 37.95% 17.68% 19.60%#
======= ======= ======== ======== ======== =======
Ratios to Average Net Assets:
Expenses.............................................. .99% 1.12% 1.46%* 2.02% 2.16% 2.48%*
======= ======= ======== ======== ======== =======
Investment income (loss)--net......................... .47% .51% .02%* (.59)% (.54)% (.95)%*
======= ======= ======== ======== ======== =======
Supplemental Data:
Net assets, end of period (in thousands).............. $62,049 $47,048 $ 21,288 $216,636 $116,641 $63,748
======= ======= ======== ======== ======== =======
Portfolio turnover.................................... 94.38% 82.10% 80.41% 94.38% 82.10% 80.41%
======= ======= ======== ======== ======== =======
Average commission rate paid##........................ $ .0628 $ .0623 -- $ .0628 $ .0623 --
======= ======= ======== ======== ======== =======
</TABLE>
- ---------------
+ Commencement of Operations.
++ Based on average number of shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
FINANCIAL HIGHLIGHTS (continued)
Class C++
------------------------------------------------------
For the Year Ended For the Period
August 31, Dec. 24, 1992+
------------------------------------- to Aug. 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....... $ 13.14 $ 11.40 $ 9.96 $ 9.86 $ 10.00
------- ------- ------- ------- -------
Investment income (loss)--net........... (.09) (.07) (.09) (.05) (.05)
Realized and unrealized gain on
investments--net...................... 4.79 2.07 1.84 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations........... 4.70 2.00 1.75 .10 (.14)
------- ------- ------- ------- -------
Less distributions from realized gain on
investments--net.......................... (1.12) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period............. $ 16.72 $ 13.14 $ 11.40 $ 9.96 $ 9.86
======= ======= ======= ======= =======
Total Investment Return:**
Based on net asset value per share......... 37.90% 17.68% 18.28% 1.01% (1.40)%#
======= ======= ======= ======= =======
Ratios to Average Net Assets:
Expenses................................... 2.02% 2.15% 2.44% 2.35% 2.79%*
======= ======= ======= ======= =======
Investment income (loss)--net.............. (.58)% (.57)% (.88)% (.52)% (.83)%*
======= ======= ======= ======= =======
Supplemental Data:
Net assets, end of period (in thousands)... $74,732 $54,052 $44,220 $47,263 $45,736
======= ======= ======= ======= =======
Portfolio turnover......................... 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid##............. $ .0628 $ .0623 -- -- --
======= ======= ======= ======= =======
<CAPTION>
Class D++
-----------------------------------------------------
For the Year Ended For the Period
August 31, Dec. 24, 1992+
------------------------------------ to Aug. 31,
1997 1996 1995 1994 1993
------- ------- ------- ------ --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....... $ 13.54 $ 11.64 $ 10.09 $ 9.91 $10.00
------- ------- ------- ------ ------
Investment income (loss)--net........... .03 .03 (.01) .03 --
Realized and unrealized gain on
investments--net...................... 4.93 2.13 1.87 .15 (.09)
------- ------- ------- ------ ------
Total from investment operations........... 4.96 2.16 1.86 .18 (.09)
------- ------- ------- ------ ------
Less distributions from realized gain on
investments--net.......................... (1.23) (.26) (.31) -- --
------- ------- ------- ------ ------
Net asset value, end of period............. $ 17.27 $ 13.54 $ 11.64 $10.09 $ 9.91
======= ======= ======= ====== ======
Total Investment Return:**
Based on net asset value per share......... 38.90% 18.70% 19.15% 1.82% (.90)%#
======= ======= ======= ====== ======
Ratios to Average Net Assets:
Expenses................................... 1.24% 1.37% 1.65% 1.58% 2.03%*
======= ======= ======= ====== ======
Investment income (loss)--net.............. .17% .24% (.10)% .31% (.04)%*
======= ======= ======= ====== ======
Supplemental Data:
Net assets, end of period (in thousands)... $53,101 $22,892 $13,231 $8,623 $6,930
======= ======= ======= ====== ======
Portfolio turnover......................... 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ====== ======
Average commission rate paid##............. $ .0628 $ .0623 -- -- --
======= ======= ======= ====== ======
</TABLE>
- ---------------
+ Commencement of Operations.
++ Based on average number of shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital. The Fund will seek to achieve its investment objective by investing in
a diversified portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in earnings. There can
be no assurance that the investment objective of the Fund will be realized. The
investment objective of the Fund set forth in the first sentence of this
paragraph is a fundamental policy of the Fund which may not be changed without a
vote of a majority of its outstanding shares as defined below.
The Fund will give particular emphasis to companies which possess
above-average growth rates in earnings, resulting from a variety of factors
including, but not limited to, above-average growth rates in sales, profit
margin improvement, proprietary or niche products or services, leading market
shares, and underlying strong industry growth. Management of the Fund believes
that companies which possess above-average earnings growth frequently provide
the prospect of above-average stock market returns, although such companies tend
to have higher relative stock market valuations. Emphasis also will be given to
companies having medium to large stock market capitalizations ($500 million or
more). Investment in companies with lower market capitalizations, especially
those under $1 billion, may involve special risks including limited product
lines, market or financial resources or a limited management group. In addition,
many smaller company stocks trade less frequently and in smaller volume, and may
be subject to more abrupt or erratic price movements or more sensitive to market
fluctuations, than stocks of larger companies.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock and rights to subscribe for
common stock, and the Fund will maintain at least 65% of its total assets
invested in equity securities except during defensive periods. The Fund reserves
the right as a defensive measure and to provide for redemptions to hold other
types of securities, including non-convertible preferred stocks and debt
securities rated investment grade by a nationally recognized statistical rating
organization, Government and money market securities, including repurchase
agreements, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant.
The Fund may invest up to 10% of its total assets in equity securities of
foreign issuers with the foregoing characteristics. (Purchases of American
Depositary Receipts ("ADRs"), however, will not be subject to this restriction.)
Investments in securities of foreign entities and securities denominated in
foreign currencies entail risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions. In addition, foreign
entities may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States entities. In
addition, certain foreign investments may be subject to foreign withholding
taxes. Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, sometimes resulting in delays in
settlement which could have an adverse effect on the Fund, including on its
performance. Costs associated with transactions in foreign securities are
generally higher than with transactions in United States securities.
The Fund may invest in the securities of foreign issuers in the form of
ADRs, European Depositary Receipts ("EDRs") or other securities convertible into
securities of foreign issuers. These securities may not
10
<PAGE>
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. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets.
Other Investment Policies and Practices
The Fund is authorized to use certain strategies involving options and
futures. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
Options on Securities and Securities Indices
The Fund may invest on individual securities, baskets of securities or
particular measurements of value or rate (an "index"), such as an index of the
price of treasury securities or an index representative of short-term interest
rates.
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially replicated by securities held in its portfolio. When the Fund
purchases a put option, in consideration for an upfront payment (the "option
premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings associated with the put option increases
rather than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
The Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which substantially
replicates the performance of the types of securities it intends to purchase.
When the Fund purchases a call option, in consideration for the option premium,
the Fund acquires a right to purchase from another party specified securities at
the exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
11
<PAGE>
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When the
Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
as a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options and Futures" below. A call option
will also be considered covered if the Fund owns the securities it would be
required to deliver upon exercise of the option (or, in the case of option on a
securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
Portfolio Transactions. In executing portfolio transactions, the Fund
seeks to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread),
12
<PAGE>
size of order, difficulty of execution, operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Fund generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available. The Fund contemplates
that, consistent with its policy of obtaining the best net results, it will
place orders for transactions with a number of brokers and dealers, including
Merrill Lynch, an affiliate of the Manager. Subject to obtaining the best price
and execution, brokers who provide supplemental investment research to the Fund
may receive orders for transactions by the Fund. Information so received will be
in addition to, and not in lieu of, services required to be performed by the
Manager and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund--Management and Advisory Arrangements". In addition, consistent with the
Conduct Rules of the NASD, the Manager may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of the
Fund will be sold by Merrill Lynch.
Portfolio Turnover. While the Fund generally does not expect to engage in
trading for short-term gains, it will effect portfolio transactions without
regard to holding period if, in its management's judgment, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. Higher portfolio turnover involves tax consequences for investors
and correspondingly greater transaction costs in the form of the dealer spreads
and brokerage commissions, which are borne directly by the Fund.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. Pursuant to that restriction, the Fund may not invest in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including repurchase
agreements maturing in more than seven days, if, regarding all such securities,
more than 15% of its net assets, taken at market value, would be invested in
such securities. Although not a fundamental policy, the Fund will include
over-the-counter ("OTC") options and the securities underlying such options (to
the extent provided under "Portfolio Strategies Involving Options and
Futures--Restrictions on OTC Options" in the Appendix herein) in calculating the
amount of its total assets subject to the limitation on illiquid securities. The
Fund will not change or modify this policy prior to the change or modification
by the Commission staff of its positions regarding OTC options.
However, the Fund may purchase, without regard to the above limitation,
securities that are not registered under the Securities Act of 1933, as amended
(the "Securities Act") but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors, or the Manager pursuant to guidelines adopted by
the Board, continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors, however,
will retain oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the other party
13
<PAGE>
agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate insulated from
market fluctuations during such period. Such agreements usually cover short
periods, such as under one week. As a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. The Fund may suffer time delays and incur costs or possible losses in
connection with disposition of the underlying securities in the event of the
failure of the repurchase agreement counterparty. Repurchase agreements maturing
in more than seven days are deemed illiquid by the Commission and are therefore
subject to the Fund's investment restriction limiting investments in securities
that are not readily marketable to 15% of the Fund's net assets.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act. During the period of this loan, the Fund receives
the income on the loaned securities and receives compensation for entering into
the loan and thereby increases its yield. In the event that the borrower
defaults on its obligation to return borrowed securities, because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities on a delayed delivery basis or a when-issued basis
at fixed purchase terms. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future. The
purchase will be recorded on the date the Fund enters into the commitment and
the value of the obligation will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or high
grade, liquid debt securities having a market value at all times at least equal
to the amount of the forward commitment.
Investment Restrictions
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies that are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may
be changed by the Board of Directors without shareholder approval. As a
non-fundamental restriction, the Fund may not borrow amounts in excess of 20% of
its total assets, taken at market value, and then only from banks as a temporary
measure
14
<PAGE>
for extraordinary or emergency purposes such as the redemption of Fund shares.
As a non-fundamental policy, the Fund will not invest in securities which cannot
readily be resold because of legal or contractual restrictions or which are not
otherwise readily marketable, including repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities, more than 15% of its total assets taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund 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 Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of six individuals, five of
whom are non-affiliated persons of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate FAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.
JOE GRILLS--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; Member of the Investment Advisory Committees of the State
of New York Common Retirement Fund and the Howard Hughes Medical Institute;
Director, Duke Management Company, LaSalle Street Fund and Kimco Realty
Corporation.
WALTER MINTZ--Special Limited Partner of Cumberland Associates (investment
partnership).
ROBERT S. SALOMON, JR.--Principal of STI Management (investment adviser).
MELVIN R. SEIDEN--Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
STEPHEN B. SWENSRUD--Chairman of Fernwood Associates (financial
consultants).
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
Management and Advisory Arrangements
The Manager, which is owned and controlled by ML & Co., a financial
services holding company, acts as the manager to the Fund and provides the Fund
with management and investment advisory services. The Manager, or an affiliate
of the Manager, FAM, acts as the investment adviser to more than 140 other
15
<PAGE>
registered investment companies. The Manager or FAM also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of October 31, 1997, the Manager and FAM had a total of approximately $271.9
billion in investment company and other portfolio assets under management.
The agreement with the Manager (the "Management Agreement") provides that,
subject to the direction of the Board of Directors of the Fund, the Manager is
responsible for the actual management of the Fund's portfolio and for the review
of the Fund's holdings in light of its own research analysis and analyses from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Manager, subject to review by the
Board of Directors.
The Manager provides the portfolio managers for the Fund, who considers
analyses from various sources, makes the necessary decisions, and places
transactions accordingly. The Manager is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Management Agreement. The Manager has access to the
total securities research and economic facilities of Merrill Lynch.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. For the fiscal year ended August 31, 1997,
the management fee paid by the Fund to the Manager aggregated $1,986,602 (based
on average net assets of approximately $306.5 million).
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares, and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services. For the
fiscal year ended August 31, 1997, the Fund paid the Manager $66,072 for such
accounting services. For the fiscal year ended August 31, 1997, the ratio of
total expenses to average net assets was .99%, 2.02%, 2.02% and 1.24% for Class
A, Class B, Class C and Class D shares, respectively.
Lawrence R. Fuller is primarily responsible for the day-to-day management
of the Fund's portfolio. Mr. Fuller is a Senior Vice President of the Fund since
1997 and has been a First Vice President of the Manager since 1997 and a Vice
President of the Manager or its predecessors since 1992. From 1984 to 1992, Mr.
Fuller served as a Senior Vice President and Director of Benefit Capital
Management.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
16
<PAGE>
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act that incorporates the Code of Ethics
of the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
Transfer Agency Services
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $11.00 per Class A or Class D account and
up to $14.00 per Class B or Class C account, and is entitled to reimbursement
for certain transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly
closed account charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended August 31,
1997, the Fund paid the Transfer Agent $661,020 pursuant to the Transfer Agency
Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except that for retirement plans the minimum initial purchase is $100 and the
minimum subsequent purchase is $1, and for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
17
<PAGE>
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing(SM)
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange ("NYSE")
(generally, 4:00 p.m., New York time), which includes orders received after the
close of business on the previous day, the applicable offering price will be
based on the net asset value determined as of 15 minutes after the close of
business on the NYSE on the day the order is placed with the Distributor,
provided the order is received by the Distributor prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received 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. Any
order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a sale of shares to such customers. Purchases made directly
through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D
18
<PAGE>
Distribution Plan). See "Distribution Plans" below. Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs with respect to Class B and Class C shares in that the sales
charges and distribution fees applicable to each class provide for the financing
of the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, that are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System.
<TABLE>
<CAPTION>
<S> <C>
=====================================================================================================================
Account
Maintenance Distribution
Clas 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 4 years, at a rate of
4.0% during the first year, decreasing B shares convert to D
1.0% annually to 0.0%(4) 0.25% 0.75% shares
automatically after
approximately eight
years(5)
- -----------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 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 may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
19
<PAGE>
Initial Sales Charge Alternatives--Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A 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>
<S> <C>
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
------------------ -------------- -------------- ------------------
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.17 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A share purchases by certain retirement plan
investors and participants in connection with certain fee-based programs. If
the sales charge is waived in connection with a purchase of $1,000,000 or
more, such purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection with
certain fee-based programs. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of $1,000,000
or more of Class A or Class D shares by certain employer-sponsored retirement
or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended August 31, 1997, the Fund sold 5,300,860 Class A
shares for aggregate net proceeds to the Fund of $80,749,430. The gross sales
charges for the sale of Class A shares of the Fund for that year were $8,133, of
which $671 and $7,462 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class A shares purchased
subject to a front-end charge waiver. During the fiscal year ended August 31,
1997, the Fund sold 2,051,457 Class D shares for aggregate net proceeds of
$31,598,761. The gross sales charges for the sale of Class D shares of the Fund
for the year were $276,456, of which $19,739 and $256,717 were received by the
Distributor and Merrill Lynch, respectively. During such year, 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 waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored
20
<PAGE>
retirement or savings plans, including eligible 401(k) plans, may purchase Class
A shares of the Fund at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
MLAM or any of its affiliates. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs and U.S. branches of
foreign banking institutions provided that the program or branch has $3 million
or more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and purchases
made in connection with certain fee-based programs. In addition, Class A shares
will be offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met (for
closed-end funds that commenced operations prior to October 21, 1994). For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. 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
Fund 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 D sales charges also may
be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc., and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without a 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
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
21
<PAGE>
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealer's own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge--Class B Shares. Class B shares that are
redeemed within four years after purchase may be subject to a CDSC at rates set
forth below charged as a percentage of the dollar amount subject thereto. The
CDSC will be assessed on an amount equal to the lesser of the proceeds of
redemption or
22
<PAGE>
the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
Class B CDSC
As a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
------------------- -----------------
0-1................................................... 4.00%
1-2................................................... 3.00
2-3................................................... 2.00
3-4................................................... 1.00
4 and thereafter...................................... 0.00
For the fiscal year ended August 31, 1997, the Distributor received CDSCs
of $315,318 with respect to redemption of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The CDSC 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 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 on or
after October 21, 1994.
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The
CDSC also is waived for any Class B shares that are purchased by eligible 401(k)
or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. 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 Class B CDSC also is waived for any
Class B shares that are purchased within qualifying Employee Access(SM)
Accounts. Additional information concerning the
23
<PAGE>
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services--Fee-Based Programs."
Contingent Deferred Sales Charge--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. The Class C CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
For the fiscal year ended August 31, 1997, the Distributor received CDSCs of
$7,765 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 Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year
24
<PAGE>
Conversion Period, or vice versa, the Conversion Period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor
$1,553,165 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $155.7
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended
25
<PAGE>
August 31, 1997, the Fund paid the Distributor $626,234 pursuant to the Class C
Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $62.8 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended August 31, 1997, the Fund paid the Distributor $90,258 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $36.2 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based upon 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 Distributor on-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 August 31 of each year on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
With respect to Class B shares, as of August 31, 1997, direct cash
revenues, for the period since commencement of operations, exceeded direct cash
expenses by $2,335,650 (1.08% of Class B net assets at that date). With respect
to Class C shares, as of August 31, 1996, direct cash revenues, for the period
since commencement of operations, exceeded direct cash expenses by $1,228,710
(1.65% of Class C net assets at that date).
With respect to Class B shares, for the period from commencement of
operations to December 31, 1996, fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch, exceeded fully allocated accrual revenues by
$1,162,000 (.81% of Class B net assets at that date). With respect to Class C
shares, for the period from commencement of operations to December 31, 1996,
fully allocated accrual revenues incurred by the Distributor and Merrill Lynch,
exceeded fully allocated accrual expenses by $114,000 (.19% of Class C net
assets at that date).
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSCs). 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.
26
<PAGE>
Consequently, the maximum amount payable to the Distributor (referred to as the
"voluntary maximum") in connection with the Class B shares is 6.75% of eligible
gross sales. The Distributor retains the right to stop waiving the interest
charges at any time. To the extent payments would exceed the voluntary maximum,
the Fund will not make further payments of the distribution fee with respect to
Class B shares and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payments in excess of the amount payable under the NASD formula
will not be made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares 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."
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption, except for any contingent deferred sales charge which may be
applicable. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares may do so 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. Redemption requests should not be sent to the Fund.
The redemption request requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as his (their) name(s) appear(s) on
the Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" (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
27
<PAGE>
Act of 1934, as amended (the "Exchange Act"), 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 Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment has been collected for the purchase of such shares. Normally, this delay
will not exceed 10 days.
Repurchase
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the day received, and such request is
received by the Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund other than any applicable
CDSC in the case of Class B shares. Securities firms that do not have selected
dealer agreements with the Distributor may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares. Repurchases made directly through the Fund's Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem shares
as set forth above.
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
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The
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reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors. Included in the
Fund's shareholder services are the following:
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 may make additions to their Investment Account any time
by mailing a check directly to the Transfer Agent. Shareholders may also
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 Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her 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 account such as an IRA from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable contingent deferred sales charge) so that the cash
proceeds can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a
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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 Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in the 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.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the
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net asset value per share next determined on the ex-dividend date of such
dividend or distribution. A shareholder may at any time, by written notification
to Merrill Lynch if the shareholder's account is maintained with Merrill Lynch
or by written notification or by telephone call (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent, elect
to have subsequent dividends or capital gains distributions, or both dividends
and capital gains distributions, paid in cash, rather than reinvested, in which
event payment will be mailed or directly deposited on or about the payment date.
The Fund is not responsible for any failure of delivery to the shareholder's
address of record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks. Cash payments can also be directly deposited
to the shareholder's bank account. No CDSC will be imposed on redemption of
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions.
Systematic Withdrawal Plans. A 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 bank account on
either a monthly or quarterly basis. A shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or
CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares of
such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed pursuant
to a systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Contingent Deferred Sales
Charges--Class B Shares" and "--Contingent Deferred Sales Charges--Class C
Shares." Where the systematic withdrawal plan is applied to Class B Shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by
pre-arranged charges of $50 or more to his or her regular bank account.
Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain
related accounts in amounts of $100 or more ($1 for retirement plans) through
the CMA(R) or CBA(R) Automated Investment Program.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified
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<PAGE>
periods within such Program may be subject to a fee based upon the current value
of such shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in such
Program's client agreement and from the Transfer Agent at (800) MER-FUND
(637-3863).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. With respect to such transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Manager generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker in the execution of
transactions for its portfolio securities. The Fund has been informed by Merrill
Lynch that it will in no way, at any time, attempt to influence or control the
placing by the Manager or by the Fund of orders for brokerage transactions.
Brokers and dealers, including Merrill Lynch, which provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Supplemental investment research received by the Manager may also be used
in connection with other management accounts of the Manager and its affiliates.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement. The
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies that
broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified 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 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 the maximum sales charge in the case of Class A and Class D shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the
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<PAGE>
specified period in the case of Class B and Class C shares. Dividends paid by
the Fund with respect all shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance fees, distribution charges and
any incremental transfer agency costs relating to each class of shares will be
borne exclusively by that class. The Fund will include performance data for all
classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, and actual, annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to
reduced sales charges in the case of Class A and Class D shares or waiver of the
CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans), the performance data may take into account the reduced, and
not the maximum, sales charges or may not take into account the contingent
deferred sales charge and therefore may reflect greater total return since, due
to the reduced sales charges or waiver of the contingent deferred sales charge,
a lower amount of expenses may be deducted. See "Purchase of Shares". The Fund's
total return may be expressed either as a percentage or as a dollar amount in
order to illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., or to data contained in publications such as Money Magazine,
U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine or
other industry publications. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. The Fund may also compare historical
performance of U.S. equity securities to the performance over the same period of
time of other financial instruments issued by domestic issuers in its
advertising literature. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature.
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ADDITIONAL INFORMATION
Dividends and Distributions
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid at
least annually. All net realized capital gains, if any, are distributed to the
Fund's shareholders at least annually. See "Additional
Information--Determination of Net Asset Value" below. Dividends and
distributions may be reinvested automatically in shares of the Fund, at net
asset value without a sales charge. Shareholders may elect in writing to receive
any such dividends or distributions, or both, in cash. See "Shareholder
Services--Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information as to how to elect either dividend reinvestment or cash
payments. Dividends and distributions are taxable to shareholders as described
below whether they are reinvested in shares of the Fund or received in cash.
From time to time, the Fund may declare a special distribution at or about the
end of the calendar year in order to comply with Federal tax requirements that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Determination of Net Asset Value" below.
Gains or losses attributable to foreign currency gains or losses from
certain of the Fund's investments may increase or decrease the amount of the
Fund's income available for distribution to shareholders. If such losses exceed
other income during a taxable year, (a) the Fund would not be able to make any
ordinary income dividend distributions, and (b) all or a portion of
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary income dividend,
reducing each shareholder's tax basis in Fund shares for Federal income tax
purposes. For a more detailed discussion of the Federal tax considerations
relevant to foreign currency transactions, see "Taxes" below.
Determination of Net Asset Value
The net asset value of the shares of all classes of the Fund is determined
once daily 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 market value of the securities held by the Fund plus
any cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time. Expenses, including the management fees
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily. The Fund employs Merrill Lynch
Securities Pricing(SM) Service ("MLSPS") an affiliate of the Manager, to provide
certain securities prices for the Fund. During the fiscal year ended August 31,
1997, the Fund did not pay MLSPS a fee for such service.
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 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
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per share net asset value of Class D shares generally will be higher than the
per share net asset value of Class B and Class C shares, reflecting the daily
expense accruals of the distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected, however, that the
per share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials 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 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 OTC market are valued at the last available bid price
in the OTC market prior to the time of valuation. When the Fund writes an
option, the amount of the premium received is recorded on the books of the Fund
as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Board of Directors of the Fund.
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund 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 Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
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 Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends, as
well as the amount of capital gain dividends in the different categories of
capital gain referred to above.
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A portion of the Fund's ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. If the Fund pays a dividend in January which was declared
in the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such 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 Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income 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 Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
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.
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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 Fund on the exchanged shares reduces any sales charge such
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 Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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 United States Government obligations. State
law varies as to whether dividend income attributable to United States
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
Fund.
Organization of the Fund
The Fund was incorporated under Maryland law on April 30, 1992. It has an
authorized capital of 400,000,000 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, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
fee relating to such shares and Class B and Class C shares bear certain expenses
related to the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Fund has received an
order from the Commission permitting the issuance and sale of multiple classes
of common stock. The Directors of the Fund may classify and reclassify the
shares of the Fund 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 matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act
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does not require shareholders to elect Directors. Also, the by-laws of the Fund
require that a special meeting of shareholders be held upon the written request
of at least 10% of the outstanding shares of the Fund entitled to vote at such
meeting, if they comply with applicable Maryland law. 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 Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, expenses related to the distribution
of the Class B, Class C, and Class D shares bear certain additional expenses.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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 800-637-3863.
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MERRILL LYNCH FUNDAMENTAL GROWTH 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 toll free (800) 637-3766.
- --------------------------------------------------------------------------------
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares
[ ] Class D shares
of Merrill Lynch Fundamental Growth 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.)
<TABLE>
<CAPTION>
<S> <C>
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address......................................................
............................................................. Name and Address
of Employer..................................
(Zip Code)
Occupation ...................................................
.............................................................
Signature of Owner
Occupation .......................................... .............................................................
..................................................... .............................................................
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
--------------------------------- ---------------------------------
</TABLE>
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 Fundamental Growth 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.
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART
1)--(Continued)
- --------------------------------------------------------------------------------
3. Social Security Number or Taxpayer Identification Number
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
Instruction: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to underreporting and if
you have not received a notice from the IRS that backup withholding has been
terminated. The undersigned authorizes the furnishing of this certification to
other Merrill Lynch sponsored mutual funds.
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. Letter of Intention--Class A and D shares only (See terms and conditions in
the Statement of Additional Information)
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Fundamental Growth 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 Merrill Lynch Fundamental Growth
Fund, Inc. 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 Fundamental Growth 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.
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Fundamental Growth Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to
notify the Distributor of any purchases or sales made under a Letter of
Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee
the Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal Plan or the
Automatic Investment Plans only.
- --------------------------------------------------------------------------------
1. Account Registration
------------------------------------
Name of Owner...............................................
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...................................
Address.....................................................
............................................................ Account Number.............................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. Systematic Withdrawal Plan (See terms and conditions in the Statement of
Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in
Merrill Lynch Fundamental Growth 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 the amount of the withdrawal you would like paid to you (check one): [ ]
$...... of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in the
account.
Specify withdrawal method: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(b) I hereby authorize payment by direct deposit to 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 shall accompany this application.
- ---------------
* Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the Systematic Withdrawal Plan
is made.
41
<PAGE>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART
2)--(Continued)
- --------------------------------------------------------------------------------
3. Application for Automatic Investment Plan
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares [ ] Class D shares
of Merrill Lynch Fundamental Growth 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 an ACH debit each month on my bank account for
investment in Merrill Lynch Fundamental Growth Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
.................................. or as soon as possible thereafter.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, 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
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 Signature of Depositor
Number (If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this application.
42
<PAGE>
APPENDIX
The Fund is authorized to use certain strategies involving options and
futures. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments".
Types of Options
The Fund may engage in transactions in options on securities or securities
indices on exchanges and in the over-the-counter ("OTC") markets. In general,
exchange-traded options have standardized exercise prices and expiration dates
and require the parties to post margin against their obligations, and the
performance of the parties' obligations in connection with such options is
guaranteed by the exchange or a related clearing corporation. OTC options have
more flexible terms negotiated between the buyer and the seller, but generally
do not require the parties to post margin and are subject to greater risk of
counterparty default. See "Additional Risk Factors of OTC Transactions" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
A-1
<PAGE>
Risk Factors in Options and Futures
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the Fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments.
The Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Strategic Instrument or the
Fund will otherwise be able to sell such instrument at an acceptable price. It
may therefore not be possible to close a position in a Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., futures transactions,
sales of put options) and other types of transactions in which the Fund may
engage (e.g., delayed delivery transactions, discussed below) may expose the
Fund to potential losses which exceed the amount originally invested by the Fund
in such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction but will not limit the Fund's
exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold, or
(ii) for which the Investment Adviser anticipates the Fund can receive on each
business day at least two independent bids or offers, unless quotation from only
one dealer is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a predetermined
price then the Fund will treat as illiquid such amount of the underlying
securities as
A-2
<PAGE>
is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e. current market value of the underlying security minus the
option's exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by;
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterpart in the Fund is at risk that its
counterpart will become bankrupt or otherwise fail to honer its obligations by
engaging in transactions in Strategic Instruments traded in OTC markets only
with financial institutions which have substantial capital or which have
provided the Fund with a third-party guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments
The Fund may not use any Strategic Instrument to gain exposure to an asset
or type or class of assets that it would be prohibited by its investment
restrictions from purchasing directly.
A-3
<PAGE>
[This page intentionally left blank]
<PAGE>
Manager
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Ernst & Young LLP
202 Carnegie Center
Princeton, New Jersey 08543-5321
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the fund, the Manager or the Distributor. This Prospectus does not constitute
an offering in any state in which such offering may not lawfully be made.
---------------------
TABLE OF CONTENTS
Page
----
Fee Table........................................ 2
Merrill Lynch Select Pricing(SM) System.......... 3
Financial Highlights............................. 8
Investment Objective and Policies................ 10
Other Investment Policies and Practices........ 11
Options on Securities and Securities Indices... 11
Investment Restrictions........................ 14
Management of the Fund........................... 15
Board of Directors............................. 15
Management and Advisory Arrangements........... 15
Code of Ethics................................. 17
Transfer Agency Services....................... 17
Purchase of Shares............................... 17
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 20
Deferred Sales Charge Alternatives--
Class B and Class C Shares................... 22
Distribution Plans............................. 25
Limitations on the Payment of Deferred Sales
Charges...................................... 26
Redemption of Shares............................. 27
Redemption..................................... 27
Repurchase..................................... 28
Reinstatement Privilege--
Class A and Class D Shares................... 28
Shareholder Services............................. 29
Fee-Based Programs............................. 31
Portfolio Transactions and Brokerage............. 32
Performance Data................................. 32
Additional Information........................... 34
Dividends and Distributions.................... 34
Determination of Net Asset Value............... 34
Taxes.......................................... 35
Organization of the Fund....................... 37
Shareholder Inquiries.......................... 38
Shareholder Reports............................ 38
Authorization Form............................... 39
Appendix......................................... A-1
Code # 16463-1197
[LOGO]
Merrill Lynch
Fundamental
Growth Fund, Inc.
Prospectus
November 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
[LOGO]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Fundamental Growth Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
------------------------
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with long term growth of capital. The Fund will
seek to achieve its investment objective by investing in a diversified portfolio
of equity securities placing particular emphasis on companies that have
exhibited above-average growth rates in earnings.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing 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 Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November
26, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
------------------------
The date of this Statement of Additional Information is November 26, 1997
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital. The Fund will seek to achieve its investment objective by investing in
a diversified portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in earnings. There can
be no assurance that the investment objective of the Fund will be realized. The
investment objective of the Fund set forth in the first sentence of this
paragraph is a fundamental policy of the Fund which may not be changed without a
vote of a majority of its outstanding shares as defined below.
The Fund will give particular emphasis to companies that have exhibited
above-average growth rates in earnings, resulting from a variety of factors
including--but not limited to--above-average growth rates in sales, profit
margin improvement, proprietary or niche products or services, leading market
shares, and underlying strong industry growth. Management of the Fund believes
that companies which possess above-average earnings growth frequently provide
the prospect of above-average stock market returns, although such companies tend
to have higher relative stock market valuations. Emphasis also will be given to
companies having medium to large stock market capitalizations ($500 million or
more).
The Fund may invest up to 10% of its total assets in equity securities of
foreign issuers with the foregoing characteristics. (Purchases of American
Depositary Receipts ("ADRs"), however, are not subject to this restriction.)
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since the Fund may invest in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
unrealized appreciation or depreciation of investments insofar as the United
States investors are concerned. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. Foreign
financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The ability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result
2
<PAGE>
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Costs associated
with transactions in foreign securities are generally higher than with
transactions in United States securities. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.
The Fund may invest in the securities of foreign issuers in the form of
ADRs, European Depositary Receipts ("EDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by 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. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets. The
Fund 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.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock and rights to subscribe for
common stock. The Fund will maintain at least 65% of its total assets invested
in equity securities except during defensive periods. The Fund reserves the
right as a defensive measure and to provide for redemptions to hold other types
of securities, including non-convertible preferred stocks and debt securities,
Government and money market securities, including repurchase agreements, or
cash, in such proportions as, in the opinion of management, prevailing market or
economic conditions warrant.
