<PAGE>
PROSPECTUS
MAY 29, 1996
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
MERRILL LYNCH FUNDAMENTAL VALUE MERRILL LYNCH U.S. GOVERNMENT
PORTFOLIO SECURITIES PORTFOLIO
MERRILL LYNCH QUALITY BOND PORTFOLIO MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO
MERRILL LYNCH GROWTH OPPORTUNITY PORTFOLIO
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Asset Builder Program, Inc. (the "Program") is a professionally
managed, open-end investment company. The Program consists of five separate
portfolios: the Merrill Lynch Fundamental Value Portfolio (the "Fundamental
Value Portfolio"), the Merrill Lynch Quality Bond Portfolio (the "Quality Bond
Portfolio"), the Merrill Lynch U.S. Government Securities Portfolio (the "U.S.
Government Securities Portfolio"), the Merrill Lynch Global Opportunity
Portfolio (the "Global Opportunity Portfolio") and the Merrill Lynch Growth
Opportunity Portfolio ("Growth Opportunity Portfolio") (each a "Portfolio").
Each Portfolio has its own separate investment objectives and may employ a
variety of instruments and techniques to enhance income and to hedge against
market risk and, in the case of the Fundamental Value, Global Opportunity and
Growth Opportunity Portfolios, currency risk. Investments on an international
basis involve risks not typically associated with investments in domestic
securities. See "Risk Factors and Special Considerations". There can be no
assurance that the investment objectives of any Portfolio will be achieved. For
more information on the Portfolios' investment objectives and policies, please
see "Investment Objectives and Policies" on page 20.
(Cover continues on next page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Program that
is relevant to making an investment in the Program. This Prospectus should be
retained for future reference. A statement containing additional information
about the Program, dated May 29, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing the
Program at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
----------------
Each Portfolio is a separate series of the Program issuing its own shares
pursuant to the Merrill Lynch Select Pricing (SM) System. Each Portfolio 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 9.
Shares of each Portfolio are available for purchase solely by holders of
individual retirement plans, individual retirement rollover accounts and
simplified employee pension plans (collectively "IRAs") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acts as custodian
and by CBA(R) accounts and CMA SubAccounts (SM) established pursuant to the
Uniform Gifts to Minors Acts or Uniform Transfers to Minors Acts (or similar
state statutes). The Program currently is engaged in a continuous offering of
the shares of each Portfolio. Merrill Lynch has advised the Program that it
will not charge an annual account fee upon any IRA which participates in the
Merrill Lynch Asset Builder (SM) Service, receives additional contributions of
at least $250 annually and is invested solely in one or more of the Program's
Portfolios or a money market fund advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Investment Adviser"), or its affiliates. Merrill Lynch
has also advised the Program that it will not collect the customary annual fee
for maintaining a CBA(R) account or CMA(R) SubAccount (SM) for any such account
which has been established pursuant to the Uniform Gifts to Minors Acts or
Uniform Transfers to Minors Acts (or similar state statutes) and is invested
solely in shares of the Program. The minimum initial purchase in any Portfolio
is $100 and the minimum subsequent purchase is $1. Merrill Lynch may charge
its customers a processing fee (presently $4.85) for confirming purchases and
repurchases. See "Purchase of Shares" and "Redemption of Shares". The holder
of each IRA is responsible for making investment decisions concerning the
funds contributed to his or her IRA.
To permit the Program to invest the net proceeds from the sale of its shares
in an orderly manner, the Program may, from time to time, suspend the sale of
its shares, except for dividend reinvestments.
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of each of the Portfolios follows:
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE PORTFOLIO QUALITY BOND PORTFOLIO
------------------------------------------------- -------------------------------------------------
CLASS A(a) CLASS B(b) CLASS C CLASS D CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------- -------- --------- ---------- ------------------- -------- ---------
<S> <C> <C> <C> <C> <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) 4.00%(c) None None 4.00%(c)
Sales Charge
Imposed on
Dividend
Reinvestments...... None None None None 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 1.0% for None(d) None(d) 4.0% during 1.0% for None(d)
the first year, one year the first year, one year
decreasing 1.0% decreasing 1.0%
annually thereafter annually thereafter
to 0.0% after to 0.0% after
the fourth year the fourth year
Exchange Fee....... None None None None None None None None
ANNUAL PROGRAM
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment
Advisory Fees(e)... .65% .65% .65% .65% .50% .50% .50% .50%
12b-1 Fees(f):
Account
Maintenance Fees. None .25% .25% .25% None .25% .25% .25%
Distribution
Fees............. None .75% .75% None None .50% .55% None
Other Expenses:
Custodial Fees... .09% .09% .09% .09% .19% .19% .19% .19%
Shareholder Ser-
vicing Costs(h).. .37% .55% .58% .46% .30% .38% .42% .28%
Other............ .89% 1.10% 1.14% 1.11% 1.61% 1.49% 1.53% 1.48%
---- ---- ---- ---- ---- ---- ---- ----
Total Other Ex-
penses........... 1.35% 1.74% 1.81% 1.66% 2.10% 2.06% 2.14% 1.95%
Reimbursement of ---- ---- ---- ---- ---- ---- ---- ----
Expenses(i)........ -- -- -- -- (.10) (.06) (.14) --
Total Portfolio --- --- --- --- ---- ---- ---- ----
Operating Ex-
penses............. 2.00% 3.39% 3.46% 2.56% 2.50% 3.25% 3.30% 2.70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(footnotes appear on page 5)
3
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES PORTFOLIO GLOBAL OPPORTUNITY PORTFOLIO
-------------------------------------------------- --------------------------------------------------
CLASS A(a) CLASS B(b) CLASS C CLASS D CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------- -------- --------- ---------- ------------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Imposed on
Purchases (as a
percentage of
offering price).... 4.00%(c) None None 4.00%(c) 5.25%(c) None None 5.25%(c)
Sales Charge
Imposed on
Dividend
Reinvestments...... None None None None 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 1.0% for None(d) None(d) 4.0% during 1.0% for None(d)
the first year, one year the first year, one year
decreasing 1.0% decreasing 1.0%
annually thereafter annually thereafter
to 0.0% after to 0.0% after
the fourth year the fourth year
Exchange Fee....... None None None None None None None None
ANNUAL PROGRAM
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment
Advisory Fees(e)... .50% .50% .50% .50% .75% .75% .75% .75%
12b-1 Fees(f):
Account
Maintenance Fees. None .25% .25% .25% None .25% .25% .25%
Distribution
Fees............. None .50% .55% None None .75% .75% None
Other Expenses:
Custodial Fees... .12% .12% .12% .12% .13% .13% .13% .13%
Shareholder Ser-
vicing Costs(h).. .14% .22% .23% .14% .30% .43% .47% .34%
Other............ 1.78% 1.76% 1.76% 1.76% 1.14% 1.30% 1.30% 1.30%
---- ---- ---- ---- ---- ---- ---- ----
Total Other Ex-
penses........... 2.04% 2.10% 2.11% 2.02% 1.57% 1.86% 1.90% 1.77%
Reimbursement of ---- ---- ---- ---- ---- ---- ---- ----
Expenses(i)........ (.04) (.10) (.11) (.02) -- (.11) (.15) (.02)
Total Portfolio ---- ---- ---- ---- --- ---- ---- ----
Operating Ex-
penses............. 2.50% 3.25% 3.30% 2.75% 2.32% 3.50% 3.50% 2.75%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(footnotes appear on page 5)
4
<PAGE>
<TABLE>
<CAPTION>
GROWTH OPPORTUNITY PORTFOLIO
----------------------------------------------------
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- --------------------- -------- ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)......... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on
Dividend Reinvestments.. None None None None
Deferred Sales Charge
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)..... None(d) 4.0% during the first 1.0% for None(d)
year, decreasing 1.0% one year
annually thereafter
to 0.0% after
the fourth year
Exchange Fee............ None None None None
ANNUAL PROGRAM OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory
Fees(e)................. .65% .65% .65% .65%
12b-1 Fees(f):
Account Maintenance
Fees.................. None .25% .25% .25%
Distribution Fees..... None .75% .75% None
Other Expenses:(g)
Custodial Fees........ .06% .06% .06% .06%
Shareholder Servicing
Costs(h).............. .30% .30% .30% .30%
Other................. 1.02% 1.02% 1.02% 1.02%
---- ---- ---- ----
Total Other Expenses.. 1.38% 1.38% 1.38% 1.38%
---- ---- ---- ----
Total Portfolio Operat-
ing Expenses............ 2.03% 3.03% 3.03% 2.28%
==== ==== ==== ====
</TABLE>
- ----
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares"--page 42.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase for the Fundamental Value, Global Opportunity
and Growth Opportunity Portfolios and approximately ten years after
initial purchase for the Quality Bond and U.S. Government Securities
Portfolios. See "Purchase of Shares--Deferred Sales Charge Alternatives--
Class B and Class C Shares"--page 44.
(c) Reduced for purchases of $25,000 and over decreasing to 0.00% for
purchases of $1,000,000 or more, and waived for purchases of Class A
shares by certain retirement plans in connection with certain investment
programs. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 42.
(d) Under certain limited conditions, purchases of Class A and Class D shares
will be subject to a contingent deferred sales charge ("CDSC") rather than
an initial sales charge.
(e) See "Management of the Program--Management and Advisory Arrangements"--
page 35.
(f) See "Purchase of Shares--Distribution Plans"--page 48.
(g) Information under "Other Expenses" for the Growth Opportunity Portfolio is
estimated for the fiscal year ending January 31, 1997.
(h) See "Management of the Program--Transfer Agency Services"--page 37.
(i) Pursuant to state expense limitations imposed on the Program, for the
period February 1, 1995 (commencement of operations), to January 31,1996,
the Investment Adviser was required to reimburse a portion of its
investment advisory fee, and voluntarily waived the remainder of its
investment advisory fee and/or reimbursed a portion of other expenses
(excluding 12b-1 fees). The Total Portfolio Operating Expenses in the fee
table have been restated to assume the absence of any such voluntary
waiver or reimbursement of expenses because the Investment Adviser may
discontinue or reduce such waiver of fees and/or assumption of expenses at
any time without notice. The actual Total Portfolio Operating Expenses,
net of the waiver and/or reimbursement, is provided below. Actual Total
Portfolio Operating Expenses is not provided for Growth Opportunity
Portfolio since that Portfolio commenced operations on February 2, 1996.
<TABLE>
<CAPTION>
INVESTMENT ADVISORY FEES WAIVED TOTAL OPERATING EXPENSES AFTER
AND EXPENSES REIMBURSED WAIVER AND REIMBURSEMENT
------------------------------- -------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fundamental Value Port-
folio................... 0.46% 0.10% 0.08% 0.11% 1.54% 3.29% 3.38% 2.45%
Quality Bond Portfolio.. 2.60% 2.52% 2.57% 2.51% 0.00% 0.79% 0.87% 0.19%
US Government Securities
Portfolio............... 2.54% 2.54% 2.55% 2.55% 0.00% 0.81% 0.86% 0.22%
Global Opportunity Port-
folio................... 0.31% 0.11% 0.07% 0.10% 2.01% 3.50% 3.58% 2.67%
</TABLE>
5
<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 in the Portfolios (and classes)
listed below would pay the following expenses
on a $1,000 investment including, for Class A
and Class D shares of the Fundamental Value,
Global Opportunity and Growth Opportunity
Portfolios, the maximum $52.50 initial sales
charge and, for Class A and Class D shares of
the Quality Bond and U.S. Government
Securities Portfolios, the maximum $40.00
initial sales charge and assuming (1) the
Total Portfolio Operating Expenses for each
class set forth above, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Fundamental Value Portfolio
Class A.................................... $72 $112 $155 $273
Class B.................................... $74 $124 $176 $351*
Class C.................................... $45 $106 $180 $374
Class D.................................... $77 $128 $181 $327
Quality Bond Portfolio
Class A.................................... $64 $115 $168 $312
Class B.................................... $73 $120 $170 $355
Class C.................................... $43 $102 $172 $359
Class D.................................... $66 $120 $177 $331
U.S. Government Securities Portfolio
Class A.................................... $64 $115 $168 $312
Class B.................................... $73 $120 $170 $355
Class C.................................... $43 $102 $172 $359
Class D.................................... $67 $122 $180 $336
Global Opportunity Portfolio
Class A.................................... $75 $121 $170 $304
Class B.................................... $75 $127 $182 $361*
Class C.................................... $45 $107 $182 $377
Class D.................................... $79 $133 $190 $344
Growth Opportunity Portfolio
Class A.................................... $72 $113 $156 $276
Class B.................................... $71 $114 $159 $317*
Class C.................................... $41 $ 94 $159 $335
Class D.................................... $74 $120 $168 $300
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Fundamental Value Portfolio
Class A.................................... $72 $115 $155 $273
Class B.................................... $34 $100 $176 $351*
Class C.................................... $35 $102 $180 $374
Class D.................................... $77 $128 $181 $327
Quality Bond Portfolio
Class A.................................... $64 $115 $168 $312
Class B.................................... $33 $100 $170 $355
Class C.................................... $33 $102 $172 $359
Class D.................................... $66 $120 $177 $331
U.S. Government Securities Portfolio
Class A.................................... $64 $115 $168 $312
Class B.................................... $33 $100 $170 $355
Class C.................................... $33 $102 $172 $359
Class D.................................... $67 $122 $180 $336
Global Opportunity Portfolio
Class A.................................... $75 $121 $170 $304
Class B.................................... $35 $107 $182 $361*
Class C.................................... $35 $107 $182 $377
Class D.................................... $79 $133 $190 $344
Growth Opportunity Portfolio
Class A.................................... $72 $113 $156 $276
Class B.................................... $31 $ 94 $159 $317*
Class C.................................... $31 $ 94 $159 $335
Class D.................................... $74 $120 $168 $300
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
6
<PAGE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in a Portfolio will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
(the "NASD"). Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Program's transfer agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares".