Portfolio Strategies Involving Options and Futures
Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The Fund may seek to hedge its portfolio against adverse movements in
the equity markets, interest rates and exchange rates between currencies. The
Fund has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and stock futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions, foreign currency options and futures
and related options on such futures. Each of such portfolio strategies is
described in the Prospectus. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will only engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities where movements on the equity markets, interest rates or
currency exchange rates occur. The following is further information relating to
portfolio strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to 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 Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option price. In addition, the Fund's ability to sell the underlying security
will be limited while the
3
<PAGE>
option is in effect unless the Fund effects a closing purchase transaction. A
closing purchase transaction cancels out the Fund's position as the writer of an
option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
particular hedge against the price of the underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of the
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges. An options position may be closed only
on an exchange which provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to effect
closing transactions in particular options, with the result, in the case of a
covered call option, that the Fund will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation (the "Clearing Corporation") may not, at all
times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter ("OTC") options transactions
("OTC options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Commission has taken the position
that OTC options and the assets used as cover for written OTC options are
illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price,
4
<PAGE>
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund may
purchase either exchange-traded options or OTC options. The Fund will not
purchase 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 Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin", are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940 (the "Investment Company Act") in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Fund from issuing a "senior security"
other than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the
Investment Company Act.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements in the prices of the securities
and currencies which are the subject of the hedge. If the prices of the options
and futures move more or less than the prices of the hedged securities or
currencies, the Fund will experience a
5
<PAGE>
gain or loss which will not be completely offset by movements in the prices of
the securities and currencies which are the subject of the hedge. The successful
use of options, futures and currency transactions also depends on the Manager'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 or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is theoretically
unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and positions limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
Other Investment Policies and Practices
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, on entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. Such
agreements usually cover short periods, such as under a week. The Fund will
require the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement. In the event of a default by the seller, the Fund
ordinarily will retain ownership of the securities underlying the repurchase
agreement, and instead of a contractually fixed rate of return, the rate of
return to the Fund shall be dependent upon intervening fluctuations of the
market value of such securities and the accrued interest on the securities. In
such event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller
6
<PAGE>
to perform. The Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the securities underlying a repurchase
agreement in the event of the counterparty's default. From time to time the Fund
also may invest in securities pursuant to purchase and sale contracts. While
purchase and sale contracts are similar to repurchase agreements, purchase and
sale contracts are structured so as to be in substance more like a purchase and
sale of the underlying security than is the case with repurchase agreements.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities on a delayed delivery basis or a when-issued basis
at fixed purchase terms. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future. The
purchase will be recorded on the date the Fund enters into the commitment and
the value of the obligation will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or high
grade, liquid debt securities having a market value at all times at least equal
to the amount of the forward commitment.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. However, the Fund may purchase, without regard to that
limitation, securities that are not registered under the Securities Act of 1933
(the "Securities Act") but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors, or the Manager pursuant to guidelines adopted by
the Board, continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors, however,
will retain oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Investment Restrictions. In addition to the investment restrictions set
forth in the Prospectus, the Fund has adopted a number of fundamental and
non-fundamental investment policies and restrictions. The fundamental policies
and restrictions set forth below may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities (which for
this purpose 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). Unless otherwise provided, all references
to the assets of the Fund below are in terms of current market value. The Fund
may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
7
<PAGE>
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Notwithstanding fundamental investment restriction (7) above, the Fund
currently does not intend to borrow amounts in excess of 33 1/3% 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 Fund shares.
In addition, the Fund will not purchase securities while borrowings are
outstanding.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment
company or registered unit investment trust, in reliance on Section
12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment
Company Act, at any time its shares are owned by another investment
company that is part of the same group of investment companies as the
Fund.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
have otherwise determined to be liquid pursuant to applicable law.
8
<PAGE>
d. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% 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 Fund shares.
Lending of Portfolio Securities. Subject to investment restriction (5)
above, the Fund may from time to time lend securities from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans will be terminable at any time. The Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
voting rights, subscription rights and rights to dividends, interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with the
Fund for services in arranging such loans. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return the
securities involved in such transactions.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to a
permissive order or otherwise in compliance with the provisions of the
Investment Company Act and the rules and regulations thereunder. Included among
such restricted transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
MANAGEMENT OF THE FUND
Directors and Officers
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the last five
years is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65)--President and Director (1)(2)--President of the Manager
(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 predecessor) 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.
JOE GRILLS (62)--Director (2)--P.O. Box 98, Rapidan, Virginia 22733. Member
of the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; member of CIEBA's Executive Committee
since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committees of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute; Director, Duke Management Company since 1993;
Director, La Salle Street Fund since 1995; Director, Kimco Realty Corporation
since January 1997.
WALTER MINTZ (68)--Director (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
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<PAGE>
ROBERT S. SALOMON, JR. (61)--Director (2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman and
CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
MELVIN R. SEIDEN (67)--Director (2)--780 Third Avenue, Suite 2502, New
York, New York 10017. Director of Silbanc Properties, Ltd. (real estate,
investments and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD (64)--Director (2)--24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Associates (financial
consultants) since 1975.
TERRY K. GLENN (57)--Executive Vice President (1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (64)--Senior Vice President (1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
LAWRENCE R. FULLER (56)--Senior Vice President (1)--First Vice President of
the Manager since 1997 and Vice President of the Manager since 1992; Senior Vice
President and Director of Benefit Capital Management from 1984 to 1992.
GERALD M. RICHARD (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Servicers since 1993; Treasurer of the Distributor since 1984 and
Vice President since 1981.
DONALD C. BURKE (37)--Vice President (1)(2)--First Vice President of FAM
since 1997; Vice President of FAM from 1990 to 1997; Director of Taxation of FAM
since 1990.
BARBARA FRASER (53)--Secretary (1)(2)--First Vice President of the Manager
since 1996; Vice President of the Manager from 1994 until 1996.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of one or more investment
companies for which the Manager, or its affiliate FAM, acts as investment
adviser or manager.
At October 31, 1997 the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
The Fund pays each Director non-affiliated with the Manager a fee of $2,000
per year, plus a fee of $500 for each board meeting attended and out-of-pocket
expenses relating to attendance at meetings, and each Audit Committee member an
annual fee of $2,000 plus $500 for each Committee meeting attended. Fees and
expenses paid to the non-affiliated Directors aggregated $40,267 for the fiscal
year ended August 31, 1997.
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<PAGE>
The following table sets forth for the fiscal year ended August 31, 1997
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996 the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate. FAM
("MLAM/FAM-Advised Funds"), to the non-affiliated Directors:
<TABLE>
<CAPTION>
<S> <C>
Aggregate
Pension or Compensation
Retirement from Fund and
Benefits Accrued MLAM/FAM-Advised
Compensation as Part of Funds Paid to
Director from the Fund Fund Expense Director(1)
-------- ------------- ---------------- ----------------
Joe Grills..................................... $8,000 None $164,000
Walter Mintz................................... $8,000 None $164,000
Robert S. Salomon, Jr.......................... $8,000 None $187,167
Melvin R. Seiden............................... $8,000 None $164,000
Stephen B. Swensrud............................ $8,000 None $154,250
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Joe
Grills (19 registered investment companies consisting of 47 portfolios),
Walter Mintz (18 registered investment companies consisting of 37
portfolios), Robert S. Salomon, Jr. (18 registered investment companies
consisting of 37 portfolios), Melvin R. Seiden (18 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (21 registered
investment companies consisting of 52 portfolios).
Management and Advisory Arrangements
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its 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
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate of
0.65% of the average daily net assets of the Fund. For the fiscal years ended
August 31, 1995, 1996 and 1997, the total advisory fees paid by the Fund to the
Manager aggregated $560,426, $1,259,493 and $1,986,602, respectively. For those
years, the Manager made no reimbursement of expenses to the Fund in respect of
the applicable expense limitation provisions.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. The Fund 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, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor), charges
of the custodian, any sub-custodian and transfer agent, expenses of redemption
of shares, Commission fees, expenses of registering the shares under Federal,
state or foreign laws, fees and expenses of unaffiliated Directors, accounting
and pricing costs (including the daily calculation of net
11
<PAGE>
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Fund. Accounting services are provided to the Fund by the Manager and the
Fund reimburses the Manager for its costs in connection with such services on a
semiannual basis. For the Fund's fiscal years ended August 31, 1995, 1996 and
1997 the amounts of such reimbursement were $72,042, $57,139, and $66,072,
respectively. The Distributor will pay certain promotional expenses of the Fund
incurred in connection with the offering of its shares. Certain expenses will be
financed by the Fund pursuant to distribution plans in compliance with Rule
12b-1 under the Investment Company Act. See "Purchase of Shares--Distribution
Plans."
ML & Co. and Princeton Services are "controlling persons" of the Manager as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., a subsidiary of ML & Co.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement and the Sub-Advisory Agreement will remain in effect
from year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of the Fund 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 contracts are not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
Alternative Sales Arrangements
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
12
<PAGE>
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
Initial Sales Charge Alternatives--Class A and Class D Shares
The gross sales charges for the sale of Class A shares for the fiscal year
ended August 31, 1997 were $8,133, of which the Distributor received $671 and
Merrill Lynch received $7,462 as a selected dealer of such shares. The gross
sales charges for the sale of Class A shares for the fiscal year ended August
31, 1996 were $7,458, of which the Distributor received $516 and Merrill Lynch
received $6,942 as a selected dealer of such shares. For the period October 21,
1994 (commencement of operations) to August 31, 1995, the gross sales charges
for the sale of Class A shares were $7,234, of which the Distributor received
$541 and Merrill Lynch received $6,693 as a selected dealer. The gross sales
charges for the sale of Class D shares for the fiscal year ended August 31, 1997
were $276,456, of which the Distributor received $19,739 and Merrill Lynch
received $256,717. The gross sales charges for the sale of Class D shares for
the fiscal year ended August 31, 1996 were $127,154, of which the Distributor
received $9,460 and Merrill Lynch received $117,694 as a selected dealer of such
shares. The gross sales charges for the sale of Class D shares for the fiscal
year ended August 31, 1995 were $98,184, of which the Distributor received
$6,751 and Merrill Lynch received $91,433 as a selected dealer. During such
period, the Distributor received CDSCs of $735 with respect to redemptions
within one year after purchase of Class D shares purchased subject to front-end
sales charge waivers.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (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 that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of the
Fund or shares of other registered investment companies at a discount. The term
"purchase" shall not include purchases by any group of individuals whose sole
organization 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
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the
13
<PAGE>
quantity discounts discussed above only if the Fund 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 Fund's Prospectus available to
individual investors or employees and forwarding investments by such persons to
the Fund 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 Fund and certain
other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the Manager
or FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date the Merrill Lynch Select Pricing(SM) System commenced operations) and wish
to reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A or Class D 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 who wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A 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 Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the 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 Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Reduced Initial Sales Charge
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 Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of any other MLAM-advised mutual fund. 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
14
<PAGE>
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. The reduced sales charges are applicable to a
purchase aggregating $25,000 or more in Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares 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 Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
The Blueprint program is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value per share plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $300.01 to
$5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class D shares of the Fund are
being offered at net asset value per share plus a sales charge of 1/2 of 1% for
corporate or group IRA programs placing orders to purchase their Class A and
Class D investors through Blueprint, however, may differ from those available to
other investors in Class A or Class D shares.
15
<PAGE>
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer sponsored retirement and savings plans
(as defined below) whose Trustee and/or plan sponsor has entered into the IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and controlled by
Merrill Lynch & Co., Inc.), and any trust, pension, profit-sharing or other
benefit plan for such persons may purchase Class A shares of the Fund at net
asset value.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; second, the investor also must establish that such redemption
had been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after notice.
Class D shares of the Fund are 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 Fund with proceeds from the
16
<PAGE>
redemption of such shares of other mutual funds 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.
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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse tax consequences
to the Fund that might result from an acquisition of assets having net
unrealized appreciation that is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, that are not restricted as to transfer either
by law or liquidity of market (except that the Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits on acquisition of such securities set forth under
"Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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 contingent deferred sales charge
("CDSC") upon redemption, based on similar criteria. Such Class B shares will
convert into Class D shares approximately ten years after the plan purchases the
first share of any MLAM-advised mutual fund. Minimum purchase requirements may
be waived or varied for such plans. Additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other arrangements
is available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
Distribution Plans
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account
17
<PAGE>
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 Fund and its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, 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 Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of the
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 Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
18
<PAGE>
The following table sets forth information as of August 31, 1997, with
respect to the Class B shares and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
<S> <C>
Data Calculated as of August 31, 1997
Annual
Allowable Amount Distribution
Eligible Aggregate Interest on Maximum Previously Aggregate Fees at Current
Gross Sales Unpaid Amount Paid to Unpaid Net Asset
Sales Charges Balance(1) Payable Distributor(2) Balance Level(3)
-------- --------- ----------- ------- -------------- --------- ---------------
Class B (in thousands)
Under NASD Rule as
Adopted............... $141,201 $8,825 $1,239 $10,064 $3,479 $6,585 $1,627
Under Distributor's
Voluntary Waiver...... $141,201 $8,825 $ 706 $9,531 $3,479 $6,052 $1,627
Class C (in thousands)
Under NASD Rule as
Adopted............... $ 58,172 $3,636 $ 826 $4,462 $1,474 $2,988 $ 559
</TABLE>
- ------------------
(1) 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.
(2) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A Shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Fund
Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC is
booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
(3) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge 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 Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the NYSE
is restricted as determined by the Commission or such Exchange is closed (other
than customary weekend and holiday closings) for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
the Fund.
Deferred Sales Charge--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 the new Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of the new Class B shares in
certain instances including in connection with certain post-retirement
withdrawals from an IRA or other retirement plans or on redemptions of Class B
shares following the death or disability of the new Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawals are:
(a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic
19
<PAGE>
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 the new Class B shareholder
(including one who owns the new 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. With respect to Class B shares, for the
fiscal years ended August 31, 1997 and 1996, and for the period October 21, 1994
(commencement of operations) to August 31, 1995, the Distributor received CDSCs
of $315,318, $175,285 and $61,480, respectively, all of which was paid to
Merrill Lynch. With respect to Class C shares, for the fiscal years ended August
31, 1997, 1996 and 1995, the Distributor received CDSCs of $7,765, $10,678 and
$10,532, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint (SM) Program. Class B shares are offered to
certain participants in the Merrill Lynch Blueprint(SM) Program ("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 Fund are offered through Blueprint only to members of certain affinity
groups. The CDSC is waived in connection with purchase orders placed through
Blueprint by members of such affinity groups. Services, including the exchange
privilege, available to Class B Investors through Blueprint, however, may differ
from those available to other Class B investors. Orders for purchases and
redemptions of Class B shares of the Fund will be grouped for execution purposes
which, in some circumstances, may involve the execution of such orders two
business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of a Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for making the Fund's portfolio decisions and placing the
Fund's portfolio transactions. The Fund has no obligation to deal with any
broker or group of brokers in the execution of transactions in portfolio
securities. Orders for transactions in portfolio securities are placed for the
Fund with a number of brokers and dealers, including Merrill Lynch. In placing
orders, it is the policy of the Fund to obtain the most favorable net results,
taking into account various factors, including price, commissions, if any, size
of the transaction and difficulty of execution. Where practicable, the Manager
surveys a number of brokers and dealers in connection with proposed portfolio
transactions and selects the broker or dealer which offers the Fund best price
and execution or other services which are of benefit to the Fund. Securities
firms also may receive brokerage commissions on transactions including covered
call options written by the Fund and the sale of underlying securities upon the
exercise of such options. In addition, consistent with the Conduct Rules of the
NASD and policies established by the Fund's Board of Directors, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $554,589, of which $8,520, or 1.54%, was paid to Merrill Lynch
for effecting 2.43% of the aggregate amount of transactions
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on which the Fund paid brokerage commissions. For the fiscal year ended August
31, 1996, the Fund paid total brokerage commissions of $345,415, of which
$15,900, or 4.6% was paid to Merrill Lynch for effecting 5.28% of the aggregate
dollar amount of transactions in which the Fund paid brokerage commissions. For
the fiscal year ended August 31, 1995, the Fund paid total brokerage commissions
of $199,948, of which $21,850, or 10.93%, was paid to Merrill Lynch for
effecting 12.81% of the aggregate amount of transactions on which the Fund paid
brokerage commissions.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will be
benefitted by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts.
The Fund also may invest in certain securities traded in the OTC market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Since transactions
in the OTC market usually involve transactions with dealers acting as principal
for their own accounts, affiliated persons of the Fund, including Merrill Lynch,
will not serve as the Fund's dealer in such transactions. However, affiliated
persons of the Fund may serve as its broker in 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 such nonaffiliated brokers in connection with
comparable transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the 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
the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities, including Merrill Lynch. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fee paid by the Fund.
After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
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While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in its management's judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions.
Accordingly, while the Fund anticipates that its annual turnover rate should not
exceed 150% under normal conditions, it is impossible to predict portfolio
turnover rates. For the fiscal years ended August 31, 1996 and 1997, the Fund's
portfolio turnover rate was 82.10% and 94.38%, respectively. Higher portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads and brokerage commissions, which are borne directly by the Fund.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all securities whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. The Fund will, however, monitor its trading so as to comply
with certain requirements for qualifying as a RIC under the Code.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of all classes of the Fund is determined once
daily 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 such
Exchange is open for trading. The NYSE is not open on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the management
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares, reflecting the daily expense accruals
of the distribution fees and higher transfer agency fees applicable with respect
to the Class B and Class C shares of the Fund. It is expected, however, that the
per share net asset value of the four classes will tend to converge (although
not necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differential 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded
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options or, in the case of options traded in the OTC market, the last bid price.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
The Fund may, to the extent permitted by its investment restrictions, have
positions in portfolio securities for which market quotations are not readily
available. It may be difficult to determine precisely the fair market value for
such investments and there may be a range of values which are reasonable at any
particular time. Determination of fair value in such instances will be based
upon such factors as are deemed relevant under the circumstances, including the
financial condition and operating results of the issuer, recent third party
transactions (actual or proposed) relating to such securities and, in extreme
cases, the liquidation value of the issuer.
Option Accounting Principles. When the Fund sells an option, an amount
equal to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of such liability will
be subsequently marked-to-market to reflect the current market value of the
option written. If current market value exceeds the premium received there is an
unrealized loss; conversely, if the premium exceeds current market value there
is an unrealized gain. The current market value of a traded option is the last
sale price or, in the absence of a sale, the last offering price. If an option
expires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option will be extinguished. If an option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of sale are increased by the premium originally
received.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place orders for the Fund's shares
through the Merrill Lynch Blueprint(SM) Program. Full details as to each of such
services can be obtained from the Fund, the Distributor or Merrill Lynch.
Investment Account
Each shareholder whose account is maintained with Financial Data Services,
Inc. (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 also will receive separate
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. A shareholder may make additions to his
or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders 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
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<PAGE>
are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for registration as described in the preceding
sentence. Shareholders considering transferring a tax-deferred retirement
account such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly 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 Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. Investors
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distribution
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 reinvested automatically in full and fractional shares of
the Fund. Such reinvestment will be at the net asset value per share (i.e.,
without a sales charge) next determined on the ex-dividend date for such
dividends and distributions. Shareholders may elect in writing to receive either
their income dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the payment
date. Cash payments can also be directly deposited to the shareholder's bank
account.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to
have the dividends and/or capital gains distributions reinvested in shares of
the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, such instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
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Systematic Withdrawal Plans
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or more
and monthly withdrawals for shareholders with shares having a value of $10,000
or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York City time) on the 24th day of each month or the 24th day of
the last month of each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the shares will be redeemed 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
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment Account
are reinvested automatically in the shares of the Fund. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares-Contingent Deferred Sales-Class B Shares" and "--Contingent Deferred
Sales Charge-Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares in
an account to Class D shares, the systematic withdrawal plan will automatically
be applied thereafter to Class D shares. See "Purchase of Shares--Deferred Sales
Charge Alternatives-Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares" in the Prospectus; if an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
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proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment Program.
For more information on the CMA(R)/CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.
Retirement Plans
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100, and the minimum subsequent purchase is $1.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should review specific tax
laws relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in the account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also are exchangeable for shares of certain MLAM-advised
money market funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. Shares with 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
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<PAGE>
shareholder for at least 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 charge 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 Fund 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 ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund")
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after having held the Fund Class B shares for two and a half years and three
years later decide to redeem the shares of Institutional Fund for cash. At the
time of this redemption, the 2% CDSC that would have been due had the Class B
shares of the Fund been redeemed 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 that the
shareholder continued to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated at any time in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid at
least annually. All net realized capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired options written by
the Fund and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes. See "Shareholder
Services--Automatic Reinvestment of Dividends and Distributions" in the
Prospectus for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund. Dividends
and distributions are taxable to shareholders as described below whether they
are invested in shares of the Fund or received in cash. The per share dividends
and distributions on Class B and Class C shares will be lower than the per share
dividends and distributions on Class A and Class D shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares; similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value".
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
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Dividends paid by the Fund 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 Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates. Not
later than 60 days after the close of its taxable year, the Fund will provide
its shareholders with a written notice designating the amounts of any ordinary
income or capital gain dividends, as well as the amount of capital gain
dividends in different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction 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 Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such 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 Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
29
<PAGE>
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 Fund 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 Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its 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 Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund 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 Fund
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 Fund 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 Fund 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 Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
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 Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
30
<PAGE>
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the United States
dollar). In general, foreign currency gains or losses from certain 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
Fund 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 Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary income 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 Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Fund 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.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
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
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual
31
<PAGE>
total returns are determined separately for Class A, Class B, Class C and Class
D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(ii) the maximum applicable sales charge will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
<S> <C>
Class C Shares
Class A Shares Class B Shares (formerly Class B Shares)
---------------------------- ---------------------------- ----------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a Value of a as a Value of a as a Value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment hypothetical investment hypothetical investment
$1,000 at the end $1,000 at the end $1,000 at the end
investment of the period investment of the period investment of the period
------------ ------------- ------------ ------------- ------------ -------------
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended August 31, 1997....... 31.93% $1,319.30 33.95% $1,339.50 36.90% $1,369.00
Inception (December 24, 1992) to
August 31, 1997..................... 14.83% $1,911.60
Inception (October 21, 1994) to
August 31, 1997..................... 24.99% $1,892.80 25.65% $1,921.40
Annual Total Return
(excluding maximum applicable sales charges)
One Year Ended August 31, 1997....... 39.24% $1,392.40 37.95% $1,379.50 37.90% $1,379.00
One Year Ended August 31, 1996....... 19.02% $1,190.20 17.68% $1,176.80 17.68% $1,176.30
One Year Ended August 31, 1995....... 18.28% $1,182.80
One Year Ended August 31, 1994....... 1.01% $1,010.10
Inception (December 24, 1992) to
August 31, 1993..................... (1.40)% $ 986.00
Inception (October 21, 1994) to
August 31, 1995..................... 20.55% $1,205.50 19.60% $1,196.00
Aggregate Total Return
(including maximum applicable sales charges)
Inception (December 24, 1992) to
August 31, 1997.................... 91.16% $1,911.60
Inception (October 21, 1994) to
August 31, 1997..................... 89.28% $1,892.80 92.14% $1,921.40
<CAPTION>
Class D Shares
(formerly Class A Shares)
----------------------------
Expressed Redeemable
as a Value of a
percentage hypothetical
based on a $1,000
hypothetical investment
$1,000 at the end
investment of the period
------------ -------------
(including maximum
applicable sales charges)
One Year Ended August 31, 1997....... 31.61% $1,316.10
Inception (December 24, 1992) to
August 31, 1997..................... 14.40% $1,878.20
Inception (October 21, 1994) to
August 31, 1997.....................
(excluding maximum
applicable sales charges)
One Year Ended August 31, 1997....... 38.90% $1,389.00
One Year Ended August 31, 1996....... 18.70% $1,187.00
One Year Ended August 31, 1995....... 19.15% $1,191.50
One Year Ended August 31, 1994....... 1.82% $1,018.20
Inception (December 24, 1992) to
August 31, 1993..................... (0.90)% $ 991.00
Inception (October 21, 1994) to
August 31, 1995.....................
(including maximum
applicable sales charges)
Inception (December 24, 1992) to
August 31, 1997.................... 87.82% $1,878.20
Inception (October 21, 1994) to
August 31, 1997.....................
</TABLE>
32
<PAGE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of CDSCs a lower amount of expenses may be deducted.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on April 30, 1992. It has an
authorized capital of 400,000,000 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, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund 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 Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund 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 Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to elect Directors. Also, the by-laws of the
Fund require that a special meeting of stockholders be held upon the written
request of at least 10% of the outstanding shares of the Fund entitled to vote
at such meeting, if they comply with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
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 Fund and in the net
assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, except that expenses related to the distribution of the
shares within a class will be borne solely by such class. Stock certificates are
issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
Class A (now redesignated Class D) shares of Common Stock and 5,000 Class B (now
redesignated Class C) shares of Common Stock for an aggregate of $100,000. Such
shares were acquired for investment and can only be disposed of by redemption.
The organizational expenses of the Fund (estimated at approximately $104,725)
will be paid by the Fund and amortized over a period not exceeding five years.
The proceeds realized by the Manager (or any subsequent holder) upon redemption
of any of such shares 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.
33
<PAGE>
Computation of Offering Price per Share
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets on August 31, 1997 and its
shares outstanding on that date is set forth below.
<TABLE>
<CAPTION>
<S> <C>
Class A Class B Class C Class D
------- ------- ------- -------
Net Assets............................... $62,048,468 $216,636,197 $74,732,279 $53,101,345
=========== ============ =========== ===========
Number of Shares Outstanding............. 3,571,596 12,983,781 4,469,488 3,074,187
=========== ============ =========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 17.37 $ 16.69 $ 16.72 $ 17.27
Sales Charge (Class A and Class D shares:
5.25% of offering price (5.54% of net
asset value per share))*............... .96 ** ** .96
----------- ------------ ----------- -----------
Offering Price........................... $ 18.33 $ 16.69 $ 16.72 $ 18.23
=========== ============ =========== ===========
</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 upon redemption. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
Independent Auditors
Ernst & Young LLP, 202 Carnegie Center, Princeton, New Jersey 08543-5321,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
Custodian
The Chase Manhattan Bank, N.A., Global Securities Services, Chase MetroTech
Center, 18th Floor, Brooklyn, New York 11245, (the "Custodian") acts as the
Custodian of the Fund's assets. Under its contract with the Fund, the Custodian
is authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Report to Shareholders
The fiscal year of the Fund ends on August 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing
34
<PAGE>
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 of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Company has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on November 1, 1997.
35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Merrill Lynch Fundamental Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Fundamental Growth Fund, Inc., including the schedule of investments, as
of August 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended and financial highlights for each of the years indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and 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 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 and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Fundamental Growth Fund, Inc. at August 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the indicated periods, in conformity with generally accepted accounting
principles.
Princeton, New Jersey
October 3, 1997
36
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 75,000 Interpublic Group of Companies, Inc. $2,084,537 $3,656,250 0.9%
Banking & Financial 120,000 Banc One Corp. 5,616,201 6,435,000 1.6
160,000 BankAmerica Corp. 11,569,931 10,530,000 2.6
60,000 Citicorp 7,586,413 7,657,500 1.9
100,000 State Street Boston Corp. 4,071,881 4,987,500 1.2
---------- ---------- -----
28,844,426 29,610,000 7.3
Beverages 70,000 The Coca-Cola Co. 3,760,705 4,011,875 1.0
Communications 50,000 + Cisco Systems, Inc. 3,335,625 3,765,625 0.9
Equipment 200,000 + FORE Systems, Inc. 4,973,550 4,075,000 1.0
50,000 Lucent Technologies, Inc. 3,344,460 3,893,750 1.0
175,000 + Newbridge Networks Corp. 6,882,028 7,962,500 2.0
120,000 Northern Telecom Ltd. 9,996,477 11,895,000 2.9
150,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 5,634,178 6,243,750 1.5
---------- ---------- -----
34,166,318 37,835,625 9.3
Computers 275,000 + COMPAQ Computer Corp. 9,796,553 18,012,500 4.4
40,000 Hewlett-Packard Co. 2,192,800 2,452,500 0.6
---------- ---------- -----
11,989,353 20,465,000 5.0
Cosmetics 45,000 The Gillette Co. 2,463,996 3,726,563 0.9
20,000 International Flavors & Fragrances Inc. 973,375 1,022,500 0.3
---------- ---------- -----
3,437,371 4,749,063 1.2
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,640,625 0.4
190,000 General Electric Co. 8,425,463 11,875,000 2.9
40,000 Honeywell, Inc. 2,993,474 2,765,000 0.7
---------- ---------- -----
12,645,077 16,280,625 4.0
Electronics 155,000 Intel Corp. 11,063,643 14,250,313 3.5
Energy 150,000 El Paso Natural Gas Co. 6,910,825 8,437,500 2.1
200,000 Enron Corp. 8,433,697 7,712,500 1.9
---------- ---------- -----
15,344,522 16,150,000 4.0
Entertainment 130,000 + Viacom, Inc. (Class A) 6,082,341 3,835,000 0.9
45,000 The Walt Disney Co. 2,948,388 3,456,563 0.9
---------- ---------- -----
9,030,729 7,291,563 1.8
Financial Services 100,000 American Express Company 8,020,647 7,775,000 1.9
270,000 Federal National Mortgage Association 11,473,014 11,880,000 2.9
200,000 Travelers Group Inc. 11,156,398 12,700,000 3.1
---------- ---------- -----
30,650,059 32,355,000 7.9
Food 30,000 ConAgra Inc. 1,334,300 1,929,375 0.5
30,000 Wrigley (Wm.) Jr. Co. (Class B) 1,890,550 2,175,000 0.5
---------- ---------- -----
3,224,850 4,104,375 1.0
Food Merchandising 110,000 Albertson's, Inc. 4,309,983 3,781,250 0.9
100,000 + Meyer (Fred), Inc. 3,679,211 5,200,000 1.3
---------- ---------- -----
7,989,194 8,981,250 2.2
37
<PAGE>
<CAPTION>
Hotel 20,000 Marriott International, Inc. 994,115 1,331,250 0.3
Household Products 120,000 Colgate-Palmolive Co. 8,092,210 7,530,000 1.9
20,000 Kimberly-Clark Corporation 1,078,644 948,750 0.2
50,000 Procter & Gamble Co. 5,346,649 6,653,125 1.6
---------- ---------- -----
14,517,503 15,131,875 3.7
Information 110,000 First Data Corp. 4,518,508 4,516,875 1.1
Processing
Insurance 10,000 Aetna Inc. 822,491 954,375 0.2
37,500 American International Group, Inc. 2,575,130 3,539,063 0.9
---------- ---------- -----
3,397,621 4,493,438 1.1
Leisure 115,000 Polygram N.V. (NY Registered Shares) 5,983,544 6,059,062 1.5
Medical -- Technology 120,000 + Boston Scientific Corp. 6,801,221 8,460,000 2.1
70,000 Johnson & Johnson 2,915,118 3,968,125 1.0
---------- ---------- -----
9,716,339 12,428,125 3.1
Oil Services 170,000 Baker Hughes, Inc. 6,610,954 7,203,750 1.8
230,000 Diamond Offshore Drilling, Inc. 8,346,270 12,563,750 3.1
165,000 Schlumberger Ltd. 9,351,028 12,570,937 3.1
---------- ---------- -----
24,308,252 32,338,437 8.0
Pharmaceuticals 165,000 Amgen, Inc. 7,109,486 8,167,500 2.0
55,000 Bristol-Myers Squibb Co. 4,234,097 4,180,000 1.0
60,000 Merck & Co., Inc. 4,447,361 5,508,750 1.4
75,000 Pfizer, Inc. 3,180,350 4,153,125 1.0
---------- ---------- -----
18,971,294 22,009,375 5.4
Photography 15,000 Eastman Kodak Co. 953,578 980,625 0.2
Pollution Control 20,000 Waste Management Inc. 591,174 640,000 0.2
Restaurant 25,000 McDonald's Corp. 1,141,245 1,182,812 0.3
Retail Specialty 100,000 CVS Corporation 5,445,625 5,637,500 1.4
155,000 + Staples Inc. 3,910,927 3,623,125 0.9
200,000 Walgreen Co. 4,591,588 5,387,500 1.3
---------- ---------- -----
13,948,140 14,648,125 3.6
Retail Stores 330,000 Wal-Mart Stores, Inc. 10,768,309 11,715,000 2.9
Software -- Computer 130,000 + Baan Company, N.V. (US Registered Shares) 6,990,450 7,816,250 1.9
60,000 + Microsoft Corp. 5,980,753 7,931,250 1.9
200,000 + Oracle Corp. 6,622,281 7,612,500 1.9
130,000 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR)(a) 7,936,625 10,010,000 2.5
---------- ---------- -----
27,530,109 33,370,000 8.2
Travel & Lodging 25,000 Carnival Corporation (Class A) 588,075 1,095,312 0.3
Total Stocks 312,158,590 361,681,250 89.0
38
<PAGE>
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
Commercial $13,000,000 Falcon Asset Securitization Corp., 5.51% due
Paper* 9/22/1997 $12,954,236 $12,954,236 3.2%
15,968,000 General Motors Acceptance Corp., 5.69% due
9/02/1997 15,960,429 15,960,429 3.9
12,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/17/1997 11,966,880 11,966,880 2.9
---------- ---------- -----
40,881,545 40,881,545 10.0
US Government 7,000,000 Federal National Mortgage Association,
Agency Obligations* 5.44% due 9/26/1997 6,971,440 6,971,440 1.7
Total Short-Term Securities 47,852,985 47,852,985 11.7
Total Investments $360,011,575 409,534,235 100.7
============
Liabilities in Excess of Other Assets (3,015,946) (0.7)
----------- -----
Net Assets $406,518,289 100.0%
============ =====
* Commercial Paper and certain US Government Agency Obligations are traded on
a discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
+ on-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
COMPAQ Computer Corp. 4.4%
Intel Corp. 3.5
Travelers Group Inc. 3.1
Schlumberger Ltd. 3.1
Diamond Offshore Drilling, Inc. 3.1
Northern Telecom Ltd. 2.9
Federal National Mortgage Association 2.9
General Electric Co. 2.9
Wal-Mart Stores, Inc. 2.9
BankAmerica Corp. 2.6
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Communications Equipment 9.3%
Software -- Computer 8.2
Oil Services 8.0
Financial Services 7.9
Banking & Financial 7.3
Pharmaceuticals 5.4
Computers 5.0
Electrical Equipment 4.0
Energy 4.0
Household Products 3.7
Equity Portfolio Changes for the
Quarter Ended August 31, 1997
Additions
American Express Company
BankAmerica Corporation
CVS Corporation
Deletion
Hasbro, Inc.