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement
of Additional Information.
THE PROGRAM
Merrill Lynch Asset Builder Program, Inc. (the "Program") is a
professionally managed, open-end investment company consisting of five
separate portfolios: the Fundamental Value Portfolio, the Quality Bond
Portfolio, the U.S. Government Securities Portfolio, the Global Opportunity
Portfolio and the Growth Opportunity Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio pursues its investment objectives through the separate
investment policies described below:
Fundamental Value Portfolio is a diversified portfolio seeking capital
appreciation and, secondarily, income by investing in securities, primarily
(i.e., at least 65% of the Portfolio's assets) in equities, that the
management of the Portfolio believes are undervalued and therefore represent
investment value. The Portfolio seeks special opportunities in securities that
are selling at a discount either from book value or historical price-earnings
ratios, or seem capable of recovering from temporarily out-of-favor
considerations. Particular emphasis is placed on securities which provide an
above-average dividend return and sell at a below-average price-earnings
ratio. The Portfolio may invest up to 30% of its total assets in securities of
foreign issuers. See "Risk Factors and Special Considerations".
Quality Bond Portfolio is a diversified portfolio seeking income and,
secondarily, capital appreciation by investing primarily in long-term
corporate bonds that are rated A or better by a nationally recognized rating
agency such as Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's") or Fitch Investors Services, Inc. ("Fitch"), or that
possess, in the judgment of the Investment Adviser, similar credit
characteristics.
U.S. Government Securities Portfolio is a diversified portfolio seeking high
current return by investing in U.S. Government and Government agency
securities, including Government National Mortgage Association ("GNMA")
mortgage-backed securities and other mortgage-backed government securities.
7
<PAGE>
Global Opportunity Portfolio is a diversified portfolio seeking high total
investment return through a fully-managed investment policy utilizing United
States and foreign equity, debt and money market securities, the combination of
which will be varied from time to time, both with respect to types of
securities and markets, in response to changing market and economic trends.
Total investment return is the aggregate of capital value changes and income.
Growth Opportunity Portfolio is a non-diversified portfolio seeking long-term
growth of capital by investing in a portfolio of equity securities, placing
particular emphasis on companies that have exhibited above-average growth rates
in earnings.
RISK FACTORS AND SPECIAL CONSIDERATIONS
All of the Portfolios may invest in fixed income securities and to the extent
a Portfolio does invest in fixed income securities, the net asset value of its
shares will be affected by changes in the general level of interest rates.
The Fundamental Value, Global Opportunity and Growth Opportunity Portfolios
are authorized to invest in foreign securities. 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 U.S.
governmental laws or restrictions applicable to such investments. These risks
are often heightened for investments in small capital markets.
The Global Opportunity Portfolio has established no rating criteria for the
fixed income securities in which it may invest and securities in the lower
rated categories are predominantly speculative with respect to the capacity to
pay interest and repay principal.
The Portfolios also may invest in certain derivative securities. See "Risk
Factors and Special Considerations".
THE INVESTMENT ADVISER
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
acts as a manager for the Program and provides the Program with management
services. The Investment Adviser or its affiliate, Fund Asset Management, L.P.
("FAM"), acts as the investment adviser for over 130 other registered
investment companies. The Investment Adviser and FAM also offer portfolio
management and portfolio analysis services to individuals and institutions. As
of April 30, 1996, the Investment Adviser and FAM had a total of approximately
$207.0 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Investment Adviser.
See "Management of the Program -- Management and Advisory Arrangements".
PURCHASE AND REDEMPTION OF SHARES
Shares of the Portfolios 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. See "Merrill Lynch Select Pricing SM System"
and "Purchase of Shares".
8
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
It is the Program's intention to distribute substantially all of the net
investment income, if any, of each Portfolio. All long-term and short-term
capital gains, if any, including gains from option and futures contract
transactions will be distributed by each Portfolio at least annually. See
"Additional Information -- Dividends and Distributions".
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio is determined by the Investment
Adviser once daily 15 minutes after the close of business on the New York
Stock Exchange (generally 4:00 P.M., New York time) on each day during which
the New York Stock Exchange is open for trading and, under certain
circumstances, on other days. See "Additional Information -- Determination of
Net Asset Value".
MERRILL LYNCH SELECT PRICING SM SYSTEM
Each Portfolio offers four classes of shares under the Merrill Lynch Select
Pricing SM System. During the continuous offering, the shares of each class of
each of the Portfolios may be purchased at a price equal to the next
determined net asset value per share subject to the sales charges and ongoing
fee arrangements described below. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing SM System is used by more than
50 mutual funds advised by MLAM or FAM, an affiliate of MLAM. Funds advised by
MLAM or FAM which utilize the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of a Portfolio represents an
identical interest in the investment portfolio of that Portfolio and has the
same rights, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees and Class B and Class C shares bear
the expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Portfolio 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 a Portfolio
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". If
pursuant to the exchange privilege, shares of any Portfolio are exchanged for
shares of a fund other than a Portfolio of the Program or a money market fund
advised by the Investment Adviser or its affiliates, then the imposition of
the IRA annual account fee, the CBA (R) account or CMA SubAccount SM annual
account fee, as the case may be, may result. For information about current IRA
fees charged by Merrill Lynch, consult the Merrill Lynch IRA disclosure
statement. For information about the current fees charged by Merrill Lynch on
a CBA (R) account, consult the Capital Builder (TM) Account Program
description. For information about the current fees charged by Merrill Lynch
on a CMA SubAccount SM, consult the Cash Management Account (R) Program
description.
9
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Program. 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 his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
FUNDAMENTAL VALUE, GLOBAL OPPORTUNITY AND GROWTH OPPORTUNITY PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.75% B shares convert to D shares
four years at a rate of automatically after
4.0% during the first approximately eight
year, decreasing 1.0% years(/4/)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 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 in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead will be
subject to a 1.0% CDSC for one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of the Quality Bond and U.S. Government Securities
Portfolios and certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio are exchanged for Class B shares of another Portfolio or
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 on to the holding period for the shares
acquired.
10
<PAGE>
QUALITY BOND AND U.S. GOVERNMENT SECURITIES PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.50% B shares convert to D shares
four years at a rate of automatically after
4.0% during the first approximately ten
year, decreasing 1.0% years(/4/)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ----------------------------------------------------------------------------------------
D Maximum 4.00% 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 in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead will be
subject to a 1.0% CDSC for one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios and certain other MLAM-advised mutual funds into
which exchanges may be made have an eight-year conversion period. If Class
B shares of a Portfolio are exchanged for Class B shares of another
Portfolio or 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 on to the holding period
for the shares acquired.
Class A: Class A shares of a Portfolio 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. Class A shares will be offered to Merrill Lynch &
Co., Inc. ("ML&Co.") and its subsidiaries (the term "subsidiaries"
when used herein with respect to ML&Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and
controlled by ML&Co.) and their directors and employees and to
members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25% for the Fundamental Value, Global
Opportunity and Growth Opportunity Portfolios and 4.00% for the
Quality Bond and U.S. Government Securities Portfolios, which is
reduced for purchases of $25,000 and over, and waived for purchases
by certain retirement plans in connection with certain investment
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge, but if the initial sales charge is waived, such
purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class
A and Class D Shares".
11
<PAGE>
Class B: Class B shares of a Portfolio do not incur a sales charge when they
are purchased, but they are subject to an ongoing account maintenance
fee of 0.25% of the Portfolio's average net assets attributable to
Class B shares, an ongoing distribution fee of 0.75% of average net
assets attributable to Class B shares for the Fundamental Value,
Global Opportunity and Growth Opportunity Portfolios and 0.50% of
average net assets attributable to Class B shares for the Quality Bond
and U.S. Government Securities Portfolios, and a CDSC if they are
redeemed within four years of purchase. Class B shares of a Portfolio
will convert automatically into Class D shares of the same Portfolio
approximately eight years after issuance in the case of the
Fundamental Value, Global Opportunity and Growth Opportunity
Portfolios and approximately ten years after issuance in the case of
the Quality Bond and U.S. Government Securities Portfolios. Class D
shares are subject to an account maintenance fee but no distribution
fee. If Class B shares of a Portfolio are exchanged for Class B shares
of another Portfolio or 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
on to the holding period for the shares acquired. Automatic conversion
of Class B shares into Class D shares will occur at least once each
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 will also 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 of a Portfolio do not incur a sales charge when they
are purchased, but they are subject to an ongoing account maintenance
fee of 0.25% of the Portfolio's average net assets attributable to
Class C shares and an ongoing distribution fee of 0.75% of the
Portfolio's average net assets attributable to Class C shares in the
case of the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios or 0.55% of the Portfolio's average net assets
attributable to Class C shares in the case of the Quality Bond and
U.S. Government Securities Portfolios. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Program's Board of Directors and regulatory limitations.
Class D: Class D shares of a Portfolio incur an initial sales charge when they
are purchased and are subject to an ongoing account maintenance fee of
0.25% of the Portfolio's average net assets attributable to Class D
shares. Class D shares are not subject to an ongoing distribution fee
or any CDSC when they are redeemed. Purchases of $1,000,000 or more
may not be subject to an initial sales charge, but if the initial
sales charge is waived, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. The
schedule of initial sales charges and reductions for Class D shares
for each Portfolio is the same as the schedule for Class A shares of
that Portfolio, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives --Class A and Class D Shares".
12
<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
PricingSM 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 on Class A
shares, or may exceed the initial sales charge plus the accumulated ongoing
account maintenance fee on Class D shares. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares of a Portfolio will be converted
into Class D shares of the same Portfolio after a conversion period of
approximately eight years for the Fundamental Value, Global Opportunity and
Growth Opportunity Portfolios or ten years for the Quality Bond and U.S.
Government Securities Portfolios, 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".
13
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in conjunction
with the annual audits of the financial statements of the Program by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for each of the Portfolios for the fiscal year ended
January 31, 1996 are included in the Statement of Additional Information.