39
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $360,011,575) (Note 1a) $409,534,235
Cash 781
Receivables:
Capital shares sold $2,119,66
Dividends 244,320 2,363,984
------------
Deferred organization expenses (Note 1f) 5,077
Prepaid registration fees and other assets (Note 1f) 48,848
------------
Total assets 411,952,925
------------
Liabilities: Payables:
Securities purchased 3,033,408
Capital shares redeemed 1,707,569
Distributor (Note 2) 243,391
Investment adviser (Note 2) 212,074 5,196,442
------------
Accrued expenses and other liabilities 238,194
------------
Total liabilities 5,434,636
------------
Net Assets: Net assets $406,518,289
============
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $357,160
Class B Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 1,298,378
Class C Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 446,949
Class D Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 307,419
Paid-in capital in excess of par 292,295,818
Undistributed realized capital gains on investments -- net 62,289,905
Unrealized appreciation on investments -- net 49,522,660
------------
Net assets $406,518,289
============
Net Asset Value: Class A -- Based on net assets of $62,048,468 and 3,571,596 shares
outstanding $17.37
============
Class B -- Based on net assets of $216,636,197 and 12,983,781 shares
outstanding $16.69
============
Class C -- Based on net assets of $74,732,279 and 4,469,488 shares
outstanding $16.72
============
Class D -- Based on net assets of $53,101,345 and 3,074,187 shares
outstanding $17.27
============
See Notes to Financial Statements.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended August 31, 1997
<S> <C> <C>
Investment Income Dividends (net of $20,477 foreign withholding tax) $,244,970
(Notes 1d & 1e): Interest and discount earned 1,126,243
------------
Total income 4,371,213
------------
Expenses: Investment advisory fees (Note 2) 1,986,602
Account maintenance and distribution fees -- Class B (Note 2) 1,553,165
Account maintenance and distribution fees -- Class C (Note 2) 626,234
Transfer agent fees -- Class B (Note 2) 350,288
Transfer agent fees -- Class C (Note 2) 141,910
Registration fees (Note 1f) 110,752
Transfer agent fees -- Class A (Note 2) 99,578
Account maintenance fees -- Class D (Note 2) 90,258
Printing and shareholder reports 86,494
Professional fees 77,441
Transfer agent fees -- Class D (Note 2) 69,244
Accounting services (Note 2) 66,072
Directors' fees and expenses 40,267
Custodian fees 21,471
Amortization of organization expenses (Note 1f) 20,308
Pricing fees 711
Other 16,745
------------
Total expenses 5,357,540
------------
Investment loss -- net (986,327)
------------
Realized & Realized gain from investments -- net 63,286,586
Unrealized Gain on Change in unrealized appreciation on investments -- net 31,560,205
Investments -- Net ------------
(Notes 1b, 1c, 1e, & 3): Net Increase in Net Assets Resulting from Operations $93,860,464
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment loss -- net $(986,327) $(574,728)
Realized gain on investments -- net 63,286,586 25,808,365
Change in unrealized appreciation on investments -- net 31,560,205 3,022,827
------------ ------------
Net increase in net assets resulting from operations 93,860,464 28,256,464
------------ ------------
Distributions to Realized gain on investments -- net:
Shareholders Class A (4,708,644) (541,580)
(Note 1g): Class B (11,489,976) (1,655,483)
Class C (4,699,934) (1,010,551)
Class D (2,535,797) (323,823)
------------ ------------
Net decrease in net assets resulting from distributions to shareholders (23,434,351) (3,531,437)
------------ ------------
Capital Share Trans- Net increase in net assets derived from capital share transactions 95,459,275 73,421,174
actions (Note 4): ------------ ------------
Net Assets: Total increase in net assets 165,885,388 98,146,201
Beginning of year 240,632,901 142,486,700
------------ ------------
End of year $406,518,289 $240,632,901
============ ============
See Notes to Financial Statements.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Class A++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.60 $11.66 $9.99
Operating ------- ------- -------
Performance: Investment income -- net .07 .07 --
Realized and unrealized gain on investments -- net 4.95 2.13 1.98
------- ------- -------
Total from investment operations 5.02 2.20 1.98
------- ------- -------
Less distributions from realized gain on investments -- net (1.25) (.26) (.31)
------- ------- -------
Net asset value, end of period $17.37 $13.60 $11.66
======= ======= =======
Total Investment Based on net asset value per share 39.24% 19.02% 20.55%++++
Return:** ======= ======= =======
Ratios to Average Expenses .99% 1.12% 1.46%*
Net Assets: ======= ======= =======
Investment income -- net .47% .51% .02%*
======= ======= =======
Supplemental Net assets, end of period (in thousands) $62,049 $47,048 $21,288
Data: ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======= ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
42
<PAGE>
<CAPTION>
Class B++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.14 $11.40 $9.85
Operating -------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09)
Realized and unrealized gain on investments -- net 4.79 2.07 1.95
-------- ------- -------
Total from investment operations 4.70 2.00 1.86
-------- ------- -------
Less distributions from realized gain on investments -- net (1.15) (.26) (.31)
-------- ------- -------
Net asset value, end of period $16.69 $13.14 $11.40
======== ======= =======
Total Investment Based on net asset value per share 37.95% 17.68% 19.60%++++
Return** ======== ======= =======
Ratios to Average Expenses 2.02% 2.16% 2.48%*
Net Assets: ======== ======= =======
Investment loss -- net (.59%) (.54%) (.95%)*
======== ======= =======
Supplemental Net assets, end of period (in thousands) $216,636 $116,641 $63,748
Data ======== ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======== ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======== ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
43
<PAGE>
<CAPTION>
Class C++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.14 $11.40 $9.96 $9.86 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09) (.05) (.05)
Realized and unrealized gain (loss) on
investments -- net 4.79 2.07 1.84 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.70 2.00 1.75 .10 (.14)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.12) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $16.72 $13.14 $11.40 $9.96 $9.86
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 37.90% 17.68% 18.28% 1.01% (1.40%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 2.02% 2.15% 2.44% 2.35% 2.79%*
Net Assets: ======= ======= ======= ======= =======
Investment loss -- net (.58%) (.57%) (.88%) (.52%) (.83%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $74,732 $54,052 $44,220 $47,263 $45,736
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
44
<PAGE>
<CAPTION>
Class D++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.54 $11.64 $10.09 $9.91 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income (loss) -- net .03 .03 (.01) .03 --
Realized and unrealized gain (loss) on
investments -- net 4.93 2.13 1.87 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.96 2.16 1.86 .18 (.09)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.23) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $17.27 $13.54 $11.64 $10.09 $9.91
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 38.90% 18.70% 19.15% 1.82% (.90%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 1.24% 1.37% 1.65% 1.58% 2.03%*
Net Assets: ======= ======= ======= ======= =======
Investment income (loss) -- net .17% .24% (.10%) .31% (.04%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands $53,101 $22,892 $13,231 $8,623 $6,930
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and
Class D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of 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 value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's Board
of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, 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.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate 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 Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current 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 Fund
enters into a closing transaction), the Fund 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.
(c) Foreign currency transactions -- Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized.
46
<PAGE>
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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-dividend
dates. Dividends from foreign securities where the ex-dividend date
may have passed are subsequently recorded when the Fund has determined
the ex-dividend date. Interest income (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 -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification -- Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,561,106 have been reclassified between undistributed net realized
capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of
MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.65% of
the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance
and distribution fees. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares as
follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates the Distributor and
MLPF&S for providing account maintenance services to Class B, Class C
and Class D shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B and Class C shareholders.
47
<PAGE>
For the year ended August 31, 1997, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $671 $7,462
Class D $19,739 $256,717
For the year ended August 31, 1997, MLPF&S received contingent
deferred sales charges of $839,643 and $7,765 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $8,520 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August
31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFDS, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1997 were $343,712,654 and $270,177,640,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $63,285,823 $49,522,660
Short-term investments 763 --
----------- -----------
Total $63,286,586 $49,522,660
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $49,522,119, of which $56,467,628 related to
appreciated securities and $6,945,509 related to depreciated
securities. At August 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $360,012,116.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
were $95,459,275 and $73,421,174 for the years ended August 31, 1997
and August 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 5,300,860 $80,749,430
Shares issued to shareholders
in reinvestment of distributions 318,999 4,411,762
---------- -----------
Total issued 5,619,859 85,161,192
Shares redeemed (5,508,434) (81,532,077)
---------- -----------
Net increase 111,425 $3,629,115
========== ===========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 2,291,835 $29,954,753
Shares issued to shareholders
in reinvestment of distributions 41,134 522,810
---------- -----------
Total issued 2,332,969 30,477,563
Shares redeemed (698,358) (8,998,807)
---------- -----------
Net increase 1,634,611 $21,478,756
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,146,257 $124,318,206
Shares issued to shareholders
in reinvestment of distributions 782,595 10,471,125
---------- -----------
Total issued 8,928,852 134,789,331
Automatic conversion
of shares (23,111) (352,449)
Shares redeemed (4,796,356) (69,880,135)
---------- -----------
Net increase 4,109,385 $64,556,747
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 5,820,916 $73,664,245
Shares issued to shareholders
in reinvestment of distributions 121,775 1,507,570
---------- -----------
Total issued 5,942,691 75,171,815
Automatic conversion
of shares (14,867) (185,102)
Shares redeemed (2,647,233) (33,330,378)
---------- -----------
Net increase 3,280,591 $41,656,335
========== ===========
48
<PAGE>
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,343,912 $20,658,965
Shares issued to share-
holders in reinvestment
of distributions 310,633 4,165,597
---------- -----------
Total issued 1,654,545 24,824,562
Shares redeemed (1,297,675) (19,022,602)
---------- -----------
Net increase 356,870 $5,801,960
========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,167,623 $14,787,083
Shares issued to share-
holders in reinvestment
of distributions 71,863 889,667
---------- -----------
Total issued 1,239,486 15,676,750
Shares redeemed (1,007,151) (12,689,514)
---------- -----------
Net increase 232,335 $2,987,236
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 2,051,457 $31,598,761
Automatic conversion of shares 22,419 352,449
Shares issued to shareholders
in reinvestment of distributions 164,753 2,268,645
---------- -----------
Total issued 2,238,629 34,219,855
Shares redeemed (855,358) (12,748,402)
---------- -----------
Net increase 1,383,271 $21,471,453
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 953,782 $12,474,082
Automatic conversion of shares 14,515 185,102
Shares issued to shareholders
in reinvestment of distributions 20,994 266,204
---------- -----------
Total issued 989,291 12,925,388
Shares redeemed (434,952) (5,626,541)
---------- -----------
Net increase 554,339 $7,298,847
========== ===========
49
<PAGE>
(This page intentionally left blank)
<PAGE>
- ------
TABLE OF CONTENTS
Page
----
Investment Objective and Policies.......... 2
Portfolio Strategies Involving Options
and Futures............................ 3
Other Investment Policies and
Practices.............................. 6
Management of the Fund..................... 9
Directors and Officers................... 9
Management and Advisory Arrangements..... 11
Purchase of Shares......................... 12
Alternative Sales Arrangements........... 12
Initial Sales Charge Alternatives--Class
A and Class D Shares................... 13
Reduced Initial Sales Charge............. 14
Employer-Sponsored Retirement or Savings
Plans and Certain Other Arrangements... 17
Distribution Plans....................... 17
Limitations on the Payment of Deferred
Sales Charges.......................... 18
Redemption of Shares....................... 19
Deferred Sales Charge--Class B and Class
C Shares............................... 19
Portfolio Transactions and Brokerage....... 20
Determination of Net Asset Value........... 22
Shareholder Services....................... 23
Investment Account....................... 23
Automatic Investment Plans............... 24
Automatic Reinvestment of Dividends and
Capital Gains Distribution............. 24
Systematic Withdrawal Plans.............. 25
Retirement Plans......................... 26
Exchange Privilege....................... 26
Dividends, Distributions and Taxes......... 28
Dividends and Distributions.............. 28
Taxes.................................... 28
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................... 30
Special Rules for Certain Foreign
Currency Transactions.................. 31
Performance Data........................... 31
General Information........................ 33
Description of Shares.................... 33
Computation of Offering Price Per
Share.................................. 34
Independent Auditors..................... 34
Custodian................................ 34
Transfer Agent........................... 34
Legal Counsel............................ 34
Report to Shareholders................... 34
Additional Information................... 35
Report of Independent Auditors............. 36
Financial Statements....................... 37
YZa Code #16464-1197
Merrill Lynch
Fundamental
Growth Fund, Inc.
Statement of mlynch compass
Additional
Information
November 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
August 31, 1997
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless accompanied
or preceded by the Fund's current prospectus. Past performance results
shown in this report should not be considered a representation of
future performance. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Statements and other information herein
are as dated and are subject to change.
Merrill Lynch
Fundamental
Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#16465 -- 8/97
[RECYCLE LOGO OMITTED]
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
Fiscal Year in Review
For the fiscal year ended August 31, 1997, total returns for Merrill
Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +39.24%, +37.95%, +37.90% and +38.90%,
respectively. The Fund substantially outperformed the Lipper
Analytical Services' Growth Funds Average total return of +33.52% and
modestly underperformed the unmanaged Standard & Poor's 500 Index
total return of +40.53% for the fiscal year. (Fund results shown do
not reflect sales charges and would be lower if sales charges were
included. Complete performance information, including average annual
total returns, can be found on pages 3 -- 5 of this report to
shareholders.)
Positive portfolio returns during the first half of the Fund's fiscal
year resulted from a relatively meaningful weighting in the
pharmaceutical industry, as well as investments in the household
products, cosmetics, beverages, and financial services industries.
Among the important holdings in these sectors were Pfizer, Inc., Merck
& Co., Inc., The Gillette Co., The Coca-Cola Co., Procter & Gamble
Co., Travelers Group Inc., American International Group, Inc. and US
Bancorp.
During the second half of the fiscal year ended August 31, 1997, our
portfolio strategy shifted more toward several cyclical growth
industries. We increased the Fund's weightings in the computer
equipment, communications equipment, and oil services and exploration
equipment industries. At year-end 1996, surveys of capital investment
intentions reflected the likelihood of an increase in spending during
1997 on networked computer systems, advanced digital wireless
communication infrastructure and energy exploration activities. During
the second half of the fiscal year, the Fund's common stock holdings
of COMPAQ Computer Corp., Cisco Systems, Inc., Lucent Technologies,
Inc., Microsoft Corp., Intel Corp., Schlumberger Ltd., Newbridge
Networks Corp. and Northern Telecom Ltd. were significant contributors
to the Fund's performance.
The Environment
We continue to expect positive, but moderate, overall real growth for
the US economy with modest levels of price inflation. Consumer
spending could be boosted by the recently enacted decrease in capital
gains tax rates on securities transactions. The recent rise in real
wages may be caused by the demand for skilled labor in the
communications equipment and computer industries as well as the
continued improvement in inflation. Growth in commercial capital
spending on communications infrastructure and networked computer
systems and software seems to be continuing at a relatively rapid
pace, even though the year-to-year rate of growth in overall corporate
profits is slowing. The US economy appears to be one of the strongest
around the globe, with a relatively strong and stable foreign exchange
value supported by meaningful and balanced real economic growth.
Investment Strategy
We continue to focus primarily on large-capitalization growth
companies where we think the valuations are reasonable relative to
expectations of above-average rates of growth in earnings. We
concentrated portfolio holdings on high-quality organizations where we
believe the managements have the experience and resources to grow
successfully in the emerging markets of Latin America, Asia and
Eastern Europe, as well as in the developed markets of the world.
The Fund's significant weightings in corporations in the
communications equipment, computer software, oil services and computer
industries contributed strongly to the positive investment returns in
the quarter ended August 31, 1997. The most significant change in
strategy during the quarter was a reduction in the Fund's
pharmaceutical industry weighting, because of our concerns about
potential meaningful declines in valuation ratios for Pfizer, Inc. and
the other pharmaceutical companies in the Fund.
Portfolio Review
We added three companies and eliminated one from the portfolio during
the August 31, 1997 quarter. We added BankAmerica Corporation, CVS
Corporation and American Express Company. BankAmerica Corp. was added
because of the attractive valuation relative to expectations of above-
average growth rates in earnings from internal restructuring of
operations. CVS Corporation, one of the major pharmaceutical
retailers, was added because of its attractive valuation relative to
expectations of above-average rates of return over the next five
years. We invested in American Express Company because of the
attractive valuation relative to expectations of above-average growth
rates in earnings from asset management as well as travel-related
business services. Hasbro, Inc. was eliminated at a capital gain given
the relatively high valuation of the common stock. There were 60
companies in the portfolio at August 31, 1997.
In Conclusion
We continue to have a positive outlook for investment returns in the
US equity market during the remainder of 1997. We thank you for your
investment in Merrill Lynch Fundamental Growth Fund, Inc., and we look
forward to reviewing our outlook and strategy in our upcoming
quarterly shareholder report.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/LAWRENCE R. FULLER
Lawrence R. Fuller
Vice President and Portfolio Manager
October 3, 1997
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricing(SM) System, which offers four pricing alternatives:
[bullet] Class A Shares incur a maximum initial sales charge (front-
end load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus. If you were a Class A
shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1%
each year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to Class
D Shares after 8 years. (There is no initial sales charge for
automatic share conversions.) If you were a Class B shareholder prior
to October 21, 1994, your Class B Shares were redesignated to Class C
Shares on October 21, 1994.
[bullet] Class C Shares are subject to a distribution fee of 0.75% and
an account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of 5.25%
and an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of all
dividends and capital gains distributions at net asset value on the
ex-dividend date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Dividends paid to each class of shares will
vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class, which
are deducted from the income available to be paid to shareholders.
Recent Performance Results
<TABLE>
<CAPTION>
12 Month 3 Month
8/31/97 5/31/97 8/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* $17.37 $15.87 $13.60 +33.52%(1) +9.45%
ML Fundamental Growth Fund, Inc. Class B Shares* 16.69 15.28 13.14 +32.98(1) +9.23
ML Fundamental Growth Fund, Inc. Class C Shares* 16.72 15.31 13.14 +33.20(1) +9.21
ML Fundamental Growth Fund, Inc. Class D Shares* 17.27 15.78 13.54 +33.36(1) +9.44
Standard & Poor's 500 Index** +37.96 +6.03
ML Fundamental Growth Fund, Inc. Class A Shares -- Total Return* +39.24(2) +9.45
ML Fundamental Growth Fund, Inc. Class B Shares -- Total Return* +37.95(3) +9.23
ML Fundamental Growth Fund, Inc. Class C Shares -- Total Return* +37.90(4) +9.21
ML Fundamental Growth Fund, Inc. Class D Shares -- Total Return* +38.90(5) +9.44
Standard & Poor's 500 Index -- Total Return** +40.53 +6.46
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included.
** An unmanaged broad-based Index comprised of common stocks. Total investment returns for unmanaged indexes are based on
estimates.
(1) Percent change includes reinvestment of $0.628 per share capital gains distributions.
(2) Percent change includes reinvestment of $0.620 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(3) Percent change includes reinvestment of $0.523 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(4) Percent change includes reinvestment of $0.495 per share ordinary income dividends and $0.628 per share capital gains
distributions.
(5) Percent change includes reinvestment of $0.598 per share ordinary income dividends and $0.628 per share capital gains
distributions.
</TABLE>
[GRAPHIC OMITTED: Total Return Based on a $10,000 Investment]
Total Return Based on a $10,000 Investment--Class A Shares and
Class B Shares
Line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the S&P 500 Total Return Index. Beginning and
ending values are:
10/21/94** 8/97
ML Fundamental Growth Fund, Inc.+ -- Class A Shares* $9,475 $18,929
ML Fundamental Growth Fund, Inc.+ -- Class B Shares* $10,000 $19,214
S&P 500 Total Return Index ++ $10,000 $20,636
Total Return Based on a $10,000 Investment--Class C Shares and
Class D Shares
Line graph depicting the growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the S&P 500 Total Return Index. Beginning and ending
values are:
12/24/92** 8/97
ML Fundamental Growth Fund, Inc.+ -- Class C Shares* $10,000 $19,116
ML Fundamental Growth Fund, Inc.+ -- Class D Shares* $9,475 $18,782
S&P 500 Total Return Index ++ $10,000 $22,958
* Assuming maximum sales charge, transaction costs and other operating
expenses including advisory fees.
** Commencement of Operations.
+ ML Fundamental Growth Fund, Inc. invests primarily in equity
securities with a particular emphasis on companies that have
exhibited above-average growth rates in earnings.
++ This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +31.25% +24.36%
Inception (10/21/94)
through 6/30/97 +27.31 +24.79
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +29.84% +25.84%
Inception (10/21/94)
through 6/30/97 +26.03 +25.53
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 +29.80% +28.80%
Inception (12/24/92)
through 6/30/97 +14.39 +14.39
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/97 +30.87% +24.00%
Inception (12/24/92)
through 6/30/97 +15.29 +13.92
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.99 $9.62 $0.255 $0.051 - 0.54%
1995 9.62 12.61 -- 0.259 +33.75
1996 12.61 13.77 0.628 0.620 +19.05
1/1/97 -- 8/31/97 13.77 17.37 -- -- +26.14
Total $0.883 Total $0.930
Cumulative total return as of 8/31/97: +99.77%**
<CAPTION>
Performance Summary -- Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.85 $9.46 $0.255 $0.051 - 0.76%
1995 9.46 12.28 -- 0.259 +32.53
1996 12.28 13.31 0.628 0.523 +17.71
1/1/97 -- 8/31/97 13.31 16.69 -- -- +25.39
Total $0.883 Total $0.833
Cumulative total return as of 8/31/97: +94.14%***
<CAPTION>
Performance Summary -- Class C Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
12/24/92 -- 12/31/92 $10.00 $9.92 -- -- - 0.80%
1993 9.92 10.43 -- -- + 5.14
1994 10.43 9.46 $0.255 $0.051 - 6.28
1995 9.46 12.28 -- 0.259 +32.53
1996 12.28 13.34 0.628 0.495 +17.73
1/1/97 -- 8/31/97 13.34 16.72 -- -- +25.34
Total $0.883 Total $0.805
Cumulative total return as of 8/31/97: +91.16%***
<CAPTION>
Performance Summary -- Class D Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change***
<S> <C> <C> <C> <C> <C>
12/24/92 -- 12/31/92 $10.00 $9.92 -- -- - 0.80%
1993 9.92 10.51 -- -- + 5.95
1994 10.51 9.61 $0.255 $0.051 - 5.56
1995 9.61 12.58 -- 0.259 +33.58
1996 12.58 13.71 0.628 0.598 +18.69
1/1/97 -- 8/31/97 13.71 17.27 -- -- +25.97
Total $0.883 Total $0.908
Cumulative total return as of 8/31/97: +98.23%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
*** Figures do not reflect deduction of sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 75,000 Interpublic Group of Companies, Inc. $2,084,537 $3,656,250 0.9%
Banking & Financial 120,000 Banc One Corp. 5,616,201 6,435,000 1.6
160,000 BankAmerica Corp. 11,569,931 10,530,000 2.6
60,000 Citicorp 7,586,413 7,657,500 1.9
100,000 State Street Boston Corp. 4,071,881 4,987,500 1.2
---------- ---------- -----
28,844,426 29,610,000 7.3
Beverages 70,000 The Coca-Cola Co. 3,760,705 4,011,875 1.0
Communications 50,000 + Cisco Systems, Inc. 3,335,625 3,765,625 0.9
Equipment 200,000 + FORE Systems, Inc. 4,973,550 4,075,000 1.0
50,000 Lucent Technologies, Inc. 3,344,460 3,893,750 1.0
175,000 + Newbridge Networks Corp. 6,882,028 7,962,500 2.0
120,000 Northern Telecom Ltd. 9,996,477 11,895,000 2.9
150,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 5,634,178 6,243,750 1.5
---------- ---------- -----
34,166,318 37,835,625 9.3
Computers 275,000 + COMPAQ Computer Corp. 9,796,553 18,012,500 4.4
40,000 Hewlett-Packard Co. 2,192,800 2,452,500 0.6
---------- ---------- -----
11,989,353 20,465,000 5.0
Cosmetics 45,000 The Gillette Co. 2,463,996 3,726,563 0.9
20,000 International Flavors & Fragrances Inc. 973,375 1,022,500 0.3
---------- ---------- -----
3,437,371 4,749,063 1.2
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,640,625 0.4
190,000 General Electric Co. 8,425,463 11,875,000 2.9
40,000 Honeywell, Inc. 2,993,474 2,765,000 0.7
---------- ---------- -----
12,645,077 16,280,625 4.0
Electronics 155,000 Intel Corp. 11,063,643 14,250,313 3.5
Energy 150,000 El Paso Natural Gas Co. 6,910,825 8,437,500 2.1
200,000 Enron Corp. 8,433,697 7,712,500 1.9
---------- ---------- -----
15,344,522 16,150,000 4.0
Entertainment 130,000 + Viacom, Inc. (Class A) 6,082,341 3,835,000 0.9
45,000 The Walt Disney Co. 2,948,388 3,456,563 0.9
---------- ---------- -----
9,030,729 7,291,563 1.8
Financial Services 100,000 American Express Company 8,020,647 7,775,000 1.9
270,000 Federal National Mortgage Association 11,473,014 11,880,000 2.9
200,000 Travelers Group Inc. 11,156,398 12,700,000 3.1
---------- ---------- -----
30,650,059 32,355,000 7.9
Food 30,000 ConAgra Inc. 1,334,300 1,929,375 0.5
30,000 Wrigley (Wm.) Jr. Co. (Class B) 1,890,550 2,175,000 0.5
---------- ---------- -----
3,224,850 4,104,375 1.0
Food Merchandising 110,000 Albertson's, Inc. 4,309,983 3,781,250 0.9
100,000 + Meyer (Fred), Inc. 3,679,211 5,200,000 1.3
---------- ---------- -----
7,989,194 8,981,250 2.2
Hotel 20,000 Marriott International, Inc. 994,115 1,331,250 0.3
Household Products 120,000 Colgate-Palmolive Co. 8,092,210 7,530,000 1.9
20,000 Kimberly-Clark Corporation 1,078,644 948,750 0.2
50,000 Procter & Gamble Co. 5,346,649 6,653,125 1.6
---------- ---------- -----
14,517,503 15,131,875 3.7
Information 110,000 First Data Corp. 4,518,508 4,516,875 1.1
Processing
Insurance 10,000 Aetna Inc. 822,491 954,375 0.2
37,500 American International Group, Inc. 2,575,130 3,539,063 0.9
---------- ---------- -----
3,397,621 4,493,438 1.1
Leisure 115,000 Polygram N.V. (NY Registered Shares) 5,983,544 6,059,062 1.5
Medical -- Technology 120,000 + Boston Scientific Corp. 6,801,221 8,460,000 2.1
70,000 Johnson & Johnson 2,915,118 3,968,125 1.0
---------- ---------- -----
9,716,339 12,428,125 3.1
Oil Services 170,000 Baker Hughes, Inc. 6,610,954 7,203,750 1.8
230,000 Diamond Offshore Drilling, Inc. 8,346,270 12,563,750 3.1
165,000 Schlumberger Ltd. 9,351,028 12,570,937 3.1
---------- ---------- -----
24,308,252 32,338,437 8.0
Pharmaceuticals 165,000 Amgen, Inc. 7,109,486 8,167,500 2.0
55,000 Bristol-Myers Squibb Co. 4,234,097 4,180,000 1.0
60,000 Merck & Co., Inc. 4,447,361 5,508,750 1.4
75,000 Pfizer, Inc. 3,180,350 4,153,125 1.0
---------- ---------- -----
18,971,294 22,009,375 5.4
Photography 15,000 Eastman Kodak Co. 953,578 980,625 0.2
Pollution Control 20,000 Waste Management Inc. 591,174 640,000 0.2
Restaurant 25,000 McDonald's Corp. 1,141,245 1,182,812 0.3
Retail Specialty 100,000 CVS Corporation 5,445,625 5,637,500 1.4
155,000 + Staples Inc. 3,910,927 3,623,125 0.9
200,000 Walgreen Co. 4,591,588 5,387,500 1.3
---------- ---------- -----
13,948,140 14,648,125 3.6
Retail Stores 330,000 Wal-Mart Stores, Inc. 10,768,309 11,715,000 2.9
Software -- Computer 130,000 + Baan Company, N.V. (US Registered Shares) 6,990,450 7,816,250 1.9
60,000 + Microsoft Corp. 5,980,753 7,931,250 1.9
200,000 + Oracle Corp. 6,622,281 7,612,500 1.9
130,000 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR)(a) 7,936,625 10,010,000 2.5
---------- ---------- -----
27,530,109 33,370,000 8.2
Travel & Lodging 25,000 Carnival Corporation (Class A) 588,075 1,095,312 0.3
Total Stocks 312,158,590 361,681,250 89.0
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
Commercial $13,000,000 Falcon Asset Securitization Corp., 5.51% due
Paper* 9/22/1997 $12,954,236 $12,954,236 3.2%
15,968,000 General Motors Acceptance Corp., 5.69% due
9/02/1997 15,960,429 15,960,429 3.9
12,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/17/1997 11,966,880 11,966,880 2.9
---------- ---------- -----
40,881,545 40,881,545 10.0
US Government 7,000,000 Federal National Mortgage Association,
Agency Obligations* 5.44% due 9/26/1997 6,971,440 6,971,440 1.7
Total Short-Term Securities 47,852,985 47,852,985 11.7
Total Investments $360,011,575 409,534,235 100.7
============
Liabilities in Excess of Other Assets (3,015,946) (0.7)
----------- -----
Net Assets $406,518,289 100.0%
============ =====
* Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ on-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
COMPAQ Computer Corp. 4.4%
Intel Corp. 3.5
Travelers Group Inc. 3.1
Schlumberger Ltd. 3.1
Diamond Offshore Drilling, Inc. 3.1
Northern Telecom Ltd. 2.9
Federal National Mortgage Association 2.9
General Electric Co. 2.9
Wal-Mart Stores, Inc. 2.9
BankAmerica Corp. 2.6
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Communications Equipment 9.3%
Software -- Computer 8.2
Oil Services 8.0
Financial Services 7.9
Banking & Financial 7.3
Pharmaceuticals 5.4
Computers 5.0
Electrical Equipment 4.0
Energy 4.0
Household Products 3.7
Equity Portfolio Changes for the
Quarter Ended August 31, 1997
Additions
American Express Company
BankAmerica Corporation
CVS Corporation
Deletion
Hasbro, Inc.
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $360,011,575) (Note 1a) $409,534,235
Cash 781
Receivables:
Capital shares sold $2,119,66
Dividends 244,320 2,363,984
------------
Deferred organization expenses (Note 1f) 5,077
Prepaid registration fees and other assets (Note 1f) 48,848
------------
Total assets 411,952,925
------------
Liabilities: Payables:
Securities purchased 3,033,408
Capital shares redeemed 1,707,569
Distributor (Note 2) 243,391
Investment adviser (Note 2) 212,074 5,196,442
------------
Accrued expenses and other liabilities 238,194
------------
Total liabilities 5,434,636
------------
Net Assets: Net assets $406,518,289
============
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $357,160
Class B Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 1,298,378
Class C Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 446,949
Class D Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 307,419
Paid-in capital in excess of par 292,295,818
Undistributed realized capital gains on investments -- net 62,289,905
Unrealized appreciation on investments -- net 49,522,660
------------
Net assets $406,518,289
============
Net Asset Value: Class A -- Based on net assets of $62,048,468 and 3,571,596 shares
outstanding $17.37
============
Class B -- Based on net assets of $216,636,197 and 12,983,781 shares
outstanding $16.69
============
Class C -- Based on net assets of $74,732,279 and 4,469,488 shares
outstanding $16.72
============
Class D -- Based on net assets of $53,101,345 and 3,074,187 shares
outstanding $17.27
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended August 31, 1997
<S> <C> <C>
Investment Income Dividends (net of $20,477 foreign withholding tax) $,244,970
(Notes 1d & 1e): Interest and discount earned 1,126,243
------------
Total income 4,371,213
------------
Expenses: Investment advisory fees (Note 2) 1,986,602
Account maintenance and distribution fees -- Class B (Note 2) 1,553,165
Account maintenance and distribution fees -- Class C (Note 2) 626,234
Transfer agent fees -- Class B (Note 2) 350,288
Transfer agent fees -- Class C (Note 2) 141,910
Registration fees (Note 1f) 110,752
Transfer agent fees -- Class A (Note 2) 99,578
Account maintenance fees -- Class D (Note 2) 90,258
Printing and shareholder reports 86,494
Professional fees 77,441
Transfer agent fees -- Class D (Note 2) 69,244
Accounting services (Note 2) 66,072
Directors' fees and expenses 40,267
Custodian fees 21,471
Amortization of organization expenses (Note 1f) 20,308
Pricing fees 711
Other 16,745
------------
Total expenses 5,357,540
------------
Investment loss -- net (986,327)
------------
Realized & Realized gain from investments -- net 63,286,586
Unrealized Gain on Change in unrealized appreciation on investments -- net 31,560,205
Investments -- Net ------------
(Notes 1b, 1c, 1e, & 3): Net Increase in Net Assets Resulting from Operations $93,860,464
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment loss -- net $(986,327) $(574,728)
Realized gain on investments -- net 63,286,586 25,808,365
Change in unrealized appreciation on investments -- net 31,560,205 3,022,827
------------ ------------
Net increase in net assets resulting from operations 93,860,464 28,256,464
------------ ------------
Distributions to Realized gain on investments -- net:
Shareholders Class A (4,708,644) (541,580)
(Note 1g): Class B (11,489,976) (1,655,483)
Class C (4,699,934) (1,010,551)
Class D (2,535,797) (323,823)
------------ ------------
Net decrease in net assets resulting from distributions to shareholders (23,434,351) (3,531,437)
------------ ------------
Capital Share Trans- Net increase in net assets derived from capital share transactions 95,459,275 73,421,174
actions (Note 4): ------------ ------------
Net Assets: Total increase in net assets 165,885,388 98,146,201
Beginning of year 240,632,901 142,486,700
------------ ------------
End of year $406,518,289 $240,632,901
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.60 $11.66 $9.99
Operating ------- ------- -------
Performance: Investment income -- net .07 .07 --
Realized and unrealized gain on investments -- net 4.95 2.13 1.98
------- ------- -------
Total from investment operations 5.02 2.20 1.98
------- ------- -------
Less distributions from realized gain on investments -- net (1.25) (.26) (.31)
------- ------- -------
Net asset value, end of period $17.37 $13.60 $11.66
======= ======= =======
Total Investment Based on net asset value per share 39.24% 19.02% 20.55%++++
Return:** ======= ======= =======
Ratios to Average Expenses .99% 1.12% 1.46%*
Net Assets: ======= ======= =======
Investment income -- net .47% .51% .02%*
======= ======= =======
Supplemental Net assets, end of period (in thousands) $62,049 $47,048 $21,288
Data: ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======= ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Class B++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.14 $11.40 $9.85
Operating -------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09)
Realized and unrealized gain on investments -- net 4.79 2.07 1.95
-------- ------- -------
Total from investment operations 4.70 2.00 1.86
-------- ------- -------
Less distributions from realized gain on investments -- net (1.15) (.26) (.31)
-------- ------- -------
Net asset value, end of period $16.69 $13.14 $11.40
======== ======= =======
Total Investment Based on net asset value per share 37.95% 17.68% 19.60%++++
Return** ======== ======= =======
Ratios to Average Expenses 2.02% 2.16% 2.48%*
Net Assets: ======== ======= =======
Investment loss -- net (.59%) (.54%) (.95%)*
======== ======= =======
Supplemental Net assets, end of period (in thousands) $216,636 $116,641 $63,748
Data ======== ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======== ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======== ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Class C++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.14 $11.40 $9.96 $9.86 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09) (.05) (.05)
Realized and unrealized gain (loss) on
investments -- net 4.79 2.07 1.84 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.70 2.00 1.75 .10 (.14)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.12) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $16.72 $13.14 $11.40 $9.96 $9.86
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 37.90% 17.68% 18.28% 1.01% (1.40%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 2.02% 2.15% 2.44% 2.35% 2.79%*
Net Assets: ======= ======= ======= ======= =======
Investment loss -- net (.58%) (.57%) (.88%) (.52%) (.83%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $74,732 $54,052 $44,220 $47,263 $45,736
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<CAPTION>
Class D++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $13.54 $11.64 $10.09 $9.91 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income (loss) -- net .03 .03 (.01) .03 --
Realized and unrealized gain (loss) on
investments -- net 4.93 2.13 1.87 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.96 2.16 1.86 .18 (.09)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.23) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $17.27 $13.54 $11.64 $10.09 $9.91
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 38.90% 18.70% 19.15% 1.82% (.90%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 1.24% 1.37% 1.65% 1.58% 2.03%*
Net Assets: ======= ======= ======= ======= =======
Investment income (loss) -- net .17% .24% (.10%) .31% (.04%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands $53,101 $22,892 $13,231 $8,623 $6,930
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and
Class D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of 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 value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's Board
of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, 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.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate 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 Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current 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 Fund
enters into a closing transaction), the Fund 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.
(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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-dividend
dates. Dividends from foreign securities where the ex-dividend date
may have passed are subsequently recorded when the Fund has determined
the ex-dividend date. Interest income (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 -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification -- Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,561,106 have been reclassified between undistributed net realized
capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of
MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.65% of
the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance
and distribution fees. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares as
follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates the Distributor and
MLPF&S for providing account maintenance services to Class B, Class C
and Class D shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B and Class C shareholders.
For the year ended August 31, 1997, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $671 $7,462
Class D $19,739 $256,717
For the year ended August 31, 1997, MLPF&S received contingent
deferred sales charges of $839,643 and $7,765 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $8,520 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August
31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFDS, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1997 were $343,712,654 and $270,177,640,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $63,285,823 $49,522,660
Short-term investments 763 --
----------- -----------
Total $63,286,586 $49,522,660
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $49,522,119, of which $56,467,628 related to
appreciated securities and $6,945,509 related to depreciated
securities. At August 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $360,012,116.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
were $95,459,275 and $73,421,174 for the years ended August 31, 1997
and August 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 5,300,860 $80,749,430
Shares issued to shareholders
in reinvestment of distributions 318,999 4,411,762
---------- -----------
Total issued 5,619,859 85,161,192
Shares redeemed (5,508,434) (81,532,077)
---------- -----------
Net increase 111,425 $3,629,115
========== ===========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 2,291,835 $29,954,753
Shares issued to shareholders
in reinvestment of distributions 41,134 522,810
---------- -----------
Total issued 2,332,969 30,477,563
Shares redeemed (698,358) (8,998,807)
---------- -----------
Net increase 1,634,611 $21,478,756
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,146,257 $124,318,206
Shares issued to shareholders
in reinvestment of distributions 782,595 10,471,125
---------- -----------
Total issued 8,928,852 134,789,331
Automatic conversion
of shares (23,111) (352,449)
Shares redeemed (4,796,356) (69,880,135)
---------- -----------
Net increase 4,109,385 $64,556,747
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 5,820,916 $73,664,245
Shares issued to shareholders
in reinvestment of distributions 121,775 1,507,570
---------- -----------
Total issued 5,942,691 75,171,815
Automatic conversion
of shares (14,867) (185,102)
Shares redeemed (2,647,233) (33,330,378)
---------- -----------
Net increase 3,280,591 $41,656,335
========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,343,912 $20,658,965
Shares issued to share-
holders in reinvestment
of distributions 310,633 4,165,597
---------- -----------
Total issued 1,654,545 24,824,562
Shares redeemed (1,297,675) (19,022,602)
---------- -----------
Net increase 356,870 $5,801,960
========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,167,623 $14,787,083
Shares issued to share-
holders in reinvestment
of distributions 71,863 889,667
---------- -----------
Total issued 1,239,486 15,676,750
Shares redeemed (1,007,151) (12,689,514)
---------- -----------
Net increase 232,335 $2,987,236
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 2,051,457 $31,598,761
Automatic conversion of shares 22,419 352,449
Shares issued to shareholders
in reinvestment of distributions 164,753 2,268,645
---------- -----------
Total issued 2,238,629 34,219,855
Shares redeemed (855,358) (12,748,402)
---------- -----------
Net increase 1,383,271 $21,471,453
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 953,782 $12,474,082
Automatic conversion of shares 14,515 185,102
Shares issued to shareholders
in reinvestment of distributions 20,994 266,204
---------- -----------
Total issued 989,291 12,925,388
Shares redeemed (434,952) (5,626,541)
---------- -----------
Net increase 554,339 $7,298,847
========== ===========
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Merrill Lynch Fundamental Growth Fund, Inc.:
We have audited the accompanying statement of assets and liabilities
of Merrill Lynch Fundamental Growth Fund, Inc., including the schedule
of investments, as of August 31, 1997, and the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years in the period then ended and
financial highlights for each of the years indicated therein. These
financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion
on these financial statements and 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 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 and financial highlights.
Our procedures included confirmation of securities owned as of August
31, 1997 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Merrill Lynch Fundamental Growth Fund, Inc. at
August 31, 1997, and the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the
indicated periods in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
Princeton, New Jersey
October 3, 1997
<TABLE>
<CAPTION>
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill Lynch Fundamental Growth Fund, Inc.
during its taxable year ended August 31, 1997:
Record Payable Qualifying Non-Qualifying Total Long-Term
Date Date Ordinary Income Ordinary Income Ordinary Income Capital Gains
<S> <C> <C> <C> <C> <C>
Class A Shares
12/10/96 12/18/96 $.114052 $.505536 $.619588 $.627966
Class B Shares
12/10/96 12/18/96 $.096321 $.426943 $.523264 $.627966
Class C Shares
12/10/96 12/18/96 $.091081 $.403716 $.494797 $.627966
Class D Shares
12/10/96 12/18/96 $.110102 $.488024 $.598126 $.627966
The qualifying ordinary income qualifies for the dividends received deductions for corporations.
Please retain this information for your records.
</TABLE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Steven B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Lawrence R. Fuller, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Semi-Annual Report
February 28, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Fundamental
Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #16465 -- 2/98
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
<PAGE>
DEAR SHAREHOLDER
For the quarter ended February 28, 1998, total returns for Merrill
Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +9.73%, +9.44%, +9.39% and +9.64%, respectively.
The Fund outperformed the Lipper Analytical Services' Growth Fund
Average, which had a total return of +9.10%, but slightly
underperformed the unmanaged Standard & Poor's 500 Index (S&P 500),
which had a total return of +10.25% for the same three-month period.
(Investment results shown do not reflect sales charges and would be
lower if sales charges were included. Complete performance
information, including average annual total returns, can be found on
pages 4 and 5 of this report to shareholders.)
During January 1998, the common stock prices of many of the Fund's
investments in the computer software, communications equipment and
electronics industries recovered from the low share price levels
experienced in December 1997, when investors were very apprehensive
about the potential negative effects of the emerging recessions in
major Asian countries on these companies. The actual reports of
fourth quarter 1997 earnings showed that the negative effects
overall were relatively modest and in some instances, were
insignificant. During the February quarter, seven of the Fund's top
ten equity holdings had total returns significantly greater than any
of the Fund's competitive benchmarks. Several of these companies,
such as Northern Telecom Ltd., Intel Corp., SAP AG (Systeme,
Anwendungen, Produkte in der Datenverarbeitung) and Baan Company,
N.V. (US Registered Shares) were considered to be at considerable
risk of earnings being adversely affected as a result of the
emerging recessions in Asia. So far, the negative effects have been
relatively modest compared to the apparent expectations of many
investors. We continue to research the potential for negative
effects of the unfolding economic declines in the major Asian
countries on individual corporations. (See page 5 of this report to
shareholders for a complete listing of the Fund's Ten Largest
Holdings.)
Based on fiscal year-to-date and the latest 12-month comparisons as
of February 28, 1998, the Fund's total returns exceeded the total
returns of both the Lipper Analytical Services' Growth Funds Average
and the unmanaged S&P 500. We continue to believe that there are
positive investment opportunities in the US equity market, and at
February 28, 1998, the Fund remained relatively fully invested in
common stocks.
The Environment
Real economic growth in the United States appears to be
strengthening. Real wage rates and personal incomes are rising at
faster rates than during the same period of 1997. Record residential
mortgage refinancings have introduced new liquidity to the consumer
sector. Federal personal income tax refunds are significantly larger
than a year ago. Also, Federal tax reductions enacted in 1997 to
assist low-income and middle-income households have started to boost
after-tax incomes at an estimated $13 billion annual rate. Consumer
price inflation is relatively low, and price discounts and rebates
are being offered on new motor vehicles. Consequently, consumer
confidence surveys are increasingly positive, and real consumer
spending is rising on many items from computers and software to
television sets and consumer electronics, furniture, recorded music,
apparel and motor vehicles. The benefits of Federal tax reduction
and residential mortgage refinancing to after-tax real personal
incomes could provide some sustainability to this improvement in
consumer spending.
The reduced rate of real growth in US corporations' exports to Asian
markets is likely to cause a slowdown in the overall rate of growth
of corporate profits in 1998, in our view. We continue to focus on
identifying individual companies that are likely to experience the
greatest reductions in exports of manufactured goods. The declines
in the currency values of the major Asian economies relative to the
US dollar during the second half of 1997 have improved the price
competitiveness of foreign manufactured goods, ranging from motor
vehicles and computer memory devices to finished steel products.
The recent reports of most technology companies in the
communications equipment, computer and computer software industries
show a continued relatively rapid rate of growth in demand globally
for advanced wireline and wireless communication infrastructure and
communication handsets, personal computers and servers and network
application software. Order cancellations or delivery delays in some
of the most severely depressed Asian economies appear to be offset
by new orders from North America and Europe. Consequently, we
anticipate a more favorable real economic growth environment in the
United States in 1998, and improved business conditions in Europe
during the second half of 1998 as we move closer to the official
start-up of the European Monetary Union in 1999.
Investment Strategy
During the February quarter, we shifted the industry weightings of
the Fund toward the technology and retailing sectors, while reducing
exposures in banking and financial services, oil services and
energy. The stock prices of many of the leading technology companies
in computers, computer software, electronics and communications
equipment declined substantially from about mid-year 1997 to year-
end, apparently from investor concerns about business dislocations
and lower profits that may follow from the business downturns in
major Asian economies. In our opinion, the leading companies in the
technology sector are likely to gain market share and grow at above-
average rates during any slowdown in overall growth of spending on
semiconductor equipment, personal computers and networks servers,
communication equipment and computer software.
We increased the Fund's weighting in consumer goods retailers in
response to company reports which support our perspective that
consumer spending could be rising at a faster rate in 1998. We
reduced the Fund's weighting in energy and energy service companies
in response to the United Nations' agreement with the government of
Iraq, which over a relatively short period of time may increase
substantially the supply of oil coming from Iraq. We reduced the
weightings in the banking and financial services industries because
the valuations are relatively high and because there may be an
increase in long-term interest rates in the United States if
household spending continues to grow at a faster pace during the
remainder of 1998.
We added ten companies to the portfolio during the February quarter
and eliminated one holding. We added Applied Materials, Inc. because
the valuation appeared reasonable relative to the above-average
long-run growth potential. In the global arena, the company is the
leading and most broad-based independent developer, manufacturer,
marketer and servicer of semiconductor capital equipment, in our
view. We purchased Clear Channel Communications, Inc. in response to
the enhanced growth potential for this primarily middle-market radio
broadcaster as the radio and television industry continues to
consolidate, and Dell Computer Corporation in response to the
continued surprisingly rapid rate of growth of this personal
computer and server company and our rising confidence level in the
outlook for industry growth for 1998. We added a position in Ethan
Allen Interiors, Inc., a leading home furnishings retailer, because
it appeared to have a reasonable valuation given recent rates of
growth in earnings and the possibility of a rapid pace of consumer
<PAGE>
spending on household furnishings in 1998. We added The Gap Inc., a
leading apparel retailer with a private brand, because we
anticipated that earnings growth would be above-average in what
appears to be a stronger consumer spending environment on apparel.
We added Morgan Stanley, Dean Witter, Discover & Co. to the
portfolio as a result of the attractive valuation and the potential
for above-average earnings growth and rates of return as the
productivity of the Dean Witter retail brokerage system improves
with the enhanced financial product offerings from Morgan Stanley &
Co. We purchased shares of PeopleSoft, Inc. because of the
reasonable valuation and the potential for above-average earnings
growth from an organization which is one of the leading developers
and marketers of enterprise business applications for networked
operating systems. We also purchased shares of SGS -- Thomson
Microelectronics N.V. (NY Registered Shares), one of the leading
European developers and manufacturers of electronic devices for
systems ranging from computers and telecommunications equipment to
industrial equipment, because we believed that the valuation was
reasonable and that earnings would grow at an above-average rate
with improved returns as soon as there are better business
conditions in Europe. We added Sprint Corporation to the portfolio
in response to the attractive valuation relative to the above-
average growth of revenues and new customers in the Internet
communication business as well as the growth of the new digital
wireless communications business. Finally, we added Texas
Instruments Inc. in response to the attractive valuation relative to
long-run earnings growth prospects, especially in the
telecommunications area where the organization has the largest
global market share for digital signal processors as well as leading
edge technological developments.
The only investment eliminated from the portfolio was Oracle Corp.,
after management reported unsatisfactory operational results. Oracle
appears to be losing business and market share to Microsoft
Corporation at the low end of the relational database market. Also,
Oracle appears to be growing at a substantially slower rate than the
leading companies in business applications software for networked
operational systems.
In Conclusion
We thank you for your investment in Merrill Lynch Fundamental Growth
Fund, Inc., and we look forward to discussing our investment
strategy and outlook with you in our upcoming quarterly report to
shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/LAWRENCE R. FULLER
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
March 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing(SM) System, which offers four pricing
alternatives:
<PAGE>
[bullet] Class A Shares incur a maximum initial sales charge (front-
end load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1%
each year thereafter to 0% after the fourth year. In addition, Class
B Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 8 years. (There is no initial sales charge for
automatic share conversions.) If you were a Class B shareholder
prior to October 21, 1994, your Class B Shares were redesignated to
Class C Shares on October 21, 1994.
[bullet] Class C Shares are subject to a distribution fee of 0.75%
and an account maintenance fee of 0.25%. In addition, Class C Shares
are subject to a 1% contingent deferred sales charge if redeemed
within one year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of
5.25% and an account maintenance fee of 0.25% (but no distribution
fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date.
Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary
because of the different levels of account maintenance, distribution
and transfer agency fees applicable to each class, which are
deducted from the income available to be paid to shareholders.
<TABLE>
<CAPTION>
Recent Performance Results*
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares +36.78% + 9.73% +129.04%
ML Fundamental Growth Fund, Inc. Class B Shares +35.28 + 9.44 +121.25
ML Fundamental Growth Fund, Inc. Class C Shares +35.24 + 9.39 +117.87
ML Fundamental Growth Fund, Inc. Class D Shares +36.33 + 9.64 +126.90
Standard & Poor's 500 Index** +34.99 +10.25 +143.12/+170.29
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge
was included. Total investment returns are based on changes in net asset values for the periods shown,
and assume reinvestment of all dividends and capital gains distributions at net asset value on the
ex-dividend date. The Fund's inception dates are: Class A and Class B Shares, 10/21/94; and Class C and
Class D Shares, 12/24/92.
** An unmanaged broad-based Index comprised of common stocks. Since inception total returns are for the
periods from 10/21/94 to 2/28/98 and from 12/24/92 to 2/28/98, respectively.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/97 +32.03% +25.10%
Inception (10/21/94)
through 12/31/97 +25.97 +23.86
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/97 +30.65% +26.65%
Inception (10/21/94)
through 12/31/97 +24.67 +24.48
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/97 +30.65% +29.65%
Five Years Ended 12/31/97 +14.97 +14.97
Inception (12/24/92)
through 12/31/97 +14.72 +14.72
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/97 +31.63% +24.72%
Five Years Ended 12/31/97 +15.86 +14.62
Inception (12/24/92)
through 12/31/97 +15.61 +14.38
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<PAGE>
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
COMPAQ Computer Corp. 3.5%
Northern Telecom Ltd. 3.2
Intel Corp. 3.0
SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR) 3.0
Travelers Group, Inc. 3.0
Merck & Co., Inc. 2.8
The Walt Disney Co. 2.8
Baan Company, N.V. (US Registered Shares) 2.7
General Electric Co. 2.5
Wal-Mart Stores, Inc. 2.4
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Communications Equipment 10.2%
Banking & Financial 8.6
Software -- Computer 7.9
Pharmaceuticals 7.1
Financial Services 5.9
Electronics 5.2
Retail Specialty 4.6
Computers 4.4
Entertainment 3.5
Electrical Equipment 2.9
Equity Portfolio Changes for the
Quarter Ended February 28, 1998
Additions
Applied Materials, Inc.
Clear Channel Communications, Inc.
Dell Computer Corporation
Ethan Allen Interiors, Inc.
Gap, Inc. (The)
Morgan Stanley, Dean Witter, Discover & Co.
PeopleSoft, Inc.
SGS - Thomson Microelectronics N.V.
(NY Registered Shares)
Sprint Corporation
Texas Instruments Inc.
Deletion
Oracle Corp.
<TABLE>
<CAPTION>
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 1998
SCHEDULE OF INVESTMENTS
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 75,000 Interpublic Group of Companies, Inc. $2,084,537 $4,087,500 0.6%
Banking & Financial 275,000 Banc One Corp. 12,748,106 15,537,500 2.3
75,000 BankAmerica Corp. 5,404,138 5,812,500 0.9
110,000 Citicorp 14,427,164 14,575,000 2.2
200,000 Mellon Bank Corp. 11,074,562 12,462,500 1.8
155,000 State Street Boston Corp. 7,301,335 9,580,938 1.4
------------ ------------ -------
50,955,305 57,968,438 8.6
Beverages 70,000 The Coca-Cola Co. 3,760,705 4,808,125 0.7
Broadcasting -- Radio 100,000 +Clear Channel Communications, Inc. 8,510,355 9,062,500 1.3
& Television
Communications 200,000 Cisco Systems, Inc. 10,842,120 13,175,000 2.0
Equipment 375,000 +FORE Systems, Inc. 8,522,573 6,000,000 0.9
75,000 Lucent Technologies, Inc. 5,552,065 8,128,125 1.2
200,000 +Newbridge Networks Corporation 8,383,528 4,700,000 0.7
<PAGE>
400,000 Northern Telecom Ltd. 17,789,260 21,325,000 3.2
320,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 12,753,213 14,500,000 2.2
------------ ------------ -------
63,842,759 67,828,125 10.2
Computers 740,000 COMPAQ Computer Corp. 16,217,189 23,726,250 3.5
35,000 +Dell Computer Corporation 4,403,375 4,893,438 0.7
20,000 Hewlett-Packard Co. 1,096,400 1,340,000 0.2
------------ ------------ -------
21,716,964 29,959,688 4.4
Cosmetics 100,000 The Gillette Co. 7,495,792 10,787,500 1.6
20,000 International Flavors & Fragrances Inc. 973,375 920,000 0.1
------------ ------------ -------
8,469,167 11,707,500 1.7
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,914,375 0.3
220,000 General Electric Co. 10,464,488 17,105,000 2.5
10,000 Honeywell, Inc. 748,156 792,500 0.1
------------ ------------ -------
12,438,784 19,811,875 2.9
Electronics 230,000 Intel Corp. 17,013,642 20,613,750 3.0
25,000 +SGS - Thomson Microelectronics N.V.
(NY Registered Shares) 1,743,352 1,903,125 0.3
220,000 Texas Instruments Inc. 12,827,918 12,732,500 1.9
------------ ------------ -------
31,584,912 35,249,375 5.2
Energy 120,000 El Paso Natural Gas Co. 5,749,547 7,965,000 1.2
130,000 Enron Corp. 5,701,185 6,110,000 0.9
------------ ------------ -------
11,450,732 14,075,000 2.1
Entertainment 100,000 +Viacom, Inc. (Class A) 4,607,042 4,725,000 0.7
170,000 The Walt Disney Co. 15,771,304 19,029,375 2.8
------------ ------------ -------
20,378,346 23,754,375 3.5
Financial Services 35,000 American Express Company 3,103,537 3,152,188 0.5
95,000 Federal National Mortgage Association 4,954,567 6,062,188 0.9
150,000 Morgan Stanley, Dean Witter, Discover
& Co. 9,143,822 10,453,125 1.5
365,000 Travelers Group, Inc. 14,617,869 20,348,750 3.0
------------ ------------ -------
31,819,795 40,016,251 5.9
Food 30,000 ConAgra Inc. 649,650 900,000 0.1
30,000 Wrigley (Wm.) Jr. Co. (Class B) 1,890,550 2,291,250 0.4
------------ ------------ -------
2,540,200 3,191,250 0.5
Food Merchandising 75,000 Albertson's, Inc. 2,849,355 3,510,938 0.5
150,000 +Meyer (Fred), Inc. 2,851,086 6,665,625 1.0
------------ ------------ -------
5,700,441 10,176,563 1.5
Home Furnishings 180,000 Ethan Allen Interiors, Inc. 9,425,905 10,035,000 1.5
Hotel 20,000 Marriott International, Inc. 994,115 1,515,000 0.2
Household Products 20,000 Colgate-Palmolive Co. 1,401,400 1,623,750 0.2
20,000 Kimberly-Clark Corporation 1,078,644 1,113,750 0.2
100,000 Procter & Gamble Co. 5,346,649 8,493,750 1.3
45,000 Unilever N.V. (NY Registered Shares) 2,568,609 2,894,063 0.4
------------ ------------ -------
10,395,302 14,125,313 2.1
Information Processing 250,000 First Data Corp. 9,431,215 8,500,000 1.3
Insurance 10,000 Aetna Inc. 822,491 873,750 0.1
95,000 American International Group, Inc. 8,617,671 11,417,812 1.7
------------ ------------ -------
9,440,162 12,291,562 1.8
Leisure 185,000 Polygram N.V. (NY Registered Shares) 9,645,436 9,620,000 1.4
Medical -- Technology 125,000 +Boston Scientifc Corp. 7,080,271 7,468,750 1.1
75,000 Guidant Corp. 4,862,965 5,470,312 0.8
20,000 Johnson & Johnson 947,465 1,510,000 0.2
------------ ------------ -------
12,890,701 14,449,062 2.1
Oil Services 135,000 Baker Hughes, Inc. 5,593,791 5,526,562 0.8
125,000 Diamond Offshore Drilling, Inc. 4,876,889 5,664,062 0.8
80,000 Schlumberger Ltd. 4,851,262 6,030,000 0.9
------------ ------------ -------
15,321,942 17,220,624 2.5
Pharmaceuticals 30,000 Amgen, Inc. 1,598,927 1,593,750 0.2
140,000 Bristol-Myers Squibb Co. 12,364,747 14,026,250 2.1
150,000 Merck & Co., Inc. 14,481,819 19,134,375 2.8
150,000 Pfizer, Inc. 9,449,770 13,275,000 2.0
------------ ------------ -------
37,895,263 48,029,375 7.1
Photography 25,000 Eastman Kodak Co. 1,602,338 1,640,625 0.2
Pollution Control 20,000 Waste Management Inc. 591,174 500,000 0.1
Restaurant 25,000 McDonald's Corp. 1,141,245 1,368,750 0.2
Retail Specialty 70,000 CVS Corporation 4,085,892 5,184,375 0.8
135,000 Gap Inc. (The) 5,452,669 6,032,812 0.9
700,000 +Staples Inc. 13,028,523 14,787,500 2.2
140,000 Walgreen Co. 3,955,723 5,136,250 0.7
------------ ------------ -------
26,522,807 31,140,937 4.6
Retail Stores 350,000 Wal-Mart Stores, Inc. 11,504,809 16,209,375 2.4
Semiconductor 260,000 +Applied Materials, Inc. 9,514,476 9,571,250 1.4
Capital Equipment
Software -- Computer 400,000 +Baan Company, N.V. (US Registered Shares) 11,975,073 17,975,000 2.7
60,000 +Microsoft Corp. 3,328,750 5,085,000 0.8
220,000 +PeopleSoft, Inc. 8,907,272 9,817,500 1.4
150,000 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR)(a) 10,425,846 20,512,500 3.0
------------ ------------ -------
34,636,941 53,390,000 7.9
Telecommunications 240,000 Sprint Corporation 14,564,609 15,840,000 2.3
Toys 175,000 Mattel, Inc. 6,563,982 7,404,687 1.1
Travel & Lodging 115,000 Carnival Corporation (Class A) 5,499,260 6,770,625 1.0
------------ ------------ -------
Total Stocks 502,834,684 611,318,750 90.3
============ ============ =======
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <C> <C> <C> <C>
Commercial $10,000,000 Atlantic Asset Securitization Corporation,
Paper* 5.52% due 3/12/1998 9,981,600 9,981,600 1.5
5,000,000 Delaware Funding Corp., 5.52% due
3/16/1998 4,987,733 4,987,733 0.7
10,000,000 Finova Capital Corp., 5.50% due 3/04/1998 9,993,889 9,993,889 1.5
4,662,000 General Motors Acceptance Corp., 5.69%
due 3/02/1998 4,660,526 4,660,526 0.7
15,000,000 Lexington Parker Capital Co. LLC, 5.50%
due 3/06/1998 14,986,250 14,986,250 2.2
22,000,000 Riverwoods Funding Corp., 5.48% due
3/06/1998 21,979,907 21,979,907 3.2
------------ ------------ -------
Total Short-Term Securities 66,589,905 66,589,905 9.8
============ ============ =======
Total Investments $569,424,589 677,908,655 100.1
============
Liabilities in Excess of Other Assets (672,219) (0.1)
------------ -------
Net Assets $677,236,436 100.0%
============ =======
* Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of February 28, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $569,424,589) (Note 1a) $677,908,655
Cash 78,047
Receivables:
Capital shares sold $5,394,600
Dividends 283,595 5,678,195
------------
Deferred organization expenses (Note 1f) 5,077
Prepaid registration fees and other assets (Note 1f) 58,750
------------
Total assets 683,728,724
------------
Liabilities: Payables:
Securities purchased 4,061,271
Capital shares redeemed 1,525,805
Distributor (Note 2) 362,804
Investment adviser (Note 2) 312,051 6,261,931
------------
Accrued expenses and other liabilities 230,357
------------
Total liabilities 6,492,288
------------
Net Assets: Net assets $677,236,436
============
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $566,838
Class B Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 2,317,225
Class C Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 620,442
Class D Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 509,070
Paid-in capital in excess of par 552,267,471
Accumulated investment loss -- net (717,621)
Undistributed realized capital gains on investments -- net 13,188,945
Unrealized appreciation on investments -- net 108,484,066
------------
Net assets $677,236,436
============
Net Asset Value: Class A -- Based on net assets of $98,908,012 and 5,668,378 shares
outstanding $17.45
============
Class B -- Based on net assets of $386,247,656 and 23,172,252 shares
outstanding $16.67
============
Class C -- Based on net assets of $103,879,295 and 6,204,417 shares
outstanding $16.74
============
Class D -- Based on net assets of $88,201,473 and 5,090,704 shares
outstanding $17.33
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for the Six Months Ended February 28, 1998
<S> <C> <C>
Investment Income Dividends (net of $7,782 foreign withholding tax) $1,982,604
(Notes 1d & 1e): Interest and discount earned 1,350,439
------------
Total income 3,333,043
------------
Expenses: Investment advisory fees (Note 2) 1,613,898
Account maintenance and distribution fees -- Class B (Note 2) 1,378,910
Account maintenance and distribution fees -- Class C (Note 2) 418,865
Transfer agent fees -- Class B (Note 2) 192,581
Account maintenance fees -- Class D (Note 2) 85,271
Registration fees (Note 1f) 69,271
Transfer agent fees -- Class C (Note 2) 59,897
Printing and shareholder reports 48,408
Transfer agent fees -- Class A (Note 2) 40,338
Transfer agent fees -- Class D (Note 2) 40,000
Professional fees 35,797
Accounting services (Note 2) 24,610
Directors' fees and expenses 18,368
Custodian fees 14,665
Amortization of organization expenses (Note 1f) 2,310
Other 7,475
------------
Total expenses 4,050,664
------------
Investment loss -- net (717,621)
------------
Realized & Realized gain from investments -- net 13,737,091
Unrealized Gain on Change in unrealized appreciation on investments -- net 58,961,406
Investments -- Net ------------
(Notes 1b, 1c, Net Increase in Net Assets Resulting from Operations $71,980,876
1e & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the Year
Months Ended Year Ended
Increase (Decrease) in Net Assets: Feb. 28, 1998 Aug. 31, 1997
<S> <C> <C> <C>
Operations: Investment loss -- net $(717,621) $(986,327)
Realized gain on investments -- net 13,737,091 63,286,586
Change in unrealized appreciation on investments -- net 58,961,406 31,560,205
------------ ------------
Net increase in net assets resulting from operations 71,980,876 93,860,464
------------ ------------
Distributions to Realized gain on investments -- net:
Shareholders Class A (8,425,794) (4,708,644)
(Note 1g): Class B (34,969,855) (11,489,976)
Class C (10,532,443) (4,699,934)
Class D (8,909,959) (2,535,797)
------------ ------------
Net decrease in net assets resulting from distributions to
shareholders (62,838,051) (23,434,351)
------------ ------------
Capital Share Net increase in net assets derived from capital share transactions 261,575,322 95,459,275
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase in net assets 270,718,147 165,885,388
Beginning of period 406,518,289 240,632,901
------------ ------------
End of period $677,236,436 $406,518,289
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A++
For the For the
Six Period
The following per share data and ratios have been derived Months Oct. 21,
from information provided in the financial statements. Ended For the Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
1998 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $17.37 $13.60 $11.66 $9.99
Operating --------- --------- --------- ---------
Performance: Investment income -- net .04 .07 .07 --+++++
Realized and unrealized gain on investments
-- net 2.38 4.95 2.13 1.98
--------- --------- --------- ---------
Total from investment operations 2.42 5.02 2.20 1.98
--------- --------- --------- ---------
Less distributions from realized gain on
investments -- net (2.34) (1.25) (.26) (.31)
--------- --------- --------- ---------
Net asset value, end of period $17.45 $17.37 $13.60 $11.66
========= ========= ========= =========
Total Investment Based on net asset value per share 14.65%++++ 39.24% 19.02% 20.55%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses .86%* .99% 1.12% 1.46%*
Net Assets: ========= ========= ========= =========
Investment income -- net .49%* .47% .51% .02%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $98,908 $62,049 $47,048 $21,288
Data: ========= ========= ========= =========
Portfolio turnover 23.53% 94.38% 82.10% 80.41%
========= ========= ========= =========
Average commission rate paid+++ $.0630 $.0628 $.0623 --
========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
++++ Aggregate total investment return.