Financial information is not presented for Growth Opportunity Portfolio since
that Portfolio commenced operations on February 2, 1996. Further information
about the performance of the Program is contained in the Program's most recent
annual report to shareholders which may be obtained, without charge, by calling
or by writing the Program at the telephone number or address on the front cover
of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE PORTFOLIO*
-----------------------------------------
FOR THE PERIOD FEBRUARY 1, 1995+ TO
JANUARY 31, 1996
-----------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Val-
ue:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.. $10.00 $10.00 $10.00 $10.00
-------- --------- -------- --------
Investment income (loss)--net......... .25 (.07) (.09) .03
Realized and unrealized gain on in-
vestments and foreign currency
transactions--net.................... 1.76 1.96 1.98 1.96
-------- --------- -------- --------
Total from investment operations...... 2.01 1.89 1.89 1.99
-------- --------- -------- --------
LESS DISTRIBUTIONS:
Realized gain on investments--net... (.20) (.20) (.20) (.20)
In excess of realized gain on in-
vestments--net..................... (.11) (.11) (.11) (.11)
Return of capital--net.............. (.03) (.03) (.03) (.03)
-------- --------- -------- --------
Total distributions................... (.34) (.34) (.34) (.34)
-------- --------- -------- --------
Net asset value, end of period........ $ 11.67 $ 11.55 $ 11.55 $ 11.65
======== ========= ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.... 20.10% 18.89% 18.89% 19.90%
======== ========= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........ 1.54% 3.29% 3.38% 2.45%
======== ========= ======== ========
Expenses.............................. 2.00% 3.39% 3.46% 2.56%
======== ========= ======== ========
Investment income (loss)--net......... 1.99% (.61)% (.75)% .24%
======== ========= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thou-
sands)............................... $ 121 $ 20,989 $ 7,990 $ 2,471
======== ========= ======== ========
Portfolio turnover.................... 51.37% 51.37% 51.37% 51.37%
======== ========= ======== ========
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
14
<PAGE>
<TABLE>
<CAPTION>
QUALITY BOND PORTFOLIO
-----------------------------------------
FOR THE PERIOD FEBRUARY 1, 1995+
TO JANUARY 31, 1996
-----------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of peri-
od................................ $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Investment income--net............. .62 .54 .53 .60
Realized and unrealized gain on in-
vestments--net.................... .27 .27 .27 .27
-------- -------- -------- --------
Total from investment operations... .89 .81 .80 .87
-------- -------- -------- --------
LESS DIVIDENDS:
Investment income--net............ (.62) (.54) (.53) (.60)
-------- -------- -------- --------
Total dividends.................... (.62) (.54) (.53) (.60)
-------- -------- -------- --------
Net asset value, end of period..... $10.27 $10.27 $10.27 $10.27
======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share. 9.22% 8.35% 8.27% 8.98%
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... .00% .79% .87% .19%
======== ======== ======== ========
Expenses........................... 2.60% 3.31% 3.44% 2.70%
======== ======== ======== ========
Investment income--net............. 6.22% 5.52% 5.46% 6.11%
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thou-
sands)............................ $2,196 $ 3,049 $ 1,123 $ 221
======== ======== ======== ========
Portfolio turnover................. 86.68% 86.68% 86.68% 86.68%
======== ======== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
15
<PAGE>
<TABLE>
<CAPTION>
US GOVERNMENT SECURITIES PORTFOLIO
-------------------------------------------------------------
FOR THE PERIOD FEBRUARY 1, 1995+ TO JANUARY 31, 1996
-------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $10.00 $10.00 $ 10.00 $ 10.00
------------- ------------- ------------- -------------
Investment income--net.. .76 .68 .67 .74
Realized and unrealized
gain on investments--
net.................... .74 .74 .73 .74
------------- ------------- ------------- -------------
Total from investment
operations............. 1.50 1.42 1.40 1.48
------------- ------------- ------------- -------------
LESS DIVIDENDS AND DIS-
TRIBUTIONS:
Investment income--net. (.76) (.68) (.67) (.74)
Realized gain on in-
vestments--net........ (.26) (.26) (.26) (.26)
------------- ------------- ------------- -------------
Total dividends and dis-
tributions............. (1.02) (.94) (.93) (1.00)
------------- ------------- ------------- -------------
Net asset value, end of
period................. $ 10.48 $ 10.48 $ 10.47 $ 10.48
============= ============= ============= =============
TOTAL INVESTMENT RE-
TURN:*
Based on net asset value
per share.............. 15.42% 14.52% 14.35% 15.09%
============= ============= ============= =============
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. .00% .81% .86% .22%
============= ============= ============= =============
Expenses................ 2.54% 3.35% 3.41% 2.77%
============= ============= ============= =============
Investment income--net.. 7.30% 6.28% 6.21% 6.90%
============= ============= ============= =============
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $ 5,463 $ 3,043 $ 1,089 $ 182
============= ============= ============= =============
Portfolio turnover...... 113.05% 113.05% 113.05% 113.05%
============= ============= ============= =============
</TABLE>
- --------
* Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
16
<PAGE>
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITY PORTFOLIO*
----------------------------------------------------------
FOR THE PERIOD FEBRUARY 1, 1995+ TO JANUARY 31, 1996
----------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 10.00 $ 10.00 $10.00 $10.00
------------ ------------- ------------ ------------
Investment income--net.. .34 .13 .12 .22
Realized and unrealized
gain on investments and
foreign currency trans-
actions--net........... .77 .85 .85 .85
------------ ------------- ------------ ------------
Total from investment
operations............. 1.11 .98 .97 1.07
------------ ------------- ------------ ------------
LESS DIVIDENDS AND DIS-
TRIBUTIONS:
Investment income--net. (.20) (.15) (.15) (.18)
In excess of investment
income on
investments--net...... (.06) (.04) (.04) (.06)
In excess of realized
gain on investments--
net................... (.03) (.03) (.03) (.03)
------------ ------------- ------------ ------------
Total dividends and
distributions.......... (.29) (.22) (.22) (.27)
------------ ------------- ------------ ------------
Net asset value, end of
period................. $ 10.82 $ 10.76 $ 10.75 $ 10.80
============ ============= ============ ============
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 11.15% 9.89% 9.81% 10.80%
============ ============= ============ ============
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. 2.01% 3.50% 3.58% 2.67%
============ ============= ============ ============
Expenses................ 2.32% 3.61% 3.65% 2.77%
============ ============= ============ ============
Investment income--net.. 2.92% 1.20% 1.07% 2.00%
============ ============= ============ ============
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $ 3,025 $ 16,117 $ 4,770 $ 1,513
============ ============= ============ ============
Portfolio turnover...... 83.14% 83.14% 83.14% 83.14%
============ ============= ============ ============
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
17
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in Fixed Income Securities. All of the Portfolios are authorized
to invest in fixed income securities. To the extent a portfolio invests in
fixed income securities, the net asset value of its shares will be affected by
changes in the general level of interest rates. Typically, when interest rates
decline, the value of a portfolio of fixed income securities can be expected to
rise. Conversely, when interest rates rise typically the value of a portfolio
of fixed income securities can be expected to decline. See "Other Investment
Policies and Practices of the Portfolios--Investments in Debt Securities".
Investments in Foreign Securities. The Fundamental Value Portfolio may invest
up to 30% of its total assets, the Growth Opportunity Portfolio may invest up
to 20% of its total assets and the Global Opportunity Portfolio may invest
without limitation, in the securities of foreign issuers. 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 U.S. governmental laws or restrictions applicable to such investments. Since
the Fundamental Value, Global Opportunity and Growth Opportunity Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
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 U.S. investors are concerned. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of the Fundamental Value, Global Opportunity and Growth Opportunity
Portfolios' assets denominated in those currencies and the corresponding
Portfolio'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 U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
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 U.S. instrument, and foreign entities may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. entities are subject. Foreign
financial markets, while growing in volume, generally have substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable domestic
companies. 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 Fundamental Value, Global Opportunity or
Growth Opportunity Portfolios are uninvested and no return is earned thereon.