+++++ Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class B++
For the For the
Six Period
The following per share data and ratios have been derived Months Oct. 21,
from information provided in the financial statements. Ended For the Year Ended 1994+ to
Feb. 28, August 31, Aug. 31,
1998 1997 1996 1995
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $16.69 $13.14 $11.40 $9.85
Operating --------- --------- --------- ---------
Performance: Investment loss -- net (.04) (.09) (.07) (.09)
Realized and unrealized gain on investments
-- net 2.26 4.79 2.07 1.95
--------- --------- --------- ---------
Total from investment operations 2.22 4.70 2.00 1.86
--------- --------- --------- ---------
Less distributions from realized gain on
investments -- net (2.24) (1.15) (.26) (.31)
--------- --------- --------- ---------
Net asset value, end of period $16.67 $16.69 $13.14 $11.40
========= ========= ========= =========
Total Investment Based on net asset value per share 13.97%++++ 37.95% 17.68% 19.60%++++
Return:** ========= ========= ========= =========
Ratios to Average Expenses 1.88%* 2.02% 2.16% 2.48%*
Net Assets: ========= ========= ========= =========
Investment loss -- net (.54%)* (.59%) (.54%) (.95%)*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $386,248 $216,636 $116,641 $63,748
Data: ========= ========= ========= =========
Portfolio turnover 23.53% 94.38% 82.10% 80.41%
========= ========= ========= =========
Average commission rate paid+++ $.0630 $.0628 $.0623 --
========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class C+
For the
Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
1998 1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $16.72 $13.14 $11.40 $9.96 $9.86
Operating --------- --------- --------- --------- ---------
Performance: Investment loss -- net (.04) (.09) (.07) (.09) (.05)
Realized and unrealized gain on
investments -- net 2.27 4.79 2.07 1.84 .15
--------- --------- --------- --------- ---------
Total from investment operations 2.23 4.70 2.00 1.75 .10
--------- --------- --------- --------- ---------
Less distributions from realized gain
on investments -- net (2.21) (1.12) (.26) (.31) --
--------- --------- --------- --------- ---------
Net asset value, end of period $16.74 $16.72 $13.14 $11.40 $9.96
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 13.97%++++ 37.90% 17.68% 18.28% 1.01%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.88%* 2.02% 2.15% 2.44% 2.35%
Net Assets: ========= ========= ========= ========= =========
Investment loss -- net (.54%)* (.58%) (.57%) (.88%) (.52%)
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $103,879 $74,732 $54,052 $44,220 $47,263
Data: ========= ========= ========= ========= =========
Portfolio turnover 23.53% 94.38% 82.10% 80.41% 112.68%
========= ========= ========= ========= =========
Average commission rate paid++ $.0630 $.0628 $.0623 -- --
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class D+
For the
Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Feb. 28, For the Year Ended August 31,
1998 1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $17.27 $13.54 $11.64 $10.09 $9.91
Operating --------- --------- --------- --------- ---------
Performance: Investment income (loss) -- net .02 .03 .03 (.01) .03
Realized and unrealized gain on
investments -- net 2.36 4.93 2.13 1.87 .15
--------- --------- --------- --------- ---------
Total from investment operations 2.38 4.96 2.16 1.86 .18
--------- --------- --------- --------- ---------
Less distributions from realized gain
on investments -- net (2.32) (1.23) (.26) (.31) --
--------- --------- --------- --------- ---------
Net asset value, end of period $17.33 $17.27 $13.54 $11.64 $10.09
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 14.47%++++ 38.90% 18.70% 19.15% 1.82%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.11%* 1.24% 1.37% 1.65% 1.58%
Net Assets: ========= ========= ========= ========= =========
Investment income (loss) -- net .23%* .17% .24% (.10%) .31%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $88,201 $53,101 $22,892 $13,231 $8,623
Data: ========= ========= ========= ========= =========
Portfolio turnover 23.53% 94.38% 82.10% 80.41% 112.68%
========= ========= ========= ========= =========
Average commission rate paid++ $.0630 $.0628 $.0623 -- --
========= ========= ========= ========= =========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. These unaudited financial statements reflect all adjustments which are,
in the opinion of management, necessary to a fair statement of the results for
the interim period presented. All such adjustments are of a normal recurring
nature. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of 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 value quotations are not available are valued at
their fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, 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.
[bullet] Financial futures contracts -- The Fund may purchase or sell financial
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 Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
[bullet] Options -- The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current 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 Fund enters into a closing
transaction), the Fund 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.
(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 Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex- dividend dates. Dividends from foreign
securities where the ex- dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (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 -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of 0.65% of the average daily value of the Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the six months ended February 28, 1998, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $794 $10,891
Class D $22,068 $303,733
For the six months ended February 28, 1998, MLPF&S received contingent deferred
sales charges of $249,548 and $5,801 relating to transactions in Class B and
Class C Shares, respectively.
In addition, MLPF&S received $13,878 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended February
28, 1998.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLFDS, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended February 28, 1998 were $284,854,984 and $107,916,480, respectively.
Net realized gains (losses) for the six months ended February 28, 1998 and net
unrealized gains as of February 28, 1998 were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $13,737,591 $108,484,066
Short-term investments (500) --
------------ ------------
Total $13,737,091 $108,484,066
============ ============
As of February 28, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $108,484,066, of which $115,959,190 related to appreciated
securities and $7,475,124 related to depreciated securities. At February 28,
1998, the aggregate cost of investments for Federal income tax purposes was
$569,424,589.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$261,575,322 and $95,459,275 for the six months ended February 28, 1998 and for
the year ended August 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
February 28, 1998 Shares Amount
Shares sold 2,943,553 $49,638,632
Shares issued to share-
holders in reinvestment
of distributions 492,245 8,166,345
------------ ------------
Total issued 3,435,798 57,804,977
Shares redeemed (1,339,016) (23,297,123)
------------ ------------
Net increase 2,096,782 $34,507,854
============ ============
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 5,300,860 $80,749,430
Shares issued to share-
holders in reinvestment
of distributions 318,999 4,411,762
------------ ------------
Total issued 5,619,859 85,161,192
Shares redeemed (5,508,434) (81,532,077)
------------ ------------
Net increase 111,425 $3,629,115
============ ============
Class B Shares for the
Six Months Ended Dollar
February 28, 1998 Shares Amount
Shares sold 10,261,713 $166,923,162
Shares issued to share-
holders in reinvestment
of distributions 2,042,041 32,448,035
------------ ------------
Total issued 12,303,754 199,371,197
Automatic conversion
of shares (25,356) (415,785)
Shares redeemed (2,089,927) (34,374,393)
------------ ------------
Net increase 10,188,471 $164,581,019
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,146,257 $124,318,206
Shares issued to share-
holders in reinvestment
of distributions 782,595 10,471,125
------------ ------------
Total issued 8,928,852 134,789,331
Automatic conversion
of shares (23,111) (352,449)
Shares redeemed (4,796,356) (69,880,135)
------------ ------------
Net increase 4,109,385 $64,556,747
============ ============
Class C Shares for the
Six Months Ended Dollar
February 28, 1998 Shares Amount
Shares sold 1,817,170 $29,652,844
Shares issued to share-
holders in reinvestment
of distributions 592,390 9,454,545
------------ ------------
Total issued 2,409,560 39,107,389
Shares redeemed (674,631) (11,193,408)
------------ ------------
Net increase 1,734,929 $27,913,981
============ ============
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,343,912 $20,658,965
Shares issued to share-
holders in reinvestment
of distributions 310,633 4,165,597
------------ ------------
Total issued 1,654,545 24,824,562
Shares redeemed (1,297,675) (19,022,602)
------------ ------------
Net increase 356,870 $5,801,960
============ ============
Class D Shares for the
Six Months Ended Dollar
February 28, 1998 Shares Amount
Shares sold 2,276,042 $38,715,211
Automatic conversion
of shares 24,432 415,785
Shares issued to share-
holders in reinvestment
of distributions 485,816 8,011,111
------------ ------------
Total issued 2,786,290 47,142,107
Shares redeemed (769,773) (12,569,639)
------------ ------------
Net increase 2,016,517 $34,572,468
============ ============
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 2,051,457 $31,598,761
Automatic conversion
of shares 22,419 352,449
Shares issued to share-
holders in reinvestment
of distributions 164,753 2,268,645
------------ ------------
Total issued 2,238,629 34,219,855
Shares redeemed (855,358) (12,748,402)
------------ ------------
Net increase 1,383,271 $21,471,453
============ ============
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Steven B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Lawrence R. Fuller, Senior Vice President and Portfolio Manager
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
4/15/98 Merrill Lynch Fundamental Growth Fund, Inc.
PAGE 29
PROSPECTUS
April 30, 1998
Merrill Lynch Fund For Tomorrow, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
----------------
Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") is a diversified,
open-end management investment company (commonly known as a mutual fund),
seeking long-term growth of capital by investing in a quality-oriented
portfolio of securities, primarily common stocks. For more information on the
Fund's investment objective and policies, please see "Investment Objective and
Policies" on page 11.
----------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
See "Merrill Lynch Select Pricing(SM) System" on page 4.
----------------
Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor" or "MLFD"), P.O. Box 9081, Princeton, New Jersey
08543-9081, (609) 282-2800, or from securities dealers that have entered into
selected dealer agreements with the Distributor, including Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial
purchase is $1,000 and the minimum subsequent purchase is $50, except that for
retirement plans, the minimum initial purchase is $100, and the minimum
subsequent purchase is $1, and for participants in certain fee-based programs
the minimum initial purchase is $500 and the minimum subsequent purchase is
$50. Merrill Lynch may charge its customers a processing fee (presently $5.35)
for confirming purchases and repurchases. Purchases and redemptions made
directly through Merrill Lynch Financial Data Services, Inc. (the "Transfer
Agent") are not subject to the processing fee. See "Purchase of Shares" and
"Repurchase and Redemption of Shares."
----------------
This Prospectus tells you briefly the information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information, dated April 30, 1998, has been filed with
the Securities and Exchange Commission (the "Commission") and contains further
information about the Fund. You can obtain a copy without charge by contacting
your broker or by calling or writing the Fund at the telephone number and
address printed above. The Commission maintains a web site
(http:///www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information about the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
Merrill Lynch Asset Management - Investment Adviser
Merrill Lynch Funds Distributor, Inc. - Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C Class D
=============== ================================== ======================== ==========
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ...... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments ............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) ............ None(d) 4.0% during the first year, 1.0% for one year(f) None(d)
decreasing 1.0% annually
thereafter to 0.0% after the
fourth year(e)
Exchange Fee .............................. None None None None
Annual Fund Operating Expenses (as a
percentage of average net assets):
Investment Advisory Fees(g) ............... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance Fees ................. None 0.25% 0.25% 0.25%
Distribution Fees ........................ None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight years
and cease being subject to
distribution fees)
Other Expenses:
Shareholder Servicing Fees(i) ............. 0.20% 0.24% 0.27% 0.19%
Other ..................................... 0.14% 0.14% 0.14% 0.14%
--------- ---- ---- ------
Total Other Expenses ..................... 0.34% 0.38% 0.41% 0.33%
--------- ---- ---- ------
Total Fund Operating Expenses .............. 0.99% 2.03% 2.06% 1.23%
========= ==== ==== ======
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
fee-based programs. See "Purchase of Shares - Initial Sales Charge
Alternatives - Class A and Class D Shares" - page 15.
(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 18 and
"Shareholder Services - Fee-Based Programs" - page 26.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of
Shares - Initial Sales Charge Alternatives - Class A and Class D Shares" -
page 15.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services -
Fee-Based Programs" - page 26.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services -
Fee-Based Programs" - page 26.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services - Fee-Based
Programs" - page 26.
(g) See "Management of the Fund - Advisory Fee" - page 12.
(h) See "Purchase of Shares - Distribution Plans" - page 21.
(i) See "Management of the Fund - Transfer Agency Services Fee" - page 13.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid
for the Period of:
============================================
1 Year 3 Years 5 Years 10 Years
======== ========= ========= =========
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth on page 2, (2) a 5%
annual return throughout the periods and (3) redemption at the end
of the period:
Class A ........................................................ $ 62 $82 $ 104 $ 167
Class B ........................................................ $ 61 $84 $ 109 $ 217*
Class C ........................................................ $ 31 $65 $ 111 $ 239
Class D ........................................................ $ 64 $89 $ 117 $ 194
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A ........................................................ $ 62 $82 $ 104 $ 167
Class B ........................................................ $ 21 $64 $ 109 $ 217*
Class C ........................................................ $ 21 $65 $ 111 $ 239
Class D ........................................................ $ 64 $89 $ 117 $ 194
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly.
The example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Commission
regulations. The example should not be considered a representation of past or
future expenses or annual rates of return, and actual expenses or annual rates
of return may be more or less than those assumed for purposes of the example.
Class B and Class C shareholders who own their shares for an extended period of
time may pay more in Rule 12b-1 distribution fees than the economic equivalent
of the maximum front-end sales charge permitted under the Conduct Rules of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Repurchase and Redemption of Shares."
3
<PAGE>
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Investment Adviser"), or an affiliate of MLAM, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM that use the Merrill
Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual
funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services - Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under the investor's particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
- --------------------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) eight years(5)
- --------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares - Initial Sales
Charge Alternatives - Class A and Class D Shares - Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding period for certain retirement plans is modified as described
under "Purchase of Shares - Deferred Sales Charge Alternatives - Class B
and Class C Shares - Conversion of Class B Shares to Class D Shares."
Also, Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a shareholder
account are entitled to purchase additional Class A shares of the Fund
in that account. Other eligible investors include certain retirement
plans and participants in certain fee-based programs. In addition, Class
A shares will be offered at net asset value to directors and employees
of 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 to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge is 5.25% is reduced for
purchases of $25,000 and over, and waived for purchases by certain
retirement plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived such
purchases may be subject to a CDSC of 1.0% if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings of
all classes of all MLAM-advised mutual funds. See "Purchase of Shares -
Initial Sales Charge Alternatives - Class A and Class D Shares."
5
<PAGE>
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately eight years after issuance,
Class B shares will convert automatically to Class D shares of the Fund,
which are subject to an account maintenance fee of 0.25% but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert to Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, as will the Class D account maintenance fee of
the acquired fund upon the conversion and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares to Class D shares will
occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans, are modified as described under "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares -
Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject to
higher distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
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
Fund's average net assets attributable to Class D shares. Class D shares
are not subject to an ongoing distribution fee or any CDSC when they are
redeemed. The maximum initial sales charge of 5.25% is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge is
waived such purchase may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described above
under "Class B." See "Purchase of Shares - Initial Sales Charge
Alternatives - Class A and Class D Shares."
6
<PAGE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine
it to be most advantageous to have all their funds invested initially and
intend to hold their shares for an extended period of time. Investors in Class
B shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees
are further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares - Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the Fund by Deloitte & Touche LLP,
independent auditors. Financial statements for the fiscal year ended January
31, 1998 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the financial statements.
Further information about the performance of the Fund is contained in the
Fund's most recent annual report to shareholders which may be obtained, without
charge, by calling or writing the Fund at the telephone number or address on
the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
Class A
=================================================
For the Year Ended January 31,
=================================================
1998++ 1997++ 1996++ 1995++
=========== =========== =========== =============
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ........ $17.16 $16.26 $ 13.55 $ 16.39
-------- -------- ------- ---------
Investment income - net ..................... .07 .08 .07 .09
Realized and unrealized gain (loss) on
investments and foreign currency
transactions - net ......................... 1.99 3.04 4.19 (1.97)
-------- -------- ------- ---------
Total from investment operations ............. 2.06 3.12 4.26 (1.88)
-------- -------- ------- ---------
Less dividends and distributions:
Investment income - net ..................... - - - -
Realized gain on investments - net .......... (3.61) (2.22) (1.55) (.96)
--------- --------- ------- ---------
Total dividends and distributions ............ (3.61) (2.22) (1.55) (.96)
--------- --------- ------- ---------
Net asset value, end of period ............... $ 15.61 $17.16 $ 16.26 $ 13.55
========= ========= ======= =========
Total Investment Return:**
Based on net asset value per share .......... 12.43% 19.99% 31.82% (11.23%)
========= ========= ======= ==========
Ratios to Average Net Assets:
Expenses .................................... .99% 1.00% 1.07% .98%
========= ========= ======= =========
Investment income - net ..................... .40% .46% .44% .59%
========= ========= ======= =========
Supplemental Data:
Net assets, end of period (in thousands) $13,552 $ 39,605 $ 34,231 $ 8,665
========= ========= ======= =========
Portfolio turnover .......................... 17.63% 39.96% 67.38% 45.86%
========= ========= ======= =========
Average Commission Rate Paid## .............. $ .0003 $ .0277 - -
========= ========= ======= =========
<CAPTION>
Class A
=========================================================================
For the Year Ended January 31,
=========================================================================
1994 1993 1992 1991 1990 1989+
=========== =========== =========== =========== =========== =============
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ........ $ 16.29 $ 16.84 $ 15.49 $ 15.26 $ 14.96 $ 16.05
------- ------- ------- ------- ------- --------
Investment income - net ...................... .15 .25 .36 .41 .30 .08
Realized and unrealized gain (loss) on
investments and foreign currency
transactions - net .......................... 2.18 .49 3.74 .59 1.45 .43
------- ------- ------- ------- ------- --------
Total from investment operations ............. 2.33 .74 4.10 1.00 1.75 .51
------- ------- ------- ------- ------- --------
Less dividends and distributions:
Investment income - net ..................... - (.23) (.35) (.40) (.41) (.13)
Realized gain on investments - net .......... (2.23) (1.06) (2.40) (.37) (1.04) (1.47)
------- ------- -------- -------- -------- ---------
Total dividends and distributions ............ (2.23) (1.29) (2.75) (.77) (1.45) (1.60)
------- ------- -------- -------- -------- ---------
Net asset value, end of period ............... $16.39 $ 16.29 $ 16.84 $ 15.49 $ 15.26 $ 14.96
========= ========= ======= ====== ======== ========
Total Investment Return:**
Based on net asset value per share ........... 15.78% 4.79% 28.35% 6.64% 10.92% 3.90%#
========= ========= ======= ======= ======= =======
Ratios to Average Net Assets:
Expenses ..................................... .88% .90% .95% .96% .89% .91%*
========= ========= ======= ======= ======= ========
Investment income - net ...................... .95% 1.35% 1.81% 2.58% 2.20% 1.87%*
========= ========= ======= ======= ======= ========
Supplemental Data:
Net assets, end of period (in thousands) $10,942 $11,394 $ 8,846 $ 5,478 $ 4,466 $ 476
========= ========= ======= ======= ====== ========
Portfolio turnover .......................... 48.63% 40.58% 48.28% 25.57% 15.23% 10.26%
========= ========= ======= ======= ====== ========
Average Commission Rate Paid## .............. - - - - - -
========= ========= ======= ======= ======= ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on October 26, 1988.
++ Based on average shares outstanding.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Class B
=====================================================
For the Year Ended January 31,
=====================================================
1998+ 1997+ 1996+ 1995+
============= ============= ============ ============
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating Performance:
Net asset value, beginning of year .... $ 16.59 $ 15.79 $ 13.33 $ 16.30
------- -------- -------- --------
Investment income (loss) - net ........ (.13) (.10) (.08) (.06)
Realized and unrealized gain (loss)
on investments and foreign
currency transactions - net .......... 1.92 2.95 4.09 (1.96)
-------- -------- -------- --------
Total from investment operations ...... 1.79 2.85 4.01 (2.02)
-------- -------- -------- --------
Less dividends and distributions:
Investment income - net .............. - - - -
Realized gain on
investments - net ................... (3.37) ( 2.05) (1.55) (.95)
-------- -------- --------- --------
Total dividends and distributions ..... (3.37) (2.05) (1.55) (.95)
-------- -------- --------- --------
Net asset value, end of year .......... $ 15.01 $ 16.59 $ 15.79 $ 13.33
======== ========= ======== ========
Total Investment Return:*
Based on net asset value per share 11.20% 18.80% 30.43% (12.22%)
======== ========= ======== ========
Ratios to Average Net Assets:
Expenses ............................. 2.03% 2.06% 2.13% 1.99%
======== ========= ======== ========
Investment income (loss) - net ....... (.74%) (.58%) (.55%) (.38%)
======== ========= ======== ========
Supplemental Data:
Net assets, end of year (in
thousands) .......................... $ 60,646 $104,828 $112,239 $119,186
======== ========= ======== ========
Portfolio turnover ................... 17.63% 39.96% 67.38% 45.86%
======== ========= ======== ========
Average Commission Rate Paid ## $ .0003 $ .0277 - -
======== ========= ======== ========
<CAPTION>
Class B
=============================================================================
For the Year Ended January 31,
=============================================================================
1994 1993 1992 1991 1990 1989
============ ============ ============ ============ ============ ============
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating Performance:
Net asset value, beginning of year .... $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94 $ 13.78
-------- -------- -------- -------- -------- --------
Investment income (loss) - net ........ (.01) .06 .14 .24 .21 .20
Realized and unrealized gain (loss)
on investments and foreign
currency transactions - net .......... 2.17 .52 3.77 .60 1.36 2.72
-------- -------- -------- -------- -------- --------
Total from investment operations ...... 2.16 .58 3.91 .84 1.57 2.92
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income - net .............. - (.06) (.17) (.23) (.23) (.20)
Realized gain on
investments - net ................... (2.14) (1.06) (2.40) (.37) (1.04) (1.56)
-------- -------- -------- -------- -------- --------
Total dividends and distributions ..... (2.14) (1.12) (2.57) (.60) (1.27) (1.76)
-------- -------- -------- -------- -------- --------
Net asset value, end of year .......... $ 16.30 $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94
============ ============ ============ ============ ============ ============
Total Investment Return:*
Based on net asset value per share 14.60% 3.75% 26.96% 5.59% 9.77% 22.11%
============ ============ ============ ============ ============ ============
Ratios to Average Net Assets:
Expenses .............................. 1.91% 1.92% 1.98% 2.00% 1.93% 1.96%
============ ============ ============ ============ ============ ============
Investment income (loss) - net ........ (.07%) .36% .83% 1.53% 1.20% 1.18%
============ ============ ============ ============ ============ ============
Supplemental Data:
Net assets, end of year (in
thousands) ........................... $396,424 $447,186 $ 476,106 $442,944 $516,402 $562,899
============ ============ ============ ============ ============ ============
Portfolio turnover .................... 48.63% 40.58% 48.28% 25.57% 15.23% 10.26%
============ ============ ============ ============ ============ ============
Average Commission Rate Paid ## ....... - - - - - -
============ ============ ============ ============ ============ ============
</TABLE>
- --------
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class C++
=========================================================
For the Year Ended
January 31, For the Period
======================================= October 21,
1994+ to
January 31,
1998 1997 1996 1995
============= ============= =========== =================
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ...... $ 16.47 $ 15.71 $ 13.28 $ 14.08
------- ------- -------- ---------
Investment income (loss) - net ............ (.11) (.10) (.10) (.04)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions - net ....................... 1.88 2.94 4.08 (.54)
-------- -------- -------- ----------
Total from investment operations ........... 1.77 2.84 3.98 (.58)
-------- -------- -------- ----------
Less distributions from realized gain on
investments - net ......................... (3.30) (2.08) (1.55) (.22)
-------- -------- -------- ----------
Net asset value, end of period ............. $ 14.94 $ 16.47 $ 15.71 $ 13.28
======== ======== ========= ==========
Total Investment Return:**
Based on net asset value per share ........ 11.15% 18.80% 30.32% (4.12%)#
======== ======== ========= ==========
Ratios to Average Net Assets:
Expenses .................................. 2.06% 2.07% 2.14% 2.26%*
======== ======== ========= ==========
Investment income (loss) - net ............ (.68%) (.61%) (.67%) (.87%)*
======== ======== ========= ==========
Supplemental Data:
Net assets, end of period (in thousands) .. $2,926 $ 8,430 $6,385 $ 80
======== ======== ========= ==========
Portfolio turnover ........................ 17.63% 39.96% 67.38% 45.86%
======== ======== ========= ==========
Average Commission Rate Paid ## ........... $.0003 $ .0277 - -
======== ======== ========= ==========
<CAPTION>
Class D++
=========================================================
For the Period
For the Year Ended October 21,
January 31, 1994+ to
======================================= January 31,
1998 1997 1996 1995
============= ============ ============ =================
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ...... $ 17.09 $ 16.20 $ 13.54 $ 14.26
-------- -------- ------- ---------
Investment income (loss) - net ............ -+++ .04 .03 (.01)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions - net ....................... 1.99 3.03 4.18 (.49)
-------- -------- ------- ----------
Total from investment operations ........... 1.99 3.07 4.21 (.50)
-------- -------- ------- ----------
Less distributions from realized gain on
investments - net ......................... (3.56) (2.18) (1.55) (.22)
-------- --------- -------- ----------
Net asset value, end of period ............. $ 15.52 $ 17.09 $ 16.20 $ 13.54
======= ======== ======= =========
Total Investment Return:**
Based on net asset value per share ........ 12.07% 19.73% 31.47% (3.50%)#
======= ======== ======= =========
Ratios to Average Net Assets:
Expenses .................................. 1.23% 1.25% 1.33% 1.43%*
======= ======== ======= =========
Investment income (loss) - net ............ (.01%) .22% .22% (.23%)*
======= ======== ======= =========
Supplemental Data:
Net assets, end of period (in thousands) .. $231,695 $238,260 $227,908 $156,947
======= ======== ======= =========
Portfolio turnover ........................ 17.63% 39.96% 67.38% 45.86%
======= ======= ======= =========
Average Commission Rate Paid ## ........... $ .0003 $ .0277 - -
======= ======== ======= =========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Amount is less than (.01) per share.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted in U.S. dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
10
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. The Fund
seeks to achieve its objective by investing in a quality-oriented portfolio of
securities, primarily common stock. Using a thematic approach of investing in
long-term trends, management will seek to identify important investment
concepts of the future and review existing concepts to confirm their validity
in meeting the Fund's objective. As part of this thematic approach, management
will seek to identify companies whose products and services are believed to
represent attractive investment opportunities. It is anticipated that the Fund
will invest primarily in common stocks of such companies. However, when
management believes it is advisable to do so, the Fund may invest in other
securities, including, but not limited to, convertible securities, preferred
stocks and bonds. The Fund does not presently intend to purchase bonds rated
lower than BBB by Standard & Poor's Ratings Group ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's"). See "Investment Practices and Restrictions
- - Investment Grade Debt Securities." While no one can predict the prices of
securities from day to day, the Fund attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. The Fund's investment objective
is non-fundamental and may be changed by the Board of Directors without a vote
of the shareholders. No assurance can be given that the Fund will be able to
achieve its investment objective.
In seeking to identify quality companies, particular emphasis is placed by
management on common stocks of companies that are believed to have internal
strengths, such as good financial resources, a satisfactory rate of return on
capital, a good industry position and superior management skills. Management
believes that companies with these characteristics have a good chance of
achieving consistent earnings growth, which in turn should make it likely that
the prices of their stocks will increase over time.
The Fund may invest in securities issued by large, medium and small
capitalized companies. Investments in securities of smaller capitalized
companies involve special considerations and risks, including risks associated
with limited product lines, markets or financial and management resources;
risks associated with lesser frequency and volume of trading of stocks of
smaller capitalized issuers as compared to larger capitalized issuers and the
greater effect of abrupt or erratic price movements on smaller capitalized
issuers; and risks associated with the sensitivity of smaller capitalized
issuers to market changes.
The Fund may invest up to 25% of its assets in the securities of foreign
issuers, including issuers in foreign countries with smaller capital markets.
The Fund reserves the right to invest, temporarily, all or a portion of its
assets in high quality money market securities (such as U.S. Treasury bills,
bank certificates of deposit, commercial paper and repurchase agreements) for
purposes of enhancing liquidity and avoiding the effects of declining stock
prices when it seems advisable to do so in light of prevailing market or
economic conditions. The proportion of the Fund's assets that is invested in
money market securities will vary from time to time.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Board of
Directors of the Fund is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the directors
of investment companies by the Investment Company Act.
11
<PAGE>
The Directors of the Fund are:
ARTHUR ZEIKEL* - Chairman of the Investment Adviser and its affiliate,
FAM; Chairman and Director of Princeton Services, Inc.; and Executive Vice
President of ML & Co.
RONALD W. FORBES - Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY - Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY - Self-employed financial consultant; former President
and Chief Investment Officer of Versus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN - Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST - Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
The Investment Adviser, with offices at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 (mailing address: P.O. Box 9011, Princeton, New
Jersey 08543-9011), is owned and controlled by ML & Co., a financial services
holding company, and the parent of Merrill Lynch. The Investment Adviser
manages the investment of the Fund's assets, provides administrative services
and manages the Fund's business affairs. These services are subject to general
oversight by the Fund's Board of Directors. The Investment Adviser or an
affiliate of the Investment Adviser, FAM, currently serves as the investment
adviser to over 100 registered investment companies. The Investment Adviser
also offers portfolio management services to individual and institutional
accounts. As of January 31, 1998, the Investment Adviser and FAM had a total of
approximately $287.0 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser.
Vincent P. Dileo is the portfolio manager for the Fund. Mr. Dileo, a First
Vice President of the Investment Adviser since 1998 was a Vice President of the
Investment Adviser from 1984 to 1998.
Advisory Fee
The shareholders have approved an Investment Advisory Agreement (the
"Advisory Agreement") pursuant to which the Fund pays the Investment Adviser a
monthly fee based upon the average daily value of the portfolio's net assets at
the following annual rates: 0.65% of the average daily net assets not exceeding
$750 million; 0.60% of the average daily net assets exceeding $750 million but
not exceeding $1 billion; and 0.55% of the average daily net assets exceeding
$1 billion. For the fiscal year ended January 31, 1998, the fee paid by the
Fund to the Investment Adviser was $2,263,650 (based on average daily net
assets of approximately $349.2 million). For the fiscal year ended January 31,
1998, the ratio of total expenses to average net assets was .99%, 2.03%, 2.06%
and 1.23% for Class A, Class B, Class C and Class D shares, respectively.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary
of ML & Co. and an affiliate of the Investment Adviser pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K., but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
12
<PAGE>
Transfer Agency Services Fee
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of up to $11.00 per Class A or Class
D account and up to $14.00 per Class B or Class C account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. Additionally, a $.20
monthly closed account charge will be assessed on all accounts which close
during the calendar year. Application of this fee will commence the month
following the month the account is closed. At the end of the calendar year, no
further fees will be due. For purposes of the Transfer Agency Agreement, the
term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended January 31, 1998, the total fee paid by the Fund to the Transfer
Agent pursuant to the Transfer Agency Agreement was $723,521.
Reimbursement for Portfolio Accounting Services
Accounting services are provided to the Fund by the Investment Adviser,
and the Fund reimburses the Investment Adviser for its costs in connection with
such services on a semi-annual basis. For the fiscal year ended January 31,
1998, the Fund reimbursed the Investment Adviser $90,076 for accounting
services.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the 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 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 Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Investment Adviser and
Merrill Lynch, acts as the distributor of the shares of the Fund. Shares of the
Fund are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase is $1000 and the minimum
subsequent purchase is $50, except that (i) for retirement plans, the minimum
initial purchase is $100 and the
13
<PAGE>
minimum subsequent purchase is $1, and (ii) for participants in certain fee
based programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("NYSE") (generally 4:00 p.m., New York time), which include
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor
in turn receives orders from the securities brokers prior to 30 minutes after
the close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business day. The Fund or
the Distributor may suspend the offering of the Fund's shares of any class at
any time in response to conditions in the securities markets or otherwise and
may thereafter resume such offering from time to time. Any order may be
rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Purchases made
directly through the Fund's Transfer Agent are not subject to the processing
fee.
The Merrill Lynch Select Pricing(SM) System, permits each investor to
choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances. Shares of Class A
and Class D are sold to investors choosing the initial sales charge alternatives
and shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to a CDSC and ongoing distribution fees.
A discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is
set forth under "Merrill Lynch Select Pricing(SM) System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B Shareholders may vote upon
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services - Exchange Privilege."
14
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
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> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
- --------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) eight years(5)
- --------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- --------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares - Initial Sales
Charge Alternatives - Class A and Class D Shares - Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividended reinvestment shares and the conversion
and holding period for certain retirement plans is modified as described
under "Purchase of Shares - Deferred Sales Charge Alternatives - Class B
and Class C Shares - Conversion of Class B Shares to Class D Shares."
Also, Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 RATHER THAN CLASS D SHARES
BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.
15
<PAGE>
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 Sales Load Discount to
as Percentage as Percentage* Selected Dealers
of Offering of the Net as Percentage of the
Amount of Purchase Price Amount Invested Offering Price
========================================== =============== ================= =====================
<S> <C> <C> <C>
Less than $25,000......................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000............. 4.75 4.99 4.50
$50,000 but less than $100,000............ 4.00 4.17 3.75
$100,000 but less than $250,000........... 3.00 3.09 2.75
$250,000 but less than $1,000,000......... 2.00 2.04 1.80
$1,000,000 and over**..................... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plan
investors and participants in certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more of the
Fund, such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The 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 Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). The proceeds from the account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities. During
the fiscal year ended January 31, 1998, the Fund sold 1,197,905 Class A shares
for aggregate net proceeds of $20,864,302. The gross sales charges for the sale
of Class A shares of the Fund for that year were $3,463, of which $262 and
$3,201 were received by the Distributor and Merrill Lynch, respectively. No
CDSCs were received with respect to Class A shares for which the initial sales
charge was waived during the fiscal year ended January 31, 1998. During the
fiscal year ended January 31, 1998, the Fund sold 265,722 Class D shares for
aggregate net proceeds of $4,736,667. The gross sales charges for the sale of
Class D shares of the Fund for that year were $38,224, of which $2,297 and
$35,927 were received by the Distributor and Merrill Lynch, respectively. For
the same period, no CDSCs were received with respect to Class D shares for
which the initial sales charge was waived.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer-Sponsored Retirement or Savings Plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs and U.S. branches of foreign banking institutions provided that
the program or branch has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML &
Co. and its subsidiaries and their directors
16
<PAGE>
and employees and to members of the Boards of investment companies advised by
MLAM or its affiliates, including the Fund. Certain persons who acquired shares
of certain closed-end funds advised by MLAM or its affiliates in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund")
and if certain conditions set forth in the Statement of Additional Information
are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
("Municipal Strategy Fund") and Merrill Lynch High Income Municipal Bond Fund,
Inc. ("High Income Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.
Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the High Income Fund or the Municipal Strategy Fund
may purchase Class A shares at net asset value rather than Class D shares
provided that (i) the shares to be purchased are held in the same account as
the Class A shares that the shareholder already owns, and (ii) all other
requirements pertaining to the reinvestment privilege are met.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services - Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or
Class D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Municipal
Strategy Fund and High Income Fund and Class A shares are offered at net asset
value to shareholders of Senior Floating Rate Fund who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch from
another investment firm within six months prior to the date of purchase if
certain conditions set forth in the Statement of Additional Information are
met. Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies.
Class D shares also are offered at net asset value, without sales charge,
to an investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
17
<PAGE>
Deferred Sales Charge Alternatives - Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year while Class C shares are subject only to a one year
1.00% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted to Class
D shares of the Fund and thereafter will be subject to lower continuing fees.
See "Conversion of Class B Shares to Class D Shares" below. Both Class B and
Class C shares are subject to an account maintenance fee at an annual rate of
0.25% of average daily net assets and a distribution fee of 0.75% of net assets
as discussed below under "Distribution Plans." The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares, from its own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately eight years after
issuance, Class B shares will convert automatically to Class D shares of the
Fund, which are subject to an account maintenance fee but no distribution fee;
Class B shares of certain other MLAM-advised mutual funds into which exchanges
may be made convert to Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
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." Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services -
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges - Class B Shares. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
18
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
as a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
============================= ==================
<S> <C>
0-1 ...................... 4.00%
1-2 ...................... 3.00
2-3 ...................... 2.00
3-4 ...................... 1.00
4 and thereafter ......... 0.00
</TABLE>
For the fiscal year ended January 31, 1998, the Distributor received CDSCs
of $81,549 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to 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 2.00% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans and in connection with
certain group plans placing orders through the Merrill Lynch Blueprint(SM)
Program. The CDSC also is waived for any Class B shares that are purchased by
eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC also is waived for any Class B shares
that are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The Class B CDSC also
is waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services - Fee-Based Programs."
Contingent Deferred Sales Charges - Class C Shares. Class C shares that
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares
19
<PAGE>
being redeemed. Accordingly, no Class C CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no Class C CDSC
will be assessed on shares derived from reinvestment of dividends or capital
gains distributions. The Class C CDSC may be waived in connection with certain
fee-based programs. See "Shareholder Services - Fee-Based Programs." For the
fiscal year ended January 31, 1998, the Distributor received CDSCs of $2,260
with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
to Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee at an annual rate of 0.25% of average daily net assets but are
not subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares to Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset values
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply and the holding period for the shares exchanged will be "tacked"
onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent
20
<PAGE>
to such conversion, that Class B Retirement Plan will be sold Class D shares of
the appropriate funds at net asset value per share.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services -
Fee-Based Programs."
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable
to shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of 0.75%
of the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended January 31, 1998, the Fund paid the Distributor
$800,509 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $80.3
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 January 31, 1998, the Fund paid the
Distributor $49,658 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$5.0 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 January 31, 1998, the Fund paid the
Distributor $599,540 pursuant to the Class D Distribution Plan (based on
average daily net assets subject to such Class D Distribution Plan of
approximately $240.5 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based upon 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
21
<PAGE>
their deliberations as to the continuance of the Class B and Class C
Distribution Plans. This information is presented annually as of December 31 of
each year on a "fully allocated accrual" basis and quarterly on a "direct
expense and revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the CDSC and certain
other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation. With respect to Class B shares, as of December 31, 1997, the last
date for which fully allocated accrual data is available, the fully allocated
accrual revenues incurred by the Distributor and Merrill Lynch since the Class B
shares commenced operations on March 5, 1984 exceeded fully allocated accrual
expenses for such period by approximately $13,736,000 (21.40% of Class B net
assets at that date). For the Class C shares, as of December 31, 1997, the fully
allocated accrual revenues incurred by the Distributor and Merrill Lynch since
the Class C shares commenced operations exceeded fully allocated accrual
expenses for such period by approximately $22,000 (0.75% of Class C assets at
that date). As of January 31, 1998, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$47,593,009 (78.48% of Class B net assets at that date). With respect to Class C
shares, as of January 31, 1998, direct cash revenues for the period since
October 21, 1994 (commencement of operations) exceeded direct cash expenses by
$116,453 (3.98% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee,
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares - Conversion of
Class B Shares to Class D Shares."
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the NASD Conduct Rules imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestment
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances, the amount
22
<PAGE>
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REPURCHASE AND REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. Except for any CDSC which may be applicable, there will
be no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
Repurchase
The Fund will repurchase shares through a shareholder's listed securities
dealer. The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next computed
after receipt of the order by the dealer, less any applicable CDSC, provided
that the request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally 4:00 p.m., New York time) on the day received,
and such request is received by the Fund from such dealer not later than 30
minutes after the close of business on the NYSE on the same day.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund (other than any applicable CDSC); however,
non-affiliated securities dealers may impose a service charge on the
shareholder for effecting such repurchases. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm the repurchase of
shares to such customers. Repurchases made directly through the Fund's Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might adversely
affect shareholders seeking redemption through the repurchase procedure.
However, a shareholder whose order for repurchase is rejected by the Fund may
redeem shares as set forth below.
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. Redemption requests should not be sent to the Fund. Except
for any CDSC which may be applicable, there will be no charge for redemption if
you send your request directly to the Transfer Agent.
To redeem through the Transfer Agent you must send a written request in
proper form. The request for redemption must be signed by all persons in whose
names the shares are registered, and the names must be exactly the same as the
names that were signed when the shares were bought. The signatures must also be
guaranteed. A "guaranteed" signature does not mean the same thing as a
"notarized" signature. The signature(s) on the redemption request must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, the existence and validity
of which may be verified by the Transfer Agent through the use of industry
publications.
23
<PAGE>
Generally, the properly signed written request, with the signatures
guaranteed, will be all you need to send to redeem your shares. In some cases,
however, other documents may be necessary. For example, although the Fund
normally does not issue certificates for shares, it will do so if you make a
special request to the Transfer Agent. If you have asked for and received
certificates for your shares, certificates for the shares being redeemed must
accompany your redemption request. In other cases, the Transfer Agent might
require additional documents, such as trust instruments, death certificates,
appointments as executor or administrator of an estate or certificates of
corporate authority.
The payment for your redemption will be mailed to you within seven days
after the Transfer Agent receives the request in proper form. Exceptions to
this are if normal trading is not taking place on the New York Stock Exchange,
or if the shares to be redeemed have recently been purchased by check and the
check has not yet cleared. If the purchase check has not yet cleared, the
Transfer Agent may delay mailing a redemption check until the purchase check
has cleared, which is usually within ten days after payment of the purchase
price.
Reinstatement Privilege - Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares
of the Fund, as the case may be, at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in its shares. 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 plans and
services, or to change options with respect thereto, can be obtained from the
Fund by calling the telephone number on the cover page of this Prospectus or
from the Distributor or Merrill Lynch. Included in such services are the
following:
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders may also 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 may be opened at the Transfer Agent. Shareholders
considering transferring their Class A or Class D shares from
24
<PAGE>
Merrill Lynch to another brokerage firm or financial institution should be
aware that if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, the shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm or
such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, the shareholder must either
redeem the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain a retirement account at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Automatic Reinvestment of Dividends and Capital Gains Distributions
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined after the close of the New York Stock Exchange on the ex-dividend
date of such dividend or distribution. A shareholder whose account is
maintained through the Transfer Agent 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 (provided that, in the event that a payment on an
account maintained at the Transfer Agent would amount to $10.00 or less, a
shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks. A shareholder whose account is accepted through Merrill
Lynch may, at any time, by notice to Merrill Lynch, elect to have both
dividends and capital gains distributions paid in cash, rather than reinvested.
Cash payments can also be directly deposited to the shareholder's bank account.
No CDSC will be imposed on redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans
A 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 shareholder's bank account on either a
monthly or quarterly basis. A shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bi-monthly, quarterly, semi-annual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program, subject to certain conditions. With respect to
redemptions of Class B and Class C shares pursuant to a systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed from
an account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan was
made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be
25
<PAGE>
waived. Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are otherwise redeemed.
See "Purchase of Shares - Deferred Sales Charge Alternatives - Class B and
Class C Shares - Contingent Deferred Sales Charges - Class B Shares" and " -
Contingent Deferred Sales Charges - Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- - Deferred Sales Charge Alternatives - Class B and Class C Shares - Conversion
of Class B Shares to Class D Shares."
Automatic Investment Plans
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his regular bank account. Investors who maintain CMA(Reg. TM) or CBA(Reg.
TM) accounts may arrange to have periodic investments made to the Fund in their
CMA(Reg. TM) or CBA(Reg. TM) accounts or in certain related accounts in amounts
of $100 or more through the CMA(Reg. TM) or CBA(Reg. TM) Automated Investment
Program.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit other
classes of shares which will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
Retirement Plans
Self-directed individual retirement accounts and other retirement plans
are available from Merrill Lynch. Under these plans, investments may be made in
the Fund and certain other mutual funds whose shares are distributed by the
Distributor, as well as in other securities. Merrill Lynch charges an initial
establishment fee and an annual custodial fee for each account. The minimum
initial purchase to establish any such plan is $100 and the minimum subsequent
purchase is $1.
Shareholders considering transferring a tax-deferred retirement account
such as an 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 being transferred will not take delivery of
shares of the Fund, the shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or continue to maintain a retirement account at Merrill Lynch for
those shares.
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Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable for shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period for the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds advised by MLAM or its
affiliate 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 Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a purchase of the
acquired shares and a sale of the exchanged shares for Federal income tax
purposes. For further information, see "Shareholder Services - Exchange
Privilege" in the Statement of Additional Information.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
In addition to any increase in the value of your shares, you may receive
two kinds of return from the Fund: dividends and capital gains distributions.
Dividends
Dividends from stocks and interest earned from other investments are the
Fund's main sources of income. Substantially all of this income, less expenses,
is distributed at least semi-annually to shareholders.
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."
Your dividends will be automatically applied to purchase additional shares
of the Fund through our shareholder reinvestment program at the net asset value
per share on the ex-dividend date, unless you notify your Merrill Lynch
financial consultant or the Transfer Agent in writing that you would rather
receive dividends in cash. There is no sales charge for purchases of additional
shares through our reinvestment program. If you give instructions to pay your
dividends in cash, your instructions will take effect 10 days after Merrill
Lynch or the Transfer Agent receives them. Dividends and distributions are
taxable to shareholders as described below whether they are reinvested in
shares of the Fund or received in cash.
Capital Gains
When the Fund sells securities from its portfolio, it can realize capital
gains or losses, depending on whether the prices for which the securities are
sold are higher or lower than the prices the Fund paid to purchase them. Net
realized capital gains represent the total profit from sales of securities,
minus total losses from sales of securities, including any losses carried
forward from prior years. The Fund distributes any net realized capital gains
to shareholders at least annually. As in the case of income dividends, capital
gains distributions will be automatically reinvested in additional shares of
the Fund at the net asset value per share in effect on the ex-dividend date,
without a sales charge, unless you give your Merrill Lynch financial consultant
or the Transfer Agent 10 days' prior instructions to pay them in cash.
Taxes
The Fund intends to continue to qualify as a regulated investment company
("RIC") under the Code and as a condition of such election the Fund intends to
distribute substantially all of its net investment income and net capital gains
to shareholders. If the Fund qualifies as a RIC, it will not be required to pay
Federal income tax on the portion of its investment company taxable income and
net capital gains which is distributed to its shareholders.
In addition, all RICs are required to pay a nondeductible 4% excise tax to
the extent the RIC does not distribute, during each calendar year, (i) 98% of
its ordinary income, determined on a calendar year basis, (ii) 98% of its
capital gains, determined, in general, on an October 31 year end, and (iii) all
ordinary income and net capital gains for previous years that were not
distributed during such years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of a taxable income and
gain will be distributed to avoid imposition of the tax. In such event, the
Fund will be liable for the excise tax only on the amount by which the Fund
does not meet the foregoing distribution requirement.
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Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income.
Any capital gains (i.e., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gains distributions. A portion of the
Fund's ordinary income dividends may be eligible for the dividends received
deduction allowed to corporate shareholders under the Code, if certain
requirements are met. If the Fund pays a dividend in January which was declared
in the previous October, November or December to shareholders of record on a
date during one of such months, then such dividend or distribution will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which the dividend was declared.
Any gain or loss realized upon the sale or redemption of shares of the
Fund by a shareholder who is not a dealer in securities will be treated as
capital gain or loss. In the case of an individual, any such capital gain will
be treated as short-term capital gain if the shares were held for not more than
12 months, gain taxable at the maximum rate of 28%, if such shares were held
for more than 12, but not more than 18 months, and gain taxable at the maximum
rate of 20% if such shares were held for more than 18 months. In the case of a
corporation, any such capital gain will be treated as long-term capital gain,
taxable at the same rates as ordinary income, if such shares were held for more
than 12 months. Any such capital loss will be treated as long-term capital loss
if the shares have been held for more than one year and otherwise as short-term
capital loss. However, any loss realized by a shareholder upon the sale of
shares of the Fund held by the shareholder for six months or less will be
treated as long-term capital loss to the extent of capital gains distributions
received by the shareholder.
Pursuant to the Fund's investment objectives, the Fund may invest in
foreign securities. Foreign taxes may be paid by the Fund as a result of tax
laws of countries in which the Fund may invest. It is impossible to determine
the amount of any such withholding at this time. Because the Fund limits its
investments in foreign securities, shareholders will not be entitled to claim
foreign tax credits with respect to their share of foreign taxes paid by the
Fund on income from investments of foreign securities held by the Fund.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provision of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax.
To avoid being subject to a 31% Federal back-up withholding tax on
reportable dividend and capital gains distributions and on the proceeds of
redemptions, a shareholder must furnish the Fund with his taxpayer
identification number and must certify under penalty of perjury that such
number is correct. The taxpayer identification number of a shareholder who is
an individual is his social security number. An investor must also certify
whether he or
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she is currently subject to back-up withholding or has been notified by the IRS
that he or she will be subject to back-up withholding.
If a shareholder exercises an exchange privilege within 90 days of
acquiring shares of the Fund, then any loss recognized on the exchange will be
reduced (or any gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge that would have been owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
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.
Dividends and capital gains distributions, as well as gain on the sale of
shares of the Fund, may also be subject to state and local taxes.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. The laws
of the various states may vary as to the taxation of distributions of the Fund.
Shareholders are urged to consult their own tax advisers regarding specific
questions regarding the Federal, state or local taxation of distributions from
the Fund. For a further discussion of the tax considerations with respect to
owning Fund shares, see the discussion in the Statement of Additional
Information under "Dividends, Distributions and Taxes."
INVESTMENT PRACTICES AND RESTRICTIONS
Lending of Portfolio Securities
The Fund may from time to time lend securities from its portfolio, with a
value not exceeding 33 1/3% of its total assets, to banks, brokers and other
financial institutions. This practice is intended to help the Fund increase the
yield on its portfolio.
Writing of Covered Call Options
The Fund may, from time to time, sell (i.e., "write") covered call options
where the Investment Adviser determines that such transactions will further the
Fund's investment objective. A covered call option is an option where the Fund,
in return for a premium, gives another party a right to buy particular
securities owned by the Fund at a specified price for a certain period of time.
By writing a covered call option, the Fund, in return for the premium income
realized from the sale of the option, gives up the opportunity to profit from a
price increase in the underlying security above the option exercise price,
where the price increase occurs while the option is in effect. In addition, the
Fund's ability to sell the underlying security will be limited while the option
is in effect. The Fund may not write covered call options on underlying
securities having a value exceeding 15% of the value of its total assets.
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Foreign Securities
Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Foreign securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may
be subject to withholding and other foreign taxes which may adversely affect
the net return on such investments. In addition, with respect to certain
countries, there are risks of expropriation, confiscatory taxation, political
or social instability or diplomatic developments that could affect assets of
the Fund held in foreign countries.
There may be less publicly available information about a foreign company
than a U.S. company. Foreign securities markets may have substantially less
volume than U.S. securities markets and some foreign company securities are
less liquid and more volatile than comparable securities of U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of such portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. In addition, a portfolio which includes foreign
securities can expect to have a higher expense ratio because of the increased
transaction costs on non-U.S. securities markets and the increased costs of
maintaining the custody of foreign securities.
Like investment in foreign markets generally, investment in foreign
countries with smaller capital markets involves risks not involved in domestic
investment, including fluctuations in foreign exchange rates, less liquidity
and greater price volatility in these markets, future political and economic
developments, different legal systems and the existence or possible imposition
of exchange contracts or other foreign or U.S. governmental laws or
restrictions applicable to such investments. However, the risks associated with
foreign investment are heightened for investments in smaller capital markets.
Portfolio Brokerage
Orders for transactions in portfolio securities are placed for the Fund
with a number of brokers and dealers, including Merrill Lynch. Merrill Lynch
has advised the Fund that, in transactions with Merrill Lynch, the Fund
receives a commission rate at least as favorable as the rate Merrill Lynch
charges its other customers in similar transactions.
Investment Grade Debt Securities
The Fund has no present intention of investing in bonds rated lower than
BBB by S&P or Baa by Moody's. Bonds rated BBB (or Baa) may have speculative
characteristics. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. If the rating
of an instrument held by the Fund is changed so that the instrument would no
longer qualify for investment by the Fund, the Fund will seek to dispose of
that instrument as soon as practicable in light of the circumstances and
consistent with the interests of the Fund.
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Illiquid Securities
The Fund may invest up to 15% of its total assets in illiquid securities.
Pursuant to that restriction the Fund may not invest in securities that cannot
be readily resold because of legal or contractual restrictions or that cannot
otherwise be marketed, redeemed, put to the issuer or a third party, or that do
not mature within seven days, or that the Board of Directors has not determined
to be liquid, if, regarding all such securities, more than 15% of its total
assets, taken at market value, would be invested in such securities.
The Fund may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act") but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's
Board of Directors, or the Manager pursuant to guidelines adopted by the Board,
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board of Directors, however, will retain
oversight and is ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board of
Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
Investment Restrictions
The Fund has adopted certain investment restrictions which may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act. Among
its more significant restrictions, the Fund may not:
o With respect to 75% of its total assets, invest more than 5% of its
assets in the securities of any one issuer or purchase more than 10% of the
outstanding voting securities of any one company or more than 10% of any
class of a company's securities, except that such restrictions shall not
apply to securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
o Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without a vote of shareholders, provide
that the Fund may not: (1) borrow amounts in excess of 5% of the value of
the Fund's assets; (2) pledge any of its assets, except that the Fund may
pledge securities having a value of not more than 10% of its total assets
in order to secure permitted borrowings from banks; (3) invest more than 5%
of its assets in companies having a record, together with its predecessors,
of less than three years of continuous operation, if more than 5% of the
Fund's assets would be invested in such securities; or (4) invest in
securities that can not be readily resold because of legal or contractual
restrictions, or which can not be marketed, redeemed or put to the issuer
or a third party, if at the time of the acquisition more than 15% of its
total assets (or 10% to the extent required by state law) would be invested
in such securities.
The full text of the Fund's investment restrictions is set forth under
"Investment Objective and Policies - Investment Restrictions" in the Statement
of Additional Information.
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ADDITIONAL INFORMATION
Year 2000 Issues
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem prior to January 1,
2000. The Investment Adviser has established a dedicated group to analyze these
issues and to implement any systems modifications necessary to prepare for the
Year 2000. Currently, the Investment Adviser does not anticipate that the
transition to the 21st century will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the Investment
Adviser has sought assurances from the Fund's other service providers that they
are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the Fund's other service providers have anticipated every step necessary to
avoid any adverse effect on the Fund attributable to the Year 2000 Problem.
Determination of Net Asset Value
Net asset value per share for all classes is computed 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 the NYSE is open for trading. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies will be 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 per share is determined by
adding together the total market value of all portfolio securities, cash and
other assets held by the Fund, and interest and dividends accrued. All
liabilities, including accrued expenses, are subtracted. The resulting amount
is divided by the total number of shares outstanding to arrive at the net asset
value of each share. In order to determine the price you will pay for your
shares, the Fund uses the first net asset value figure computed after the
Distributor receives your order. The per share net asset value of Class A
shares generally will be higher than the per share net asset value of shares of
the other classes, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to Class D shares; moreover,
the per share net asset value of Class D shares generally will be higher than
the per share net asset value of Class B and Class C shares, reflecting the
daily expense accruals of the distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differential among the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are valued or,
lacking any sales, at the last available bid price for long positions, and at
the last available ask price for short positions. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent
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liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or in the case of
options traded in the OTC market, the last bid price. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund including valuations furnished by a pricing
service retained by the Fund.
Performance Data
The Fund may from time to time include its average annual total return 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 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 initial sales charge in the case of Class A
and Class D shares. Dividends paid by the Fund with respect to all shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees and distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements directed to investors whose purchases
are subject to waiver of the CDSC in the case of Class B and Class C shares
(such as investors in certain retirement plans) or reduced sales charges in the
case of Class A and Class D shares, performance data may take into account the
reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses may be
deducted. See "Purchase of Shares." The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and
are not intended to indicate future performance. The Fund's total return will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or
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losses during the period. The value of an investment in the Fund will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost.
On occasion, the Fund may compare its performance to that of the S&P's 500
Composite Stock Price Index, the Value Line Composite Index, the Dow Jones
Industrial Average, Lipper Analytical Services, Inc., or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. From time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period.
The Fund's average annual total return will vary depending upon market
conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of net capital gains or losses realized by
the Fund during the period. An investment in the Fund will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Organization of the Fund
The Fund was incorporated under Maryland law on October 5, 1983. It has an
authorized capital of 400,000,000 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, each of which consists of 100,000,000 shares. Class A,
Class B, Class C and Class D Common Stock represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares." The Fund
has received an order from the Commission permitting the issuance and sale of
multiple classes of Common Stock. The Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
Shareholders are entitled to one vote for each share held and to
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Fund 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; or (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 Fund and in the net assets of the
Fund 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 Inquiries
Shareholder inquiries should be directed to the Fund at the telephone
number or address set forth on the cover page of this Prospectus.
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
35
<PAGE>
receive separate copies of each report and communication for each of the
shareholder's related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, and/or Fund account number. If you
have any questions regarding this please call your Merrill Lynch Financial
Consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863.
36
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, 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 toll free (800) 637-3766.
============================================================================
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Fund For Tomorrow, 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. ..............................
2. ..............................
3. ..............................
4. ..............................
5. ..............................
6. ..............................
Name .................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ............................................
First Name Initial Last Name
Address ...............................................................
(Zip Code)
Occupation ...........................................................
.....................................................................
Signature of Owner
Name and Address of Employer .......................................
....................................................................
....................................................................
....................................................................
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 Fund For Tomorrow, 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.
37
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC. - AUTHORIZATION FORM (PART 1) -
(Continued)
=====================================================================
3. Social Security Number or Taxpayer Identification Number
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information - Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
Instruction: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to underreporting and
if you have not received a notice from the IRS that backup withholding has been
terminated. The undersigned authorizes the furnishing of this certification to
other Merrill Lynch sponsored mutual funds.
........................... .....................................
Signature of Owner Signature of Co-Owner (if any)
===============================================================================
4. Letter of Intention - Class A and D shares only (See terms and conditions in
the Statement of Additional
Information)
.................., 19.....
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of
Merrill Lynch Fund For Tomorrow, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Fund For Tomorrow,
Inc. 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 Fund For Tomorrow, Inc. held as security.
By: ................. .............................................
Signature of Co-Owner
Signature of Owner (If registered in joint parties, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name .................. (2) Name ...................
Account Number.............. Account Number............
==============================================================================
5. For Dealer Only
Branch Office, Address, Stamp
[ ]
This form when completed, should be mailed to:
Merrill Lynch Fund For Tomorrow, Inc
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent
in connection with transactions under this authorization form and agree to
notify the Distributor of any purchases or sales made under a Letter of
Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We
guarantee the Shareholder's signature.
.............................................................
Dealer Name and Address
By: .........................................................
Authorized Signature of Dealer
[ ] [ ] [ ] [ ] [ ] [ ] [ ] ....................
Branch Code F/C No. F/C Last Name
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Dealer's Customer Account No.
38
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC. - AUTHORIZATION FORM (PART 2)
================================================================================
Note: This form is required to apply for the Systematic Withdrawal Plan or the
Automatic Investment Plans only.
================================================================================
1. Account Registration
(Please Print)
Name ..........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) .....................................................
First Name Initial Last Name
Address .......................................................................
...............................................................................
(Zip Code)
[------------------------------------------------------------]
[------------------------------------------------------------]
Social Security No.
or Taxpayer Identification Number
Account Number ...........................
(if existing account).....................
===============================================================================
2. Systematic Withdrawal Plan - (See terms and conditions in the Statement of
Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in Merrill
Lynch Fund For Tomorrow, 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 _______ or as soon as possible
(month)
thereafter.
Specify the amount of the withdrawal you would like paid to you (check one):
[ ] $______ of [ ]____ % of the current value of [ ] Class A, [ ] Class B*, [ ]
Class C* or [ ] Class D shares in the account.
Specify withdrawal method: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of ......................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print) ..................................................
Address .......................................................................
.......................................................................
Signature of Owner..................................... Date...................
Signature of Co-Owner (if any) ................................................
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I provide
written notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number......................... Account Number............................
Bank Address ..................................................................
..................................................................
Signature of Depositor.................................... Date................
Signature of Depositor.........................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked "VOID" or
a deposit slip from your savings account should accompany this application.
- --------
* Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the systematic withdrawal
plan is made.
39
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC. - AUTHORIZATION FORM (PART 2)-(Continued)
===============================================================================
3. Application for Automatic Investment Plan
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Fund For Tomorrow, 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 an ACH debit each month on my bank
account for investment in Merrill Lynch Fund For Tomorrow, Inc., as indicated
below:
Amount of each ACH debit $ ..................................................
Account No. .................................................................
Please date and invest ACH debits on the 20th of each month beginning
- ------ or as soon as possible thereafter.
(month)
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 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 .....................
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.
40
<PAGE>
[This page intentionally left blank.]
<PAGE>
[This page intentionally left blank.]
<PAGE>
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
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
Counsel
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund, 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>
<CAPTION>
Page
=====
TABLE OF CONTENTS
<S> <C>
Fee Table ........................................ 2
Merrill Lynch Select Pricing(SM) System .......... 4
Financial Highlights ............................. 8
Investment Objective and Policies ................ 11
Management of the Fund ........................... 11
Board of Directors ............................ 11
Advisory Fee .................................. 12
Transfer Agency Services Fee .................. 13
Reimbursement for Portfolio Accounting
Services ................................... 13
Code of Ethics ................................ 13
Purchase of Shares ............................... 13
Initial Sales Charge Alternatives - Class A and
Class D Shares ............................. 15
Deferred Sales Charge Alternatives - Class B
and Class C Shares ......................... 18
Distribution Plans ............................ 21
Limitations on the Payment of Deferred Sales
Charges .................................... 22
Repurchase and Redemption of Shares .............. 23
Repurchase .................................... 23
Redemption .................................... 23
Reinstatement Privilege - Class A and
Class D Shares ............................. 24
Shareholder Services ............................. 24
Investment Account ............................ 24
Automatic Reinvestment of Dividends and
Capital Gains Distributions ................ 25
Systematic Withdrawal Plans ................... 25
Automatic Investment Plans .................... 26
Fee-Based Programs ............................ 26
Retirement Plans .............................. 26
Exchange Privilege ............................ 27
Dividends, Distributions and Taxes ............... 28
Investment Practices and Restrictions ............ 30
Additional Information ........................... 33
Year 2000 Issues .............................. 33
Determination of Net Asset Value .............. 33
Performance Data .............................. 34
Organization of the Fund ...................... 35
Shareholder Inquiries ......................... 35
Shareholder Reports ........................... 35
Authorization Form ............................... 37
</TABLE>
Code #10227-0498
(Merrill Lynch logo appears here)
Merrill Lynch Fund
For Tomorrow, Inc.
(graphics)
Prospectus
April 30, 1998
Distributor:
Merrill Lynch
Funds Disributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
Merrill Lynch Fund For Tomorrow, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
----------------
Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") is a mutual fund that
has as its primary investment objective long-term growth of capital. In seeking
to accomplish its objective the Fund invests in a quality-oriented portfolio of
securities, primarily common stocks.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
----------------
A Prospectus for the Fund dated April 30, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from Merrill Lynch Funds Distributor, Inc. (the "Distributor" or
"MLFD"), P.O. Box 9081, Princeton, New Jersey 08543-9081, (609) 282-2800 or
from your securities dealer. This Statement of Additional Information contains
information in addition to and more detailed than that set forth in the
Prospectus. It is intended to provide you additional information regarding the
activities and operations of the Fund, and should be read in conjunction with
the Prospectus.
----------------
Merrill Lynch Asset Management - Investment Adviser
Merrill Lynch Funds Distributor, Inc. - Distributor
----------------
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As discussed in the Prospectus, the Fund may invest in convertible
securities, preferred stocks and bonds when management determines it is
advisable to do so. Such securities will be issued by companies which satisfy
the criteria, set forth in the Prospectus, utilized by management in
identifying quality companies. The Fund has no present intention of investing
in bonds rated lower than BBB by Standard & Poor's Ratings Group ("S&P") or Baa
by Moody's Investors Service, Inc. ("Moody's"). See "Investment Practices and
Restrictions - Investment Grade Debt Securities" in the Prospectus.
As also discussed in the Prospectus, the Fund may, under certain
circumstances, invest all or a portion of its assets in high quality money
market securities which, for this purpose, shall include the following: (1)
U.S. Treasury bills; (2) bankers' acceptances and certificates of deposit of
the 50 largest commercial banks in the United States, measured by total assets
as shown by their most recent annual financial statements; (3) commercial paper
rated A-1 or A-2 by S&P or P-1 or P-2 by Moody's, or, if not rated, issued by
companies having an outstanding debt issue rated AA or better by S&P or Aa or
better by Moody's; and (4) repurchase agreements with respect to the foregoing.
MANAGEMENT OF THE FUND
Reference is made to "The Fund and Its Management" in the Prospectus for
certain information concerning management and advisory arrangements of the
Fund.
The Investment Adviser
Merrill Lynch Asset Management, L.P., doing business as Merrill Lynch
Asset Management ("MLAM" or the "Investment Adviser"), is the investment
adviser of the Fund. The Investment Adviser or its affiliate, Fund Asset
Management, L.P. ("FAM"), is also the investment adviser to over 140 registered
investment companies. The Investment Advisor also offers portfolio management
and portfolio analysis services to individual and institutional accounts. The
Investment Adviser is a Delaware limited partnership and is owned and
controlled by Merrill Lynch & Co., Inc. ("ML & Co."), a financial services
holding company and the parent company of Merrill Lynch, Pierce, Fenner & Smith
("Merrill Lynch").