The inability of a Portfolio to make intended security purchases due to
settlement problems could cause that Portfolio to miss attractive investment
opportunities. Inability to dispose of securities in a Portfolio due to
settlement problems could result either in losses to that Portfolio due to
subsequent declines in value of the portfolio securities or, if the Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities generally are higher than costs associated with transactions in U.S.
securities. There is
18
<PAGE>
generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the United
States.
The operating expense ratios of the Fundamental Value, Global Opportunity and
Growth Opportunity Portfolios can be expected to be higher than those of an
investment company investing exclusively in U.S. securities because the
expenses of each Portfolio, such as custodial costs, may be higher.
Dividends and interest received by the Global Opportunity Portfolio and, to a
lesser extent, the Fundamental Value and Growth Opportunity Portfolios, 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. Where their participation in such Portfolios is in an
IRA, shareholders will generally not be able to credit or deduct such taxes in
computing their taxable incomes. See "Taxes".
International Investing in Countries with Smaller Capital Markets. The risks
associated with investments in foreign securities discussed above are often
heightened for investments in small capital markets.
There may be less publicly available information about an issuer in a smaller
capital market than would be available about a U.S. company, and it may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, typically
have substantially less volume than U.S. markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable U.S. companies. Brokerage commissions, custodial
services, and other costs relating to investment in smaller capital markets are
generally more expensive than in the United States. Such markets 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.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Portfolio's incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement could
result in temporary periods when assets of the Portfolio are uninvested and no
return is earned thereon. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio security or, if
the Portfolio has entered into a contract to sell the security, could result in
possible liability to the purchaser. There is generally less government
supervision and regulation of exchanges, brokers and issuers in countries
having smaller capital markets than there is in the United States.
As a result, management of the Program may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country. The Portfolios may invest in
countries in which foreign investors, including management of the Program, have
had no or limited prior experience.
Investments in Lower Rated Securities. The Global Opportunity Portfolio has
established no rating criteria for the fixed income securities in which it may
invest. Securities rated in the medium to lower rating
19
<PAGE>
categories of nationally recognized rating agencies (commonly referred to as
"junk bonds") are predominately speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher
rating categories. The Portfolio does not intend to purchase securities that
are in default. See "Other Investment Policies and Practices of the
Portfolios--Investments in Debt Securities".
Derivative Investments. In order to seek to enhance income or to hedge
various portfolio positions, including to hedge against price movements in
markets in which the Portfolios anticipate increasing their exposure, the
Portfolios may invest in certain instruments which may be characterized as
derivative investments. These investments include various types of interest
rate transactions, options and futures. Such investments also may consist of
indexed securities, including inverse securities. The Program has express
limitations on the percentage of its assets that may be committed to certain of
such investments. Other of such investments have no express quantitative
limitations, although they may be made solely for hedging purposes, not for
speculation, and may in some cases require limitations as to the type of
permissible counter-party to the transaction. Interest rate transactions
involve the risk of an imperfect correlation between the index used in the
hedging transactions and that pertaining to the securities which are the
subject of such transactions. Similarly, utilization of options and futures
transactions involves the risk of imperfect correlation in movements in the
price of options and futures and movements in the price of the securities or
interest rates which are the subject of the hedge. Investments in indexed
securities, including inverse securities, subject the Portfolios to the risks
associated with changes in the particular indexes, which may include reduced or
eliminated interest payments and losses of invested principal. An investment in
derivative instruments for the purpose of enhancing income may have certain
speculative characteristics and may increase a Portfolio's volatility. For a
further discussion of the risks associated with these investments, see "Other
Investment Policies and Practices of the Portfolios -- Indexed and Inverse
Securities" "--Portfolio Strategies Involving Options and Futures" and Appendix
A--"Options and Futures Transactions". Management of the Program believes the
above investments are appropriate for the Portfolios.
Non-Diversified Status. The Growth Opportunity Portfolio is classified as a
non-diversified investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which means that the Portfolio is not
limited by the Investment Company Act in the proportion of its assets that may
be invested in the obligations of a single issuer. Thus, the Portfolio may
invest a greater proportion of its assets in the securities of a smaller number
of issuers and, as a result, will be subject to greater risk of loss with
respect to its portfolio securities. The Portfolio, however, intends to comply
with the diversification requirements imposed by the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), for qualification as a
regulated investment company. See "Investment Objectives and Policies--Growth
Opportunity Portfolio" and "Additional Information--Taxes".
INVESTMENT OBJECTIVES AND POLICIES
The Program consists of five separate Portfolios: the Fundamental Value
Portfolio, the Quality Bond Portfolio, the U.S. Government Securities
Portfolio, the Global Opportunity Portfolio and the Growth Opportunity
Portfolio, each with its own separate investment objectives. Each of the
Portfolios pursues its investment objectives through separate investment
policies. Set forth below are the specific investment objectives and policies
of each Portfolio, followed by a description of general investment policies
applicable
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to some or all of the Portfolios. Management of the Program believes that all
of the Portfolios' investments will be appropriate for the retirement plans,
CBA(R) and CMA (R) accounts for which the Program is designed.
FUNDAMENTAL VALUE PORTFOLIO
The Fundamental Value Portfolio seeks capital appreciation and, secondarily,
income by investing in securities, with at least 65% of the Portfolio's assets
being invested in equities. These objectives are fundamental policies of the
Fundamental Value Portfolio and may not be changed without the approval of a
majority of the Portfolio's outstanding voting securities. The Portfolio seeks
special opportunities in securities that the Investment Adviser believes are
undervalued and therefore represent investment value, including securities that
are selling at a discount, either from book value or historical price-earnings
ratios, or seem capable of recovering from temporarily out-of-favor
considerations. Particular emphasis is placed on securities which provide an
above-average dividend return and sell at a below-average price-earnings ratio.
There can be no assurance that the objectives of the Fundamental Value
Portfolio will be achieved.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Fundamental Value
Portfolio also may invest in preferred stocks and non-convertible debt
securities. The Portfolio may invest up to 30% of its total assets, taken at
market value at the time of acquisition, in the securities of foreign issuers.
See "Other Investment Policies and Practices of the Portfolios" below for
additional investment policies applicable to the Fundamental Value Portfolio.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio seeks a high level of current income through
investment in a diversified portfolio of debt obligations, such as corporate
bonds and notes, convertible securities, preferred stocks and governmental
obligations. The Portfolio will invest primarily in securities rated in the top
three rating categories (typically "A" or better) of a nationally recognized
rating agency such as Moody's, S&P or Fitch, or in securities that possess, in
the judgment of the Investment Adviser, similar credit characteristics. This
objective is a fundamental policy of the Quality Bond Portfolio and may not be
changed without the approval of a majority of the Portfolio's outstanding
voting securities. The credit risk of the Portfolio should be minimized by the
quality of the bonds in which it will invest, but the long maturities that
typically provide the best yields will subject the Portfolio to possible
substantial price changes resulting from market yield fluctuations. Portfolio
management strategy will attempt to mitigate adverse price changes and optimize
favorable price changes through active trading that shifts the maturity and/or
quality structure of the Portfolio within the overall investment guidelines.