The Advisory Agreement
Under its investment advisory agreement with the Fund (the "Advisory
Agreement"), the Investment Adviser is responsible for the actual management of
the Fund's portfolio. Responsibility for making decisions to buy, sell or hold
a particular security rests with the Investment Adviser, subject to review by
the Board of Directors. The Investment Adviser provides the portfolio managers
for the Fund, who make investment decisions and place orders to effect
portfolio transactions for the Fund. In this regard, the Investment Adviser has
access to the total securities research and economic research facilities of
Merrill Lynch. Pursuant to the Advisory Agreement, the Investment Adviser also
performs certain administrative and management services for the Fund. The
Advisory Agreement obligates the Investment Adviser to pay all compensation of
and furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, and to pay the fees of all Directors of the Fund who are affiliated with
ML & Co. or any of its subsidiaries. Portfolio accounting services are provided
for the Fund by the Investment Adviser and the Fund reimburses the Investment
Adviser for its costs in connection with such services.
2
<PAGE>
The Advisory Agreement will continue in effect from year to year if
approved at least annually by the vote of a majority of Directors of the Fund
or by the holders of a majority of the Fund's outstanding shares. Any such
continuation also requires approval by a majority of the Directors who are not
parties to the Advisory Agreement or "interested persons" of any such party as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act"), by vote cast in person at a meeting called for such purpose. The
Advisory Agreement may be terminated at any time, without penalty, on sixty
days' written notice by the Fund's Board of Directors, by the holders of a
majority of the Fund's outstanding voting securities or by the Investment
Adviser. The Advisory Agreement automatically terminates in the event of its
assignment (as defined in the Investment Company Act and the rules thereunder).
The Advisory Agreement provides that the Fund will pay the Investment
Adviser a monthly fee based upon the average daily value of the Fund's net
assets at the following annual rate: 0.65% of the average daily net assets not
exceeding $750 million; 0.60% of the average daily net assets exceeding $750
million but not exceeding $1 billion; and 0.55% of the average daily net assets
exceeding $1 billion. For the Fund's fiscal years ended January 31, 1998, 1997
and 1996, the Investment Adviser earned a fee of $2,263,650, $2,505,726, and
$2,147,843, respectively, from the Fund.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary
of ML & Co., and an affiliate of the Investment Adviser pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services, Inc. ("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. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., and a subsidiary of ML & Co.
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund and
their principal occupations for at least the last five years are set forth
below. Unless otherwise noted, the address of each Director and executive
officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65) - President and Director (1)(2) - Chairman of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1997; Chairman of FAM (which term, as used herein, includes
its corporate predecessors) since 1997; President of the Investment Advisor and
FAM from 1977 to 1997; Chairman of Princeton Services since 1997 and Director
thereof since 1993; President of Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co. since 1990.
RONALD W. FORBES (57) - Director (2) - 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989.
CYNTHIA A. MONTGOMERY (45) - Director (2) - Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate
3
<PAGE>
School of Management, Northwestern University from 1985 to 1989; Assistant
Professor, Graduate School of Business Administration, The University of
Michigan from 1979 to 1985; Director, UNUM Corporation since 1990 and Director
of Newell Co. since 1995.
CHARLES C. REILLY (66) - 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; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (65) - Director (2) - 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and current Director of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (60) - 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 School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), and Alexander's, Inc. (real estate
company).
TERRY K. GLENN (57) - 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 Merrill
Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
NORMAN R. HARVEY (64) - Senior Vice President (1)(2) - Senior Vice
President of the Investment Adviser and FAM since 1982.
VINCENT P. DILEO (59) - Vice President (1) - Portfolio Manager of the
Investment Adviser since 1984.
DONALD M. BURKE (37) - Vice President (1)(2) - First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997; Director of Taxation of the Investment Adviser since 1990.
GERALD M. RICHARD (49) - 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; Treasurer since 1984 and employee of the Distributor
since 1978.
SUSAN B. BAKER (40) - Secretary (1) - Vice President of the Investment
Adviser since 1993; attorney associated with the Investment Adviser since 1987.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or FAM acts as
Investment Adviser.
At March 31, 1998, the officers and Directors of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
The Fund has an Audit and Nominating Committee consisting of all of the
Directors of the Fund who are not interested persons of the Fund.
4
<PAGE>
The Fund pays each Director not affiliated with the Investment Adviser
(each a "non-affiliated Director") a fee of $2,000 per year plus $400 per
meeting, plus actual out-of-pocket expenses for each meeting of the Board of
Directors attended. The Fund also compensates each member of the Audit and
Nominating Committee which consists of all the non-affiliated Directors a fee
of $900 per year. In addition, the Chairman of the Audit Committee receives an
annual fee of $1,800 for serving as Chairman of the Committee. These fees and
expenses aggregated $24,196 for the fiscal year ended January 31, 1998.
The following table sets forth the rate of the compensation paid by the
Fund to the non-affiliated Directors as of the fiscal year end January 31, 1998
and the aggregate compensation paid by all investment companies advised by MLAM
and its affiliate, FAM ("MLAM/FAM Advised Funds") to the non-affiliated
Directors for the calendar year ended December 31, 1997.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Fund and
Aggregate Benefits Accrued MLAM/FAM-Advised
Compensation as Part of Funds Paid to
Name of Director from the Fund Fund Expenses Directors(1)
=============================== =============== ================== =================
<S> <C> <C> <C>
Ronald W. Forbes .............. $4,500 None $153,500
Cynthia A. Montgomery ......... $4,500 None $153,500
Charles C. Reilly ............. $5,500 None $313,000
Kevin A. Ryan ................. $4,500 None $153,500
Richard R. West ............... $4,500 None $299,000
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (29 registered investment companies consisting of 42 portfolios);
Ms. Montgomery (29 registered investment companies consisting of 42
portfolios); Mr. Reilly (47 registered investment companies consisting of
60 portfolios); Mr. Ryan (29 registered investment companies consisting of
42 portfolios); and Mr. West (47 registered investment companies
consisting of 60 portfolios).
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which the account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class B Distribution Plan). Each class has different
exchange privileges. See "Shareholder Services - Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM that use the Merrill Lynch Select Pricing(SM) System are
referred to herein as "MLAM-advised mutual funds."
5
<PAGE>
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Advisory
Agreement described above.
Initial Sales Charge Alternatives - Class A and Class D Shares
The gross sales charges for the sale of Class A shares for the fiscal year
ended January 31, 1998 were $3,463, of which the Distributor received $262 and
Merrill Lynch received $3,201. The gross sales charges for the sale of Class A
shares for the fiscal year ended January 31, 1997 were $8,522, of which the
Distributor received $639 and Merrill Lynch received $7,883. The gross sales
charges for the sale of Class A shares for the fiscal year ended January 31,
1996 were $8,672, of which the Distributor received $546 and Merrill Lynch
received $8,126. During the fiscal years ended January 31, 1998, 1997 and 1996,
the Distributor received no CDSCs with respect to Class A shares for which
the initial sales charge was waived.
The gross sales charges for the sale of Class D shares of the Fund for the
fiscal year ended January 31, 1998 were $38,224, of which the Distributor
received $2,297 and Merrill Lynch received $35,927. The gross sales charges for
the sale of Class D shares for the fiscal year ended January 31, 1997 were
$45,631, of which the Distributor received $2,872 and Merrill Lynch received
$42,759. The gross sales charge for the sale of Class D shares of the Fund for
the fiscal year ended January 31, 1996 were $29,595, of which the Distributor
received $1,825 and Merrill Lynch received $27,770. During the fiscal years
ended January 31, 1998, 1997 and 1996 the Distributor received no CDSCs with
respect to Class D shares for which the initial sales charge was waived.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases that in the aggregate are at least equal to the prescribed
amounts, by an individual, his spouse and their children under the age of 21
years purchasing shares for his or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company," as that term is
defined in the Investment Company Act, but does not include purchases by any
such company that has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Reduced Initial Sales Charges
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's
6
<PAGE>
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension,
profit-sharing, or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund, or any
other MLAM-advised mutual funds, made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in
the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Merrill Lynch Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and
Class D shares of the Fund and of other MLAM-advised mutual funds presently
held, at cost or maximum offering price (whichever is higher), on the date of
the first purchase under the Letter of Intention, may be included as a credit
toward the completion of such Letter, but the reduced sales charge applicable
to the amount covered by such Letter will be applied only to new purchases. If
the total amount of shares does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the
Letter. Class A or Class D shares equal to at least five percent of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to that further reduced percentage sales charge but there will be no
retroactive reduction of the sales charges on any previous purchase. The value
of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from a money market fund
advised by MLAM or its affiliates into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. The Blueprint
Program is directed to small investors, group IRAs and participants in certain
affinity groups such as benefit plans, credit unions and trade associations.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $300 at 4.25%, $300.01 to $5,000 at 3.25% plus $3.00, and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 1/2 of 1% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services, including the exchange privilege, available to
Class A and Class D investors through Blueprint, however, may differ from those
available to other investors in Class A and Class D shares.
7
<PAGE>
Class A and Class D shares are offered at net asset value, with a waiver
of the front-end sales charge, to participants in Blueprint through the Merrill
Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from
Merrill Lynch Business Financial Services, a business unit of Merrill Lynch.
The IRA Rollover Program is available to custodian rollover assets from
employer-sponsored retirement and savings plans (see definition below) whose
Trustee and/or Plan Sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
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.
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 eight years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived 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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other investment companies advised by MLAM or its affiliates,
directors and employees of ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co., includes MLAM, FAM
and certain other entities directly or indirectly wholly-owned and controlled
by ML & Co.), and any trust, pension, profit-sharing or other benefit plan for
such persons, may purchase Class A shares of the Fund at net asset value. Under
such programs, the Fund realizes economies of scale and reduction of
sales-related expenses by virtue of familiarity with the Fund.
Employees and directors or trustees wishing to purchase shares of the Fund
must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied. First, the investor must advise Merrill Lynch that he or she will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than 6
8
<PAGE>
months. Second, such purchase of Class D shares must be made within 60 days
after the redemption and the proceeds from the redemption must have been
maintained in the interim in cash or a money market fund.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis. Second, the investor must also establish that such redemption
had been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund also are offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and when Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or FAM who purchased such closed-end fund shares prior to October 21,
1994 and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of 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 continuously offered closed-end funds advised by
MLAM or its affiliates may reinvest at net asset value the net proceeds from a
sale of certain shares of common stock of such funds in shares of the Fund.
Upon exercise of this investment option, shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if such
additional Class A shares will be held in the same account as the existing
Class A shares and the other requirements pertaining to the reinvestment
privilege are met. In order to exercise this investment option, a shareholder
of one of the above-referenced continuously offered closed-end funds (an
"eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the fund in connection with a tender offer
conducted by the eligible fund and reinvest the proceeds immediately in the
designated class of shares of the Fund. This investment option is available
only with respect to eligible shares as to which no Early Withdrawal Charge or
CDSC (each as defined in the eligible fund's prospectus) is applicable.
9
<PAGE>
Purchase orders from eligible fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation disproportionately higher at the time of acquisition than the
realized or unrealized appreciation of the Fund. The issuance of Class D shares
for consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities that (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Distribution Plans
Reference is made to "Purchase of Shares - Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each, a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the 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 Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act,
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 Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the holders of a majority
of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of the
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 Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne
10
<PAGE>
by the Class B and Class C shares, but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution
fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales
of Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed
to waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of January 31,
1998, with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares only, the Distributor's voluntary
maximum. The information is shown for the period March 5, 1984 (commencement of
operations) to January 31, 1998, with respect to Class B shares, and for the
period October 21, 1994 (commencement of operations) to January 31, 1998, with
respect to Class C shares.
Data Calculated as of January 31, 1998
<TABLE>
<CAPTION>
Allowable Allowable
Aggregate Interest on
Eligible Gross Sales Unpaid
Sales(1) Charges Balance(2)
================ =========== =============
<S> <C> <C> <C>
Class B (in thousands)
Under NASD Rule as Adopted
(in thousands) ................. $1,155,614 $72,226 $63,390
Under Distributor's Voluntary
Waiver (in thousands) .......... $1,155,614 $72,226 $ 5,778
Class C (in thousands)
Under NASD Rule as Adopted
(in thousands) ................. $ 6,629 $ 414 $ 56
<CAPTION>
Annual
Distribution
Amounts Fee at
Maximum Previously Aggregate Current
Amount Paid to Unpaid Net Asset
Payable Distributor(3) Balance Level(4)
=========== ================ =========== =============
<S> <C> <C> <C> <C>
Class B (in thousands)
Under NASD Rule as Adopted
(in thousands) ................. $135,616 $56,241 $79,375 $455
Under Distributor's Voluntary
Waiver (in thousands) .......... $ 78,004 $56,241 $21,763 $455
Class C (in thousands)
Under NASD Rule as Adopted
(in thousands) ................. $ 470 $ 123 $ 347 $ 22
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since March 5, 1984
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
maximum sales charge rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan
applicable to Class B shares at the 1.0% rate, 0.75% of average daily net
assets has been treated as a distribution fee and 0.25% of average daily
net assets has been deemed to have been a service fee and not subject to
the NASD maximum sales charge rule. See "Purchase of Shares - Distribution
Plans" in the Prospectus. This figure may include CDSCs that were deferred
when a shareholder redeemed shares prior to the expiration of the
applicable CDSC period and invested the proceeds, without the imposition
of a sales charge, in Class A shares in conjunction with the shareholder's
participation in the Merrill Lynch Mutual Funds Advisor ("MFA") program.
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
11
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Repurchase and Redemption of Shares" in the
Prospectus for certain information as to the redemption and repurchase of Fund
shares.
Redemption Payments. Payment for shares presented for redemption will be
made by check sent within seven days after receipt by the Transfer Agent of a
shareholder's written request in proper form and, if issued, certificates for
the shares being redeemed. Such payment may be postponed or the right of
redemption suspended for more than seven days: (a) when the New York Stock
Exchange ("NYSE") is closed for other than customary weekends and holidays; (b)
when trading on that Exchange is restricted; (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets; or (d) during any other period when
the Securities and Exchange Commission by order so permits. Applicable rules
and regulations of the Securities and Exchange Commission govern as to whether
the conditions described in (b) or (c) above exist.
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
Fund at any such time.
Deferred Sales Charges - Class B and Class C Shares
As discussed in the Prospectus under "Purchase of Shares - Deferred Sales
Charge Alternatives - Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a
CDSC under most circumstances, the charge is waived on redemptions of Class B
shares in certain instances, including in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or on redemptions of Class B shares following the death
or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawals are: (a) any partial or complete
redemption in connection with a distribution following retirement under a
tax-deferred retirement plan which is permitted to be made without tax penalty
under the Internal Revenue Code of 1986, as amended (the "Code"), or attaining
age 59 1/2 in the case of an IRA or other retirement plan, or part of series
of equal periodic payments (not less frequently than annually) made for life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability.
For the fiscal years ended January 31, 1998, 1997 and 1996, the
Distributor received contingent deferred sales charges of $81,549, $261,117 and
$108,712, respectively, with respect to redemption of Class B shares, all of
which were paid to Merrill Lynch. Additional CDSCs payable to the Distributor
during the fiscal year ended January 31, 1998, may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. Similarly for the fiscal years
ended January 31, 1998, 1997 and 1996, the Distributor received contingent
deferred sales charges of $2,260 $5,359 and $1,548, respectively, with respect
to redemption of Class C shares, all of which were paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors and
participants in certain affinity groups such as trade associations and credit
unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may
differ from those available to other Class B investors. Orders for purchases
and redemptions of Class B shares of the Fund will be grouped for
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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 Blueprint(SM) Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of 15 minutes after the close of business on the NYSE (generally 4:00 p.m., New
York time) on each day during which the NYSE is open for trading. The NYSE is
open weekdays except New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies will be translated into U.S. dollars at the
prevailing market rates quoted by one or more banks or dealers on the day of
valuation. Net asset value will also be calculated on each other day on which
there is a sufficient degree of trading in the Fund's portfolio securities that
the net asset value per share might be materially affected, but only if on such
day the Fund receives a request to purchase or redeem its shares. The net asset
value is computed by dividing the value of the securities held by the Fund plus
any cash or other assets (including interest and dividends accrued but not
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time. Expenses of the Fund, including investment
advisory fees 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 its Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to the Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential among the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
the last available ask price for short positions. Long positions in securities
traded in the over-the-counter ("OTC") market are valued at the last available
bid price in the OTC market prior to the time of valuation. Short positions in
securities traded in the OTC market are valued at the last available ask price
in the OTC market prior to the time of valuation. Portfolio securities that are
traded both in the OTC market and on a stock exchange are valued according to
the broadest and most representative market. 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. When the Fund writes an option, the amount of the premium received is
recorded on the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or in the case of options traded in
the OTC market, the
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last bid price. Other investments, including futures contracts and related
options, are stated at market value. Securities for which market quotations are
not readily available and other assets are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. Shareholders may make additions to their Investment Account at
any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly 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 Transfer Agent is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to
the investors' bank account is required. Investors who maintain CMA(Reg. TM)
accounts may arrange to have periodic investments made in the Fund, in CMA(Reg.
TM) accounts or in certain related accounts in the amounts of $100 or more ($1
for retirement accounts) through the CMA(Reg. TM) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on the payment date.
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Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in
writing or by telephone (1-800-MER-FUND) if their account is maintained with
the Transfer Agent that they no longer wish to have their dividends and/or
capital gains distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after the receipt by the Transfer Agent of such notice,
those instructions will be effected (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Systematic Withdrawal Plans
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account, on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired shares
of the Fund having a value, based on cost or the current offering price of
$5,000 or more, and monthly withdrawals are available for shareholders with
shares having such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. Redemptions will be made at net
asset value determined as described herein on the 24th day of each month or the
24th day of the last month of each calendar quarter, whichever is applicable.
If the NYSE is not open for business on such date, the shares will be redeemed
at the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit for withdrawal payment
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends and distributions on all shares in
the Investment Account are reinvested automatically in shares of the Fund. A
shareholder's systematic withdrawal plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the Fund's Transfer Agent or
the Distributor.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(Reg. TM),
CBA(Reg. TM) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semi-annual or annual basis through the CMA(Reg.
TM)/CBA(Reg. TM) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth Monday
of each month, in the case of monthly redemptions, or of every other month, in
the case of bimonthly redemptions. For quarterly, semiannual or annual
redemptions, the shareholder may select the month in which the shares are to be
redeemed and may designate whether the redemption is to be made on the first,
second, third or fourth Monday of the month. If the Monday selected is not a
business day, the redemption will be processed at net value on the next business
day. The CMA(Reg. TM) or CBA(Reg. TM) Systematic Redemption
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Program is not available if Fund shares are being purchased within the account
pursuant to the Automatic Investment Program. For more information on the
CMA(Reg. TM) or CBA(Reg. TM) Systematic Redemption Program, eligible
shareholders should contact their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares - Contingent
Deferred Sales Charges - Class B Shares" and " - Contingent Deferred Sales
Charges - Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- - Deferred Sales Charge Alternatives - Class B and Class C Shares - Conversion
of Class B Shares to Class D Shares" in the Prospectus; if an investor wishes
to change the amount being withdrawn in a systematic withdrawal plan the
investor should contact his or her Financial Consultant.
Retirement Plans
Self-directed individual retirement accounts and other retirement plans
are available from Merrill Lynch. Under these plans, investments may be made in
the Fund and certain of the other mutual funds sponsored by Merrill Lynch as
well as in other securities. Merrill Lynch charges an initial establishment fee
and an annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100 and the minimum subsequent purchase is $1.
However, there is no minimum for purchases through Blueprint's automatic
investment plans.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class
A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares will be exchangeable for shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period
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of the newly acquired shares of the other fund as more fully described below.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain money market funds advised by MLAM or its affiliates
specifically designated below as available for exchange by holders of Class A,
Class B, Class C or Class D shares. Shares with an aggregate net asset value of
at least $100 are required to qualify for the exchange privilege, and any shares
utilized in an exchange must have been held by the shareholder for 15 days.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A shares or Class D shares of another
MLAM-advised mutual fund ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, dividend reinvestment Class A or Class D shares shall
be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A or Class D money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Funds' 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 Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two-and-a-half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three-year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Special Value Fund Class B shares for more than
five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the 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 that were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of that fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for
two-and-a-half years and three years later decide to redeem the shares of
Institutional Fund for cash.
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At the time of this redemption, the 2% CDSC that would have been due had the
Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two-and-a-half years, any
subsequent redemption would incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to continue to qualify as a regulated investment company
(a "RIC") under the provisions of the Code. As long as it so qualifies, the
Fund will not be subject to Federal income tax on that part of its net
investment income and net realized capital gains that it distributes to
shareholders. To qualify for such tax treatment, the Fund must, among other
things and in general, derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of securities, and certain other
related income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income.
Any capital gains (i.e., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Not later than sixty days after the end of each fiscal year, the Fund will
send to its shareholders a written notice required by the Code designating the
amounts of any dividends or capital gains distributions, and also designating
the amounts of various categories of capital gain income in capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission's exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the average daily net assets of each class
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<PAGE>
(taking into account the incremental expenses of the Class B shares) during the
taxable year, or such other method as the Internal Revenue Service may
prescribe.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends and distributions on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends and distributions on Class D shares will be lower than the per
share dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value."
Any gain or loss realized upon the sale or redemption of shares of the Fund
by a shareholder who is not a dealer in securities will be treated as capital
gain or loss. In the case of an individual, any such capital gain will be
treated as short-term capital gain if the shares were held for not more than 12
months, gain taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and capital gain taxable at the
maximum rate of 20% if such share were held for more than 18 months. In the case
of a corporation, any such capital gain will be treated as long-term capital
gain, taxable at the same rates as ordinary income, if such shares were held for
more than 12 months. Any such capital loss will be treated as long-term capital
loss if the shares have been held for more than one year and otherwise as
short-term capital loss. However, any loss realized by a shareholder upon the
sale of shares of the Fund held by the shareholder for six months or less will
be treated as long-term capital loss to the extent of capital gains
distributions received by the shareholder.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain if the shares were held for not more than
12 months, gain taxable at the maximum rate of 28% if such shares were held for
more than 12, but not more than 18 months, and gain taxable at the maximum rate
of 20% if such shares were held for more than 18 months. In the case of a
corporation, any such capital gain will be treated as long-term capital gain,
taxable at the same rates as ordinary income, if such shares were held for more
than 12 months. Any such capital loss will be long-term capital loss if the
shares were held for more than 12 months. A sale or exchange of shares held for
six months or less, however, will be treated as long-term capital loss to the
extent of any long-term capital gains distributions with respect to such
shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
Generally, any loss realized on a sale or exchange of shares of the Fund
will be disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
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Under certain provisions of the Code, some shareholders may be subject to
31% withholding on ordinary income dividends, capital gains distributions and
redemption payments ("back-up withholding"). Generally, shareholders subject to
back-up withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that he is not
otherwise subject to back-up withholding.
Dividends and short-term capital gains distributions paid by the Fund to
shareholders who are non-resident aliens or foreign entities generally are
subject to withholding at the rate of 30% unless a reduced rate of withholding
or a withholding exemption is provided under applicable treaty law.
Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Because the
Fund limits its investments in foreign securities, shareholders will not be
entitled to claim foreign tax credits with respect to their share of foreign
taxes paid by the Fund on income from investments of foreign securities held by
the Fund.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state and local taxes. Qualification as a
regulated investment company under the Code for income tax purposes does not
entail government supervision of management or investment policies.
INVESTMENT PRACTICES AND RESTRICTIONS
Lending of Portfolio Securities. As discussed in the Prospectus, the Fund
may from time to time lend its portfolio securities in order to increase the
total yield on its portfolio. Such loans will be effected in accordance with
applicable regulatory guidelines and will at all times be secured by cash
collateral or securities issued or guaranteed by the United States government
in an amount that is at least equal to the market value, determined daily, of
the loaned securities. Cash collateral received by the Fund is invested in
short-term money market securities, and a portion of the yield earned on such
securities is retained by the Fund. Where securities, instead of cash, are
delivered to the Fund as collateral, the Fund earns its return in the form of a
loan premium paid by the borrower. The Fund retains the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Securities loans can be terminated by the Fund at any time. The
Fund may pay reasonable finders', administrative and custodial fees in
connection with such loans. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Fund could experience delays and costs in gaining access to collateral and
could suffer a loss to the extent that the value of the collateral falls below
the market value of the securities.
Writing of Covered Call Options. As discussed in the Prospectus, the Fund
may from time to time sell (i.e., "write") covered call options on its portfolio
securities. The term option, as used herein, means a call option issued by The
Options Clearing Corporation (the "Clearing Corporation") and traded on a
national securities exchange. A call option gives the purchaser of the option
the right to buy and obligates the writer (seller) to sell the underlying
security at the exercise price during the option period. When the Fund writes an
option it receives a premium. This premium is the price of such option on the
exchange on which it is traded. At the time the option is written, the exercise
price of the option may be lower, equal to or higher than the market price of
the security on which the option is written.
20
<PAGE>
A covered call option is an option where the Fund already owns securities
subject to the option ("underlying securities") or has an absolute and
immediate right to acquire that security without additional cash consideration
upon conversion or exchange of other securities held in its portfolio. By
writing a covered call option, the Fund, in return for the premium income
realized from the sale of the option, gives up the opportunity to profit from
any increase in the price of the underlying security above the option exercise
price during the period until the option expires, is exercised or the Fund
effects a "closing purchase transaction" as described below. For example,
assume that the Fund owned 100 shares of stock that was trading at $50. If the
Fund were to write a call option on such stock with an exercise price of $50
for which it received premium income of $500, in the event that the price of
the underlying stock were to increase to $55 during the term of the option, the
option would most likely be exercised and the Fund would be required to sell
the underlying stock at $50 per share. If the price of the stock were to
decline to below $50, however, the option would most likely expire unexercised
in which case the Fund would be able to retain the underlying stock. In
addition, the Fund will not be able to sell the security during the period of
the option without taking special steps described below which will involve
expense. If the option expires unexercised, the Fund realizes a gain
(short-term capital gain for Federal income tax purposes) in the amount of the
premium received for the option. This gain may be offset by a decline in the
market price of the underlying security during the option period.
The Fund can terminate its obligation under an option prior to the
expiration date of the option by effecting a "closing purchase transaction."
This is done by purchasing on an exchange an option of the same series (i.e.,
same underlying security, exercise price and expiration date) as the option
previously written. This can be done, however, only on an exchange that
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option. In the
event the Fund is unable to effect a closing purchase transaction, it will not
be able to dispose of the underlying securities until the option expires or
until the underlying securities are delivered upon exercise of the option, with
the result that the Fund will be subject to the risk of decline in the price of
the underlying securities during such period. The Fund writes options on
securities only if management believes that secondary markets will exist on an
exchange for options of the same series that will permit the Fund to effect
closing purchase transactions. Depending on the premium paid by the Fund in
effecting a closing transaction and transaction costs, the cost of a closing
purchase transaction may exceed the premium received by the Fund from writing
the original option, in which case the transaction will result in a loss to the
Fund.
The Fund may not write a covered call option on any of its portfolio's
securities if, as a result of writing such option, portfolio securities having
a value in excess of 15% of the Fund's total assets would be subject to such
options.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. Repurchase
agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. The Fund will
require the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement. In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities are
not owned by the Fund but only constitute collateral for the
21
<PAGE>
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral.
Illiquid Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933, as
amended (the "Securities Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. However, the
Fund will not invest more than 15% of its total assets in illiquid investments,
which includes securities for which there is no readily available market,
securities subject to contractual restrictions on resale, certain investments
in asset-backed and receivable-backed securities and restricted securities,
unless the Fund's Board of Directors continuously determines, based on the
trading markets for the specific restricted security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
The Board of Directors monitors the Fund's investments in these securities
purchased pursuant to Rule 144A, focusing on such factors, among others, as
valuation, liquidity and availability of information. These investments in
securities purchased pursuant to Rule 144A could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted
securities.
Portfolio Turnover. The Fund has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the Investment Adviser, investment
considerations warrant such action. As a result, the portfolio turnover rate
may vary greatly from year to year or during periods within a year. Also, the
use of covered call options at times when the underlying securities are
appreciating in value may result in higher portfolio turnover than would
otherwise be the case. The Fund pays brokerage commissions in connection with
writing call options and effecting closing purchase transactions, as well as in
connection with purchases and sales of portfolio securities. A high rate of
portfolio turnover would result in correspondingly greater brokerage commission
expenses. The Fund's portfolio turnover rate for the fiscal years ended January
31, 1998, 1997 and 1996 were 17.63%, 39.96% and 67.38%, respectively. Portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales
or purchases of portfolio securities (exclusive of securities, including
options, whose maturities or expiration dates, at the time of acquisition, were
one year or less) by the monthly average value of the securities in the Fund's
portfolio during the year.
Portfolio Brokerage. Subject to policies established by the Board of
Directors of the Fund, the Investment Adviser is responsible for the Fund's
portfolio decisions and the placing of orders to effect the Fund's portfolio
transactions. With respect to such transactions, the Investment Adviser seeks
to obtain the best net results for the Fund taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund will
not necessarily be paying the lowest commission or spread available. The Fund
has no obligation to deal with any broker or dealer in the execution of its
portfolio transactions. The Fund has been informed by Merrill Lynch that it
will not attempt to influence or control the placing by the Investment Adviser
or by the Fund of orders for brokerage transactions. Consistent with the NASD
Conduct Rules, the Investment Adviser may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions of the Fund.
22
<PAGE>
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research (such as economic data and market forecasts) to the
Investment Adviser may receive orders for transactions by the Fund. Information
so received is in addition to, and not in lieu of, the services required to be
performed by the Investment Adviser under the Advisory Agreement with the Fund.
If in the judgment of the Investment Adviser the Fund will be benefited by
supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services that are in excess
of commissions that another broker may have charged for effecting the same
transaction. The expenses of the Investment Adviser are not necessarily reduced
as a result of the receipt of such supplemental information. Supplemental
investment research received by the Investment Adviser may also be used in
connection with other investment advisory accounts of the Investment Adviser
and its affiliates.
The Fund may invest in securities traded in the over-the-counter market.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Fund deals directly with dealers who make markets in the
securities involved where possible, except in circumstances where better prices
and execution are available elsewhere. Under the Investment Company Act,
Merrill Lynch and its affiliates are generally prohibited from dealing with the
Fund as principal in the purchase and sale of securities. Since transactions in
the over-the-counter market usually involve transactions with dealers acting as
principal for their own account, neither Merrill Lynch nor any affiliate of
Merrill Lynch may serve as the Fund's dealer in connection with such
transactions. However, such companies may serve as broker for the Fund in
over-the-counter transactions conducted on an agency basis.
The aggregate dollar amounts of brokerage commissions paid by the Fund for
the fiscal years ended January 31, 1998, 1997 and 1996 were $337,563, $332,184
and $516,478, respectively. For these periods, brokers providing research
services received $190,881, $517,724 and $370,558, respectively, in commissions
on portfolio transactions effected for the Fund. The aggregate dollar amounts
of such portfolio transactions were $111,640,179, $193,852,940 and
$220,278,211, respectively. During those periods, the aggregate dollar amounts
of brokerage commissions paid by the Fund to Merrill Lynch were $17,500, $4,891
and $36,666, respectively. These amounts represent 5.2%, 1.5% and 7.1%,
respectively, of the Fund's aggregate brokerage commissions paid to all brokers
during those periods. The Fund's aggregate dollar amounts of transactions
involving the payment of commissions effected through Merrill Lynch during
those periods were 2.7%, 1.5% and 4.0%, respectively, of the aggregate dollar
amount of all Fund transactions involving the payment of commissions.
The Fund, and one or more of the other investment companies or accounts
which the Investment Adviser or its affiliate FAM manage, may own the same
investments from time to time. Similarly, a particular security may be bought
for one or more companies or accounts at the same time that one or more
companies or accounts are selling the same security. If purchases or sales of
securities for the Fund and other companies or accounts arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective companies and accounts in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one company or account during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on the price of the security being purchased or sold for the
Fund.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of
any national securities exchange, provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection
with such transactions.
23
<PAGE>
Investment Restrictions. The Fund has adopted certain fundamental
investment restrictions which may not be changed without the prior approval of
the holders of the majority of the Fund's outstanding shares. A majority for
this purpose and under the Investment Company Act means: (a) more than 50% of
the outstanding shares, or (b) 67% of the shares represented at a meeting where
more than 50% of the outstanding shares are represented, whichever is less. For
purposes of the following restrictions and the restrictions set forth in the
Prospectus, all percentage limitations apply immediately after a purchase or
initial investment and any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from the Fund's portfolio. Under its fundamental investment restrictions, the
Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates
of deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
24
<PAGE>
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Investment Adviser without approval by the
shareholders, subject to the supervision of the Board of Directors. Under the
non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies except to the
extent permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provisions) of the Investment Company Act, at any
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities that cannot be readily resold because of legal
or contractual restrictions or 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 that mature within seven days or
securities that the Board of Directors of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A security") and
determined to be liquid by the Fund's Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental restriction (7) above, borrow amounts in
excess of 5% of the Fund's assets. In addition, the Fund may not pledge any
of its assets, except that the Fund may pledge securities having a value of
not more than 10% of the Fund's assets to secure permitted borrowings.
-------------------------
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to a permissive order or otherwise in compliance with the provisions
of the Investment Company Act and the rules and regulations thereunder.
Included among such restricted transactions are purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal and
purchases of securities from underwriting syndicates of which Merrill Lynch is
a member.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective investors. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with 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 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 each specified period in the case of
Class B and Class C shares.
25
<PAGE>
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual
rates, but rather, actual annual, annualized or aggregate total 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 calculation of including or excluding the maximum applicable sales
charges, actual annual or annualized total return data generally will be lower
than average annual total return data since the average rates of return reflect
compounding of return; aggregate total return data generally will be higher
than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for Class A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
================================ ===============================
Expressed Redeemable Expressed Redeemable
as a Value of a as a Value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
========================================================== ============== =============== ============== ==============
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended January 31, 1998 .......................... 6.53% $ 1,065.30 7.58% $ 1,075.80
Five Years Ended January 31, 1998 ........................ 11.61% $ 1,731.70 11.63% $ 1,733.40
Ten Years Ended January 31, 1998 ......................... - - 12.45% $ 3,231.60
Inception (October 26, 1988) to January 31, 1998 ......... 12.02% $ 2,862.20 - -
<CAPTION>
Year Ended January 31,
========================
<S> <C> <C> <C> <C>
Annual Total Return
(excluding maximum applicable sales charges)
1998 ................... 12.43% $ 1,124.30 11.20% $ 1,112.00
1997 ................... 19.99% 1,199.90 18.80% 1,188.00
1996 ................... 31.82% 1,318.20 30.43% 1,304.30
1995 ................... (11.23)% 887.70 (12.22)% 877.80
1994 ................... 15.78% 1,157.80 14.60% 1,146.00
1993 ................... 4.79% 1,047.90 3.75% 1,037.50
1992 ................... 28.35% 1,283.50 26.96% 1,269.60
1991 ................... 6.64% 1,066.40 5.59% 1,055.90
1990 ................... 10.92% 1,109.20 9.77% 1,097.70
1989 ................... 3.90%* 1,039.00 22.11% 1,221.10
1988 ................... ( 8.63)% 913.70
1987 ................... 26.99% 1,269.90
1986 ................... 15.87% 1,158.70
1985 ................... 20.33%* * 1,203.30
</TABLE>
- --------
* Commencement of operations of Class A shares was October 26, 1988.
** Commencement of operations of Class B shares was March 5, 1984.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 26, 1988) to January 31, 1998 ......... 186.22% $ 2,862.20 - -
Inception (March 5, 1984) to January 31, 1998 ............ - - 422.78% $ 5,227.80
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Class C Shares* Class D Shares*
================================ ===============================
Expressed Redeemable Expressed Redeemable
as a Value of a as a Value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
========================================================== ============== =============== ============== ==============
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended January 31, 1998 .......................... 10.24% $ 1,102.40 6.19% $ 1,061.90
Inception (October 21, 1994) to January 31, 1998 ......... 16.50% $ 1,650.00 15.70% $ 1,613.00
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended January 31,
==========================================================
1998 ..................................................... 11.15% $ 1,111.50 12.07% $ 1,120.70
1997 ..................................................... 18.80% $ 1,188.00 19.73% $ 1,197.30
1996 ..................................................... 30.32% $ 1,303.20 31.47% $ 1,314.70
1995 ..................................................... (4.12)%* $ 958.80 (3.50)%* $ 965.00
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994) to January 31, 1998 ......... 65.00% $ 1,650.00 61.30% $ 1,613.00
</TABLE>
- --------
* Class C shares and D shares commenced operations on October 21, 1994.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemptions," respectively, the total return data quoted by the Fund, in
advertisements directed to such investors, may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
From time to time, the Fund may include the Fund's Morningstar's
risk-adjusted performance rating in advertisements or supplemental sales
literature.
GENERAL INFORMATION
Common Stock
The Fund has authorized capital of 400,000,000 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, each of which consists of 100,000,000 shares.
Class A, Class B, Class C and Class D Common Stock represent an interest in the
same assets of the Fund 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. Voting rights are not cumulative. This means that the holders of
more than 50% of the shares can elect all of the Directors of the Fund if they
choose to do so and, in such event, the holders of the remaining less than 50%
of the shares voting will not be able to elect any person or persons to the
Board of Directors. The Fund 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;
or (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 25% of the outstanding shares of the
Fund. Shares are issued fully paid and nonassessable and have no preemptive
rights.
27
<PAGE>
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on April 1, 1998.
Computation of Offering Price Per Share
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of January 31, 1998, is calculated as set forth below.
<TABLE>
<CAPTION>
Class A
================
<S> <C>
Net Assets ............................................................ $ 13,551,614
============
Number of Shares Outstanding .......................................... 868,395
============
Net Asset Value Per Share (net assets divided by number of shares
outstanding) ......................................................... $ 15.61
Sales Charge* (for Class A and Class D shares: 5.25% of offering price;
5.54% of net asset value) ............................................ .86
------------
Offering Price ........................................................ $ 16.47
============
<CAPTION>
Class B Class C Class D
================ =============== =================
<S> <C> <C> <C>
Net Assets ............................................................ $ 60,645,938 $ 2,926,135 $ 231,694,912
============== ============ =============
Number of Shares Outstanding .......................................... 4,040,291 195,858 14,926,567
============== ============ =============
Net Asset Value Per Share (net assets divided by number of shares
outstanding) ......................................................... $ 15.01 $ 14.94 $ 15.52
Sales Charge* (for Class A and Class D shares: 5.25% of offering price;
5.54% of net asset value) ............................................ ** ** .86
------------- ------------ -------------
Offering Price ........................................................ $ 15.01 $ 14.94 $ 16.38
================ ============ ==============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares - Deferred
Sales Charge Alternatives - Class B and Class C Shares" in the Prospectus
and "Redemption of Shares - Deferred Sales Charges - Class B and Class C
Shares" herein.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
Custodian
The Bank of New York, 90 Washington Street, 12th floor, New York, New York
10286, acts as custodian of the Fund's assets. The Custodian is responsible
for, among other things, safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"The Fund and Its Management - Transfer Agency Services Fee" in the Prospectus.
Reports to Shareholders
The Fund's fiscal year ends on January 31 of each year. The Fund
distributes reports at least semi-annually to its shareholders. Each year an
annual report, containing financial statements audited by the Fund's
independent auditors, is sent to shareholders.
28
<PAGE>
Legal Counsel
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
Additional Information
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Commission. The complete Registration Statement may be obtained
from the Commission upon payment of the fee prescribed by the rules and
regulations of the Commission.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Fund For Tomorrow, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Fund For Tomorrow, Inc. as of
January 31, 1998, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at January
31, 1998 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Fund
For Tomorrow, Inc. as of January 31, 1998, 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
March 10, 1998
30
<PAGE>
Merrill Lynch Fund for Tomorrow, Inc. January 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Concept Tomorrow Held Stocks Cost (Note 1a) Net Assets
- -------------------------------------------------------------------------------------------------------------------
Computer Technologies
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Personal Computers 400,000 COMPAQ Computer Corp. $ 3,045,990 $ 12,025,000 3.9%
Personal Computers 100,000 +Gateway 2000, Inc. 3,347,740 3,768,750 1.2
Systems 50,000 +Networks Associates, Inc. 2,524,250 2,700,000 0.9
Systems 300,000 +Silicon Graphics, Inc. 11,151,240 4,650,000 1.5
Systems 200,000 +Sun Microsystems, Inc. 5,396,880 9,587,500 3.1
------------ ------------ ------
25,466,100 32,731,250 10.6
- -------------------------------------------------------------------------------------------------------------------
Demographic Trends
- -------------------------------------------------------------------------------------------------------------------
Home Furnishings 50,000 American Woodmark Corporation 1,037,187 1,037,500 0.3
Healthcare 200,000 +HEALTHSOUTH Corp. 3,537,000 4,487,500 1.4
Pollution Technology 550,000 +Philip Services Corp. 5,122,752 4,537,500 1.5
Insurance 200,000 Torchmark Corp. 4,206,236 8,312,500 2.7
------------ ------------ ------
13,903,175 18,375,000 5.9
- -------------------------------------------------------------------------------------------------------------------
Developing Foreign Economies
- -------------------------------------------------------------------------------------------------------------------
Food & Beverage 980,000,000 Avipal S.A.--Avicultura e Agropecuaria 4,130,033 1,658,059 0.5
Telecommunications 105,000 Compania Anonima Nacional Telefonos
de Venezuela (ADR)* 2,415,000 3,858,750 1.3
Specialty Services 1,000,000 National Mutual Asia Ltd. 940,132 840,010 0.3
Holding Company 200,000 +Quinenco S.A. (ADR)* 3,755,087 1,950,000 0.6
Building Materials 100,000 +Royal Group Technologies Ltd. 1,047,206 2,463,729 0.8
Telecommunications 477 SK Telecom Co. (Ordinary) 533,107 250,141 0.1
------------ ------------ ------
12,820,565 11,020,689 3.6
- -------------------------------------------------------------------------------------------------------------------
Future Retailing
- -------------------------------------------------------------------------------------------------------------------
Retail Apparel 40,000 +The Children's Place Retail Stores, Inc. 560,000 290,000 0.1
Specialty Retail 188,900 +OfficeMax, Inc. 2,027,656 2,762,663 0.9
------------ ------------ ------
2,587,656 3,052,663 1.0
- -------------------------------------------------------------------------------------------------------------------
Global Market Expansion
- -------------------------------------------------------------------------------------------------------------------
Cosmetics 174,400 Avon Products, Inc. 6,259,222 10,464,000 3.4
Electrical Equipment 74,760 General Electric Company 2,278,626 5,793,900 1.9
Specialty Retailing 50,000 Gucci Group N.V. (NY Registered Shares) 1,896,750 1,990,625 0.6
Machinery 9,800 Kubota Corp. (ADR)* 1,259,888 588,000 0.2
Food & Beverage 160,000 PepsiCo, Inc. 2,438,212 5,770,000 1.9
Electronics 100,000 Philips Electronics N.V.
(NY Registered Shares) 4,983,486 6,662,500 2.1
------------ ------------ ------
19,116,184 31,269,025 10.1
- -------------------------------------------------------------------------------------------------------------------
Healthcare Cost Containment
- -------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 133,333 Astra AB (ADR)* 1,781,250 2,416,661 0.8
Pharmaceuticals 100,000 Bristol-Myers Squibb Co. 3,953,500 9,968,750 3.2
Pharmaceuticals 100,000 Lilly (Eli) and Company 2,286,050 6,750,000 2.2
Pharmaceuticals 100,900 Merck & Co., Inc. 4,001,062 11,830,525 3.8
Pharmaceuticals 50,000 Novartis AG (ADR)* 1,942,188 4,268,750 1.4
Information Services 300,000 +Physician Computer Network, Inc. 3,074,250 1,237,500 0.4
Pharmaceuticals 100,800 Schering-Plough Corp. 580,167 7,295,400 2.4
Pharmaceuticals 107,500 +Sequus Pharmaceuticals, Inc. 1,263,437 886,875 0.3
Medical Devices 100,000 United States Surgical Corp. 6,799,013 2,856,250 0.9
Medical Services 100,000 +Vencor, Inc. 3,194,630 2,450,000 0.8
------------ ------------ ------
28,875,547 49,960,711 16.2
===================================================================================================================
</TABLE>
31
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Concept Tomorrow Held Stocks Cost (Note 1a) Net Assets
- -------------------------------------------------------------------------------------------------------------------
Industrial Outsourcing
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Information Services 50,000 +Ceridian Corp. $ 1,959,250 $ 2,265,625 0.7%
Systems 50,000 +Computer Sciences Corporation 3,878,500 4,243,750 1.4
Specialty Services 250,000 +Sitel Corporation 3,939,288 2,265,625 0.7
Computer Software 50,000 +Sterling Commerce, Inc. 1,838,339 1,815,625 0.6
Aerospace & Defense 19,700 +Triumph Group, Inc. 534,070 733,825 0.2
------------ ------------ ------
12,149,447 11,324,450 3.6
- -------------------------------------------------------------------------------------------------------------------
Industrial Renaissance
- -------------------------------------------------------------------------------------------------------------------
Aerospace & Defense 50,000 The Boeing Company 2,645,250 2,378,125 0.7
Transportation 75,000 Delta Air Lines, Inc. 5,782,613 8,559,375 2.8
Automotive 100,000 General Motors Corp. 3,964,542 5,793,750 1.9
Information Systems 100,000 International Business Machines Corp. 2,834,250 9,868,750 3.2
Aerospace & Defense 6,377 Raytheon Company (Class A) (a) 226,358 326,024 0.1
------------ ------------ ------
15,453,013 26,926,024 8.7
- -------------------------------------------------------------------------------------------------------------------
Multimedia
- -------------------------------------------------------------------------------------------------------------------
Broadcasting Services 200,000 Carlton Communications PLC (ADR)* 7,266,875 6,975,000 2.3
Components 150,000 Harman International Industries Inc. 6,836,788 5,868,750 1.9
Information Services 400,000 +OzEmail, Ltd. (ADR)* 4,632,341 3,200,000 1.0
Cable Television 150,000 +Tele-Communications Liberty Media Group
(Series A) 2,675,003 5,371,875 1.8
Publishing Services 150,000 +World Color Press Inc. 3,056,000 4,125,000 1.3
------------ ------------ ------
24,467,007 25,540,625 8.3
- -------------------------------------------------------------------------------------------------------------------
Next Generation Technology
- -------------------------------------------------------------------------------------------------------------------
Pollution Technology 400,000 +Molten Metal Technology, Inc. 6,605,221 150,000 0.0
Environmental Equipment 119,400 +Thermo Ecotek Corp. 1,281,614 2,074,575 0.7
Multi-Industry 230,000 +Thermo Electron Corp. 4,937,738 8,970,000 2.9
Medical Devices 100,000 +Thermotrex Corp. 1,586,723 1,800,000 0.6
Components 150,000 +Voice Control Systems Inc. 834,037 618,750 0.2
------------ ------------ ------
15,245,333 13,613,325 4.4
- -------------------------------------------------------------------------------------------------------------------
Strategic Growth Opportunities
- -------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 100,000 American Home Products Corp. 3,875,049 9,543,750 3.1
Leisure & Entertainment 300,000 +Galoob (Lewis) Toys, Inc. 4,238,645 2,681,250 0.9
Specialty Services 100,000 Household International, Inc. 6,712,565 12,450,000 4.0
Retail 88,400 +Toys `R' Us, Inc. 2,700,054 2,370,225 0.8
------------ ------------ ------
17,526,313 27,045,225 8.8
- -------------------------------------------------------------------------------------------------------------------
Telecommunications
- -------------------------------------------------------------------------------------------------------------------
Telecommunications 100,000 +ADC Telecommunications, Inc. 2,867,500 1,906,250 0.6
Telecommunications 200,000 Alcatel Alsthom Cie Generale
d'Electricite S.A. (ADR)* 5,087,260 5,212,500 1.7
Components 120,000 +Andrew Corp. 2,299,683 3,300,000 1.1
Telecommunications 300,000 Inter-Tel Inc. 2,153,750 7,500,000 2.4
Components 100,000 Nokia Corp. AB (ADR)* 3,778,500 7,600,000 2.5
Telecommunications 100,000 +RSL Communications, Ltd. (Class A) 2,200,000 2,200,000 0.7
------------ ------------ ------
18,386,693 27,718,750 9.0
===================================================================================================================
Total Stocks 205,997,033 278,577,737 90.2
===================================================================================================================
</TABLE>
32
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial $ 7,000,000 Apreco, Inc., 5.47% due 3/02/1998 $ 6,968,092 $ 6,968,092 2.3%
Paper** 13,978,000 Associates Corp. of North America, 5.61%
due 2/02/1998 13,973,643 13,973,643 4.5
5,000,000 Fleet Funding Corp., 5.50% due 3/02/1998 4,977,083 4,977,083 1.6
===================================================================================================================
Total Short-Term Securities 25,918,818 25,918,818 8.4
===================================================================================================================
Total Investments $231,915,851 304,496,555 98.6
============
Other Assets Less Liabilities 4,322,044 1.4
------------ ------
Net Assets $308,818,599 100.0%
============ ======
===================================================================================================================
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
(a) Received as a spin-off from General Motors Corp.
Categories of companies shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
33
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of January 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$231,915,851) (Note 1a) .. $304,496,555
Cash ............................................................. 234
Receivables:
Securities sold ................................................ $ 5,201,002
Capital shares sold ............................................ 341,806
Dividends ...................................................... 111,562 5,654,370
------------
Prepaid registration fees and other assets (Note 1f) ............. 23,372
------------
Total assets ..................................................... 310,174,531
------------
=================================================================================================================
Liabilities: Payables:
Capital shares redeemed ........................................ 872,200
Investment adviser (Note 2) .................................... 164,843
Distributor (Note 2) ........................................... 100,548 1,137,591
------------
Accrued expenses and other liabilities ........................... 218,341
------------
Total liabilities ................................................ 1,355,932
------------
=================================================================================================================
Net Assets: Net assets ....................................................... $308,818,599
============
=================================================================================================================
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized ................................................ $ 86,840
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ................................................ 404,029
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ................................................ 19,586
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized ................................................ 1,492,657
Paid-in capital in excess of par ................................. 231,300,803
Undistributed realized capital gains on investments and foreign
currency transactions--net ....................................... 2,933,989
Unrealized appreciation on investments and foreign currency
transactions--net ................................................ 72,580,695
------------
Net assets ....................................................... $308,818,599
============
=================================================================================================================
Net Asset Value: Class A--Based on net assets of $13,551,614 and 868,395 shares
outstanding ...................................................... $ 15.61
============
Class B--Based on net assets of $60,645,938 and 4,040,291 shares
outstanding ...................................................... $ 15.01
============
Class C--Based on net assets of $2,926,135 and 195,858 shares
outstanding ...................................................... $ 14.94
============
Class D--Based on net assets of $231,694,912 and 14,926,567 shares
outstanding ...................................................... $ 15.52
============
=================================================================================================================
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Statement of Operations for the Year Ended January 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Dividends (net of $111,810 foreign withholding tax) ............ $ 3,017,973
Income Interest and discount earned ................................... 1,337,906
(Notes 1d & 1e): ------------
Total income ................................................... 4,355,879
------------
=================================================================================================================
Expenses: Investment advisory fees (Note 2) .............................. $ 2,263,650
Account maintenance and distribution fees--Class B (Note 2) .... 800,509
Account maintenance fees--Class D (Note 2) ..................... 599,540
Transfer agent fees--Class D (Note 2) .......................... 466,112
Transfer agent fees--Class B (Note 2) .......................... 196,321
Printing and shareholder reports ............................... 113,883
Accounting services (Note 2) ................................... 90,076
Registration fees (Note 1f) .................................... 69,810
Custodian fees ................................................. 66,456
Professional fees .............................................. 59,995
Account maintenance and distribution fees--Class C (Note 2) .... 49,658
Transfer agent fees--Class A (Note 2) .......................... 47,598
Directors' fees and expenses ................................... 24,196
Transfer agent fees--Class C (Note 2) .......................... 13,490
Pricing fees ................................................... 1,200
Other .......................................................... 40,230
------------
Total expenses ................................................. 4,902,724
------------
Investment loss--net ........................................... (546,845)
------------
=================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net ............................................. 57,704,612
(Loss) on Foreign currency transactions--net ........................... (28,936) 57,675,676
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions-- Investments--net ............................................. (15,555,112)
Net (Notes 1b, Foreign currency transactions--net ........................... 17 (15,555,095)
1c, 1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions .......................................... 42,120,581
------------
Net Increase in Net Assets Resulting from Operations ........... $ 41,573,736
============
=================================================================================================================
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended
January 31,
---------------------------
Increase (Decrease) in Net Assets: 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
Operations: Investment income(loss)--net .......................................... $ (546,845) $ 6,084
Realized gain on investments and foreign currency transactions--net ... 57,675,676 52,807,780
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net .................................... (15,555,095) 15,690,009
------------ ------------
Net increase in net assets resulting from operations .................. 41,573,736 68,503,873
============ ============
=======================================================================================================================
Distributions to Realized gain on investments--net:
Shareholders Class A ............................................................. (3,096,223) (5,337,338)
(Note 1g): Class B ............................................................. (12,917,948) (12,797,082)
Class C ............................................................. (663,684) (1,078,464)
Class D ............................................................. (45,397,650) (28,024,409)
------------ ------------
Net decrease in net assets resulting from distributions to shareholders (62,075,505) (47,237,293)
============ ============
=======================================================================================================================
Capital Share Net decrease in net assets derived from capital
Transactions share transactions .................................................... (61,802,479) (10,906,448)
(Note 4): ------------ ------------
=======================================================================================================================
Net Assets: Total increase (decrease) in net assets ............................... (82,304,248) 10,360,132
Beginning of year ..................................................... 391,122,847 380,762,715
------------ ------------
End of year ........................................................... $308,818,599 $391,122,847
============ ============
=======================================================================================================================
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. -----------------------------------------------
For the Year Ended January 31,
-----------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995+ 1994
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ............... $ 17.16 $ 16.26 $ 13.55 $ 16.39 $ 16.29
Operating ------- ------- ------- ------- -------
Performance: Investment income--net ........................... .07 .08 .07 .09 .15
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net ........... 1.99 3.04 4.19 (1.97) 2.18
------- ------- ------- ------- -------
Total from investment operations ................. 2.06 3.12 4.26 (1.88) 2.33
------- ------- ------- ------- -------
Less distributions from realized gain
on investments--net .............................. (3.61) (2.22) (1.55) (.96) (2.23)
------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 15.61 $ 17.16 $ 16.26 $ 13.55 $ 16.39
======= ======= ======= ======= =======
========================================================================================================================
Total Investment Based on net asset price per share ............... 12.43% 19.99% 31.82% (11.23%) 15.78%
Return:* ======= ======= ======= ======= =======
========================================================================================================================
Ratios to Average Expenses ......................................... .99% 1.00% 1.07% .98% .88%
Net Assets: ======= ======= ======= ======= =======
Investment income--net ........................... .40% .46% .44% .59% .95%
======= ======= ======= ======= =======
========================================================================================================================
Supplemental Net assets, end of year (in thousands) ........... $13,552 $39,605 $34,231 $ 8,665 $10,942
Data: ======= ======= ======= ======= =======
Portfolio turnover ............................... 17.63% 39.96% 67.38% 45.86% 48.63%
======= ======= ======= ======= =======
Average commission rate paid++ ................... $ .0003 $ .0277 -- -- --
======= ======= ======= ======= =======
========================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
37
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. ---------------------------------------------------
For the Year Ended January 31,
---------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995+ 1994
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........... $ 16.59 $ 15.79 $ 13.33 $ 16.30 $ 16.28
Operating ------- -------- -------- -------- --------
Performance: Investment loss--net ......................... (.13) (.10) (.08) (.06) (.01)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ............................ 1.92 2.95 4.09 (1.96) 2.17
------- -------- -------- -------- --------
Total from investment operations ............. 1.79 2.85 4.01 (2.02) 2.16
------- -------- -------- -------- --------
Less distributions from realized gain
on investments--net .......................... (3.37) (2.05) (1.55) (.95) (2.14)
------- -------- -------- -------- --------
Net asset value, end of year ................. $ 15.01 $ 16.59 $ 15.79 $ 13.33 $ 16.30
======= ======== ======== ======== ========
============================================================================================================================
Total Investment Based on net asset price per share ........... 11.20% 18.80% 30.43% (12.22%) 14.60%
Return:* ======= ======== ======== ======== ========
============================================================================================================================
Ratios to Average Expenses ..................................... 2.03% 2.06% 2.13% 1.99% 1.91%
Net Assets: ======= ======== ======== ======== ========
Investment loss--net ......................... (.74%) (.58%) (.55%) (.38%) (.07%)
======= ======== ======== ======== ========
============================================================================================================================
Supplemental Net assets, end of year (in thousands) ....... $60,646 $104,828 $112,239 $119,186 $396,424
Data: ======= ======== ======== ======== ========
Portfolio turnover ........................... 17.63% 39.96% 67.38% 45.86% 48.63%
======= ======== ======== ======== ========
Average commission rate paid++ ............... $ .0003 $ .0277 -- -- --
======= ======== ======== ======== ========
============================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
38
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C++
----------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended January 31, 1994+ to
------------------------------ Jan. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ............ $ 16.47 $ 15.71 $ 13.28 $ 14.08
Operating ------- ------- ------- -------
Performance: Investment loss--net ............................ (.11) (.10) (.10) (.04)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ............................... 1.88 2.94 4.08 (.54)
------- ------- ------- -------
Total from investment operations ................ 1.77 2.84 3.98 (.58)
------- ------- ------- -------
Less distributions from realized gain
on investments--net ............................. (3.30) (2.08) (1.55) (.22)
------- ------- ------- -------
Net asset value, end of period .................. $ 14.94 $ 16.47 $ 15.71 $ 13.28
======= ======= ======= =======
================================================================================================================
Total Investment Based on net asset value per share .............. 11.15% 18.80% 30.32% (4.12%)+++
Return:** ======= ======= ======= =======
================================================================================================================
Ratios to Average Expenses ........................................ 2.06% 2.07% 2.14% 2.26% *
Net Assets: ======= ======= ======= =======
Investment loss--net ............................ (.68%) (.61%) (.67%) (.87%)*
======= ======= ======= =======
================================================================================================================
Supplemental Net assets, end of period
Data: (in thousands) .................................. $ 2,926 $ 8,430 $ 6,385 $ 80
======= ======= ======= =======
Portfolio turnover .............................. 17.63% 39.96% 67.38% 45.86%
======= ======= ======= =======
Average commission rate paid# ................... $ .0003 $ .0277 -- --
======= ======= ======= =======
================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
# For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
39
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D++
-----------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended January 31, 1994+ to
------------------------------ Jan. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
=================================================================================================================
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ....... $ 17.09 $ 16.20 $ 13.54 $ 14.26
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net .............. --# .04 .03 (.01)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .......................... 1.99 3.03 4.18 (.49)
-------- -------- -------- --------
Total from investment operations ........... 1.99 3.07 4.21 (.50)
-------- -------- -------- --------
Less distributions from realized gain
on investments--net ........................ (3.56) (2.18) (1.55) (.22)
-------- -------- -------- --------
Net asset value, end of period ............. $ 15.52 $ 17.09 $ 16.20 $ 13.54
======== ======== ======== ========
=================================================================================================================
Total Investment Based on net asset value per share ......... 12.07% 19.73% 31.47% (3.50%)+++
Return:** ======== ======== ======== ========
=================================================================================================================
Ratios to Average Expenses ................................... 1.23% 1.25% 1.33% 1.43% *
Net Assets: ======== ======== ======== ========
Investment income (loss)--net .............. (.01%) .22% .22% (.23%)*
======== ======== ======== ========
=================================================================================================================
Supplemental Net assets, end of period
Data: (in thousands) ............................. $231,695 $238,260 $227,908 $156,947
======== ======== ======== ========
Portfolio turnover ......................... 17.63% 39.96% 67.38% 45.86%
======== ======== ======== ========
Average commission rate paid## ............. $ .0003 $ .0277 -- --
======== ======== ======== ========
=================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
# Amount is less than $(.01) per share.
## For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
See Notes to Financial Statements.
40
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of 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.
Short-term securities are valued at amortized cost, which approximates market
value. Other investments are stated at market value. Securities and assets for
which market value quotations are not available are valued at their fair value
as determined in good faith by or under the direction of the Fund's Board of
Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, 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.
o Options--The Fund is authorized to write covered call options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is sold through an exercise of an option, the
related premium received is deducted from the basis of the security sold. When
an option expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premium received (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium received).
Written options are non-income producing investments.
(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 Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
41
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $546,845 have been reclassified between undistributed
net realized capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the general partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: 0.65% of the average daily net assets not exceeding $750 million;
0.60% of the average daily net assets exceeding $750 million but not exceeding
$1 billion, and 0.55% of the average daily net assets exceeding $1 billion.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B ................................ 0.25% 0.75%
Class C ................................ 0.25% 0.75%
Class D ................................ 0.25% --
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended January 31, 1998, MLFD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class D Shares as follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A ..................................... $ 262 $ 3,201
Class D ..................................... $2,297 $35,927
- --------------------------------------------------------------------------------
For the year ended January 31, 1998, MLPF&S also received contingent deferred
sales charges of $286,983 and $2,260 relating to transactions in Class B and C
Shares, respectively.
In addition, MLPF&S received $17,500 in commissions on the execution of
portfolio security transactions for the Fund for the year ended January 31,
1998.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
42
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 1998 were $57,175,449 and $179,839,410, respectively.
Net realized and unrealized gains (losses) as of January 31, 1998 were as
follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $57,704,895 $ 72,580,704
Short-term investments ................... (283) --
Foreign currency transactions ............ (28,936) (9)
----------- ------------
Total .................................... $57,675,676 $ 72,580,695
=========== ============
- --------------------------------------------------------------------------------
As of January 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $72,580,704, of which $106,344,675 related to appreciated
securities and $33,763,971 related to depreciated securities. The aggregate
cost of investments at January 31, 1998 for Federal income tax purposes was
$231,915,851.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$61,802,479 and $10,906,448 for the years ended January 31, 1998 and January 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended January 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,197,905 $ 20,864,302
Shares issued to shareholders
in reinvestment of
distributions ............................ 180,489 2,873,039
---------- ------------
Total issued ............................. 1,378,394 23,737,341
Shares redeemed .......................... (2,817,447) (50,445,255)
---------- ------------
Net decrease ............................. (1,439,053) $(26,707,914)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,845,808 $ 31,115,024
Shares issued to shareholders
in reinvestment of
distributions ............................ 305,672 4,989,091
---------- ------------
Total issued ............................. 2,151,480 36,104,115
Shares redeemed .......................... (1,949,689) (32,436,435)
---------- ------------
Net increase .......................... 201,791 $ 3,667,680
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended January 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 852,979 $ 14,843,653
Shares issued to shareholders
<PAGE>
in reinvestment of
distributions ............................ 734,764 11,120,083
---------- ------------
Total issued ............................. 1,587,743 25,963,736
Automatic conversion of
shares ................................... (542,990) (9,274,818)
Shares redeemed .......................... (3,322,941) (57,782,855)
---------- ------------
Net decrease ............................. (2,278,188) $(41,093,937)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,580,584 $ 26,170,965
Shares issued to shareholders
in reinvestment of
distributions ............................ 716,413 11,324,876
---------- ------------
Total issued ............................. 2,296,997 37,495,841
Automatic conversion of
shares ................................... (510,660) (8,450,651)
Shares redeemed .......................... (2,575,080) (42,132,286)
---------- ------------
Net decrease ............................. (788,743) $(13,087,096)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended January 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 203,919 $ 3,547,005
Shares issued to shareholders
in reinvestment of
distributions ............................ 39,199 597,135
---------- ------------
Total issued ............................. 243,118 4,144,140
Shares redeemed .......................... (559,154) (9,692,133)
---------- ------------
Net decrease ............................. (316,036) $ (5,547,993)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 389,112 $ 6,432,736
Shares issued to shareholders
in reinvestment of
distributions ............................ 62,177 974,884
---------- ------------
Total issued ............................. 451,289 7,407,620
Shares redeemed .......................... (345,702) (5,592,847)
---------- ------------
Net increase ............................. 105,587 $ 1,814,773
========== ============
- --------------------------------------------------------------------------------
43
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1998
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended January 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 265,722 $ 4,736,667
Automatic conversion
of shares ................................ 525,220 9,274,818
Shares issued to shareholders
in reinvestment of
distributions ............................ 2,574,802 39,929,189
---------- ------------
Total issued ............................. 3,365,744 53,940,674
Shares redeemed .......................... (2,380,236) (42,393,309)
---------- ------------
Net increase ............................. 985,508 $ 11,547,365
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 299,900 $ 5,100,435
Automatic conversion
of shares ................................ 496,702 8,450,651
Shares issued to shareholders
in reinvestment of
distributions ............................ 1,512,537 24,588,964
---------- ------------
Total issued ............................. 2,309,139 38,140,050
Shares redeemed .......................... (2,438,121) (41,441,855)
---------- ------------
Net decrease ............................. (128,982) $ (3,301,805)
========== ============
- --------------------------------------------------------------------------------
44
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
=====
<S> <C>
Investment Objective and Policies .................. 2
Management of the Fund ............................. 2
The Investment Adviser .......................... 2
The Advisory Agreement .......................... 2
Directors and Officers ............................. 3
Purchase of Shares ................................. 5
Initial Sales Charge Alternatives - Class A and
Class D Shares ............................... 6
Reduced Initial Sales Charges ................... 6
Distribution Plans .............................. 10
Limitations on the Payment of Deferred Sales
Charges ...................................... 10
Redemptions of Shares .............................. 12
Deferred Sales Charges - Class B and Class C
Shares ....................................... 12
Determination of Net Asset Value ................... 13
Shareholder Services ............................... 14
Investment Account .............................. 14
Automatic Investment Plans ...................... 14
Automatic Reinvestment of Dividends and
Capital Gains Distributions .................. 14
Systematic Withdrawal Plans ..................... 15
Retirement Plans ................................ 16
Exchange Privilege .............................. 16
Dividends, Distributions and Taxes ................. 18
Investment Practices and Restrictions .............. 20
Performance Data ................................... 26
General Information ................................ 27
Common Stock .................................... 27
Computation of Offering Price Per Share ......... 28
Independent Auditors ............................ 28
Custodian ....................................... 28
Transfer Agent .................................. 28
Reports to Shareholders ......................... 28
Legal Counsel ................................... 29
Additional Information .......................... 29
Independent Auditors' Report ....................... 30
Financial Statements ............................... 31
</TABLE>
Code #10228-0498
(MERRILL LYNCH logo appears here)
MERRILL LYNCH FUND
FOR TOMORROW, INC.
(graphics)
STATEMENT OF
ADDITIONAL
INFORMATION
April 30, 1998
Distributor:
Merrill Lynch
Funds Distributor. Inc.