There can be no assurance that the objectives of the Quality Bond Portfolio
will be achieved.
The Quality Bond Portfolio may continue to hold securities which, after being
purchased by the Portfolio, are downgraded to a rating below the top three
rating categories of a nationally recognized rating agency as well as any
unrated securities which, in the Investment Adviser's judgment, have suffered a
similar decline in quality.
The securities in the Quality Bond Portfolio will be varied from time to time
depending upon the judgment of management as to prevailing conditions in the
economy and the securities markets and the
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prospects for interest rate changes among different categories of fixed income
securities. The Portfolio anticipates that under normal circumstances more than
90% of the assets of the Portfolio will be invested in fixed income securities,
including convertible and nonconvertible debt securities and preferred stock.
In addition, as a matter of operating policy, at least 65% of the assets of the
Portfolio will under normal circumstances be invested in corporate bonds. The
remaining assets of the Portfolio may be held in cash or, as described herein,
may be used in connection with hedging transactions in futures contracts,
related options, and options on debt securities, or in connection with non-
hedging transactions in options on debt securities. The Portfolio does not
intend to invest in common stocks, rights or other equity securities.
Transactions in options on debt securities for non-hedging purposes may have
certain speculative characteristics.
See "Other Investment Policies and Practices of the Portfolios" below for
additional investment policies applicable to the Quality Bond Portfolio.
U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio seeks a high current return through
investments in U.S. Government and Government agency securities, including GNMA
mortgage-backed certificates and other mortgage-backed government securities.
This investment objective is a fundamental policy of the Portfolio which may
not be changed without a vote of a majority of the Portfolio's outstanding
voting securities. There can be no assurance that the objectives of the U.S.
Government Securities Portfolio will be achieved.
The securities in which the U.S. Government Securities Portfolio may invest
are marketable securities issued or guaranteed by the U.S. Government, by
various agencies of the U.S. Government and by various instrumentalities which
have been established or sponsored by the U.S. Government ("U.S. Government
securities"). Certain of these obligations, including U.S. Treasury bills,
notes and bonds and securities of GNMA and the Federal Housing Administration
("FHA"), are issued or guaranteed by the U.S. Government and supported by the
full faith and credit of the United States. Other U.S. Government securities
are issued or guaranteed by Federal agencies or government-sponsored
enterprises and are not direct obligations of the United States but involve
sponsorship or guarantees by Government agencies or enterprises. The guarantee
by Federal agencies or government-sponsored enterprises of their securities
does not extend to the Program's shares. These obligations include securities
that are supported by the right of the issuer to borrow from the Treasury, such
as obligations of Federal Home Loan Banks, and securities that are supported
only by the credit of the instrumentality, such as Federal National Mortgage
Association ("FNMA") bonds. Because the U.S. Government is not obligated to
provide support to its instrumentalities, the Portfolio will invest in
obligations issued by these instrumentalities where the Portfolio is satisfied
that the credit risk with respect to the issuers is minimal. In addition, the
Portfolio may invest up to 5% of its assets in obligations issued or guaranteed
by the International Bank for Reconstruction and Development (the "World
Bank").
The Portfolio has authority to invest in all U.S. Government securities. It
is anticipated that under certain circumstances as described below, a
significant portion of its portfolio of U.S. Government securities may consist
of GNMA mortgaged-backed certificates ("GNMA Certificates") and other U.S.
Government securities representing ownership interests in mortgage pools.
The Investment Adviser will effect portfolio transactions without regard to
any holding period if, in its judgment, such transactions are advisable in
light of a change in general market, economic or financial conditions. While
the Portfolio anticipates that its annual turnover rate should not exceed 400%
under
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normal conditions, it is impossible to predict portfolio turnover rates. A high
portfolio turnover rate involves correspondingly greater transaction costs in
the form of dealer spreads and brokerage commissions, which are borne directly
by the Portfolio. Such turnover also has certain tax consequences for the
Portfolio.
See "Other Investment Policies and Practices of the Portfolios" below for
additional investment policies applicable to the U.S. Government Securities
Portfolio.
GLOBAL OPPORTUNITY PORTFOLIO
The Global Opportunity Portfolio seeks a high total investment return through
a fully-managed investment policy utilizing United States and foreign equity,
debt and money market securities, the combination of which will be varied from
time to time, both with respect to types of securities and markets, in response
to changing market and economic trends. Total investment return is the
aggregate of capital value changes and income. This objective is a fundamental
policy of the Global Opportunity Portfolio and may not be changed without the
approval of a majority of the Portfolio's outstanding voting securities. There
can be no assurance that the objectives of the Global Opportunity Portfolio
will be achieved.
The Global Opportunity Portfolio will invest in a portfolio of U.S. and
foreign equity, debt and money market securities. The composition of the
portfolio among these securities and markets will be varied from time to time
by the Investment Adviser in response to changing market and economic trends.
This fully managed investment approach provides the Portfolio with the
opportunity to benefit from anticipated shifts in the relative performance of
different types of securities and different capital markets. For example, at
times the Portfolio may emphasize investments in equity securities in
anticipation of significant advances in stock markets and at times may
emphasize debt securities in anticipation of significant declines in interest
rates. Similarly, the Portfolio may emphasize foreign markets in its security
selection when such markets are expected to outperform, in U.S. dollar terms,
the U.S. markets. The Portfolio will seek to identify longer-term structural or
cyclical changes in the various economies and markets of the world which are
expected to benefit certain capital markets and certain securities in those
markets to a greater extent than other investment opportunities.
In determining the allocation of assets among capital markets, the Investment
Adviser will consider, among other factors, the relative valuation, condition
and growth potential of the various economies, including current and
anticipated changes in the rates of economic growth, rates of inflation,
corporate profits, capital reinvestment, resources, self-sufficiency, balance
of payments, governmental deficits or surpluses and other pertinent financial,
social and political factors which may affect such markets. In allocating among
equity, debt and money market securities within each market, the Investment
Adviser also will consider the relative opportunity for capital appreciation of
equity and debt securities, dividend yields, and the level of interest rates
paid on debt securities of various maturities.
While there are no prescribed limits on the geographical allocation of the
Portfolio's assets, the Investment Adviser anticipates that it will invest
primarily in the securities of corporate and governmental issuers domiciled or
located in the U.S., Canada, Western Europe and the Far East. In addition, the
Investment Adviser anticipates that a portion of the Portfolio's assets
normally will be invested in the U.S. securities markets and the other major
capital markets. Under normal conditions, the Portfolio's investments will be
denominated in at least three currencies or multinational currency units.
However, the Portfolio
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reserves the right to invest substantially all of its assets in U.S. markets or
U.S. dollar-denominated obligations when market conditions warrant.
Similarly, there are no prescribed limits on the allocation of the
Portfolio's assets among equity, debt and money market securities. Therefore,
at any given time, the Portfolio's assets may be primarily invested in either
equity, debt or money market securities or in any combination thereof. However,
the Investment Adviser anticipates that the Portfolio's holdings generally will
include both equity and debt securities.
The Global Opportunity Portfolio may invest up to 34% of the Portfolio's
assets in debt securities rated below "investment grade" (i.e., Ba or lower by
Moody's or BB or lower by S&P or Fitch) or which possess, in the judgment of
the Investment Adviser, similar credit characteristics. Investment in debt
securities rated in the medium to lower rating categories of a nationally
recognized rating agency or in unrated securities of comparable quality involve
special risks which are described more fully below under "Other Investment
Policies and Practices of the Portfolios--Investments in Debt Securities--
Credit Quality".
See "Other Investment Policies and Practices of the Portfolios" below for
additional investment policies applicable to the Global Opportunity Portfolio.
GROWTH OPPORTUNITY PORTFOLIO
The Growth Opportunity Portfolio seeks long-term growth of capital. The
Portfolio will seek to achieve its investment objective by investing in a
portfolio of equity securities placing particular emphasis on companies that
have exhibited above-average growth rates in earnings. The investment objective
of the Portfolio set forth in the first sentence of this paragraph is a
fundamental policy of the Portfolio which may not be changed without approval
of a majority of the Portfolio's outstanding voting securities.
The Portfolio 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 Portfolio
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 emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks. The Portfolio also
may invest in nonconvertible preferred stocks and debt securities during
temporary periods as market or economic conditions may warrant. Up to 5% of the
Portfolio's total assets may be invested in debt securities rated below
investment grade (i.e., Ba or lower by Moody's or BB or lower by S&P or Fitch),
or which possess, in the judgment of the Investment Adviser, similar credit
characteristics. See "Other Investment Policies and Practices of the
Portfolios--Investments in Debt Securities--Credit Quality".
The Portfolio may invest up to 20% of its total assets in equity securities
of foreign issuers with the foregoing characteristics. Except as otherwise set
forth herein, there are no prescribed limits on the geographical allocation of
the Portfolio's assets. (Purchases of American Depositary Receipts ("ADRs"),
however, will not be subject to this restriction.) The Portfolio may invest in
securities of foreign issuers in the form of ADRs, European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") or other
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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. GDRs are tradeable both in the U.S. and Europe and are designed for
use throughout the world.
The Growth Opportunity Portfolio is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Portfolio is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Portfolio's investments will be limited,
however, in order to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code. See "Additional
Information--Taxes". To qualify, the Portfolio will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Portfolio's total assets will be invested in the securities of a single issuer
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Portfolio will not own more than 10% of
the outstanding voting securities of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Portfolio assumes large positions in the securities of a
small number of issuers, the Portfolio's net asset value may fluctuate to a
greater extent than that of the other Portfolios or of another diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers, and the Portfolio may be more susceptible to any
single economic, political or regulatory occurrence than a diversified company.
For purposes of the diversification requirements set forth above with respect
to regulated investment companies, and to the extent required by the
Commission, the Portfolio, as a non-fundamental policy, will consider
securities issued or guaranteed by the government of any one foreign country as
the obligations of a single issuer.
See "Other Investment Policies and Practices of the Portfolios" below for
additional investment policies applicable to the Growth Opportunity Portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS
Set forth below are additional investment policies applicable to some or all
of the Portfolios.
INVESTMENTS IN EQUITY SECURITIES
The Fundamental Value Portfolio will invest primarily (at least 65% of the
Portfolio's net assets) in equity securities. The Growth Opportunity Portfolio
will also, except during temporary periods as market or economic conditions may
warrant, maintain at least 65% of its total assets invested in equity
securities. A significant portion of the Global Opportunity Portfolio also may
be invested in equity securities. In purchasing equity securities for these
Portfolios, the Investment Adviser will seek to identify the securities of
companies and industry sectors which are expected to provide high total return
relative to alternative equity investments.
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These Portfolios generally will seek to invest in securities the Investment
Adviser believes to be undervalued. Undervalued issues include securities
selling at a discount from the price-to-book value ratios and price-earnings
ratios computed with respect to the relevant stock market averages. A Portfolio
also may consider as undervalued securities selling at a discount from their
historic price-to-book value or price-earnings ratios, even though these ratios
may be above the ratios for the stock market averages. Securities offering
dividend yields higher than the yields for the relevant stock market averages
or higher than such securities' historic yield may also be considered to be
undervalued. The Portfolios may also invest in the securities of small and
emerging growth companies when such companies are expected to provide a higher
total return than other equity investments. Such companies are characterized by
rapid historical growth rates, above-average returns on equity or special
investment value in terms of their products or services, research capabilities
or other unique attributes. The Investment Adviser will seek to identify small
and emerging growth companies that possess superior management, marketing
ability, research and product development skills and sound balance sheets.
Investment in the securities of small and emerging growth companies involves
greater risk than investment in larger, more established companies. Such risks
include the fact that securities of small or emerging growth companies may be
subject to more abrupt or erratic market movements than larger, more
established companies or the market average in general. Also, these companies
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.
There may be periods when market and economic conditions exist that favor
certain types of tangible assets as compared to other types of investments.
INVESTMENTS IN DEBT SECURITIES
The Quality Bond and U.S. Government Securities Portfolios will invest
primarily in debt securities. A significant portion of the Global Opportunity
Portfolio also may be invested in debt securities. The Growth Opportunity
Portfolio may also invest up to 5% of its total assets in debt securities. The
average maturity of a Portfolio's holdings of debt securities will vary based
on the Investment Adviser's assessment of pertinent economic and market
conditions. As with all debt securities, changes in market yields will affect
the value of such securities. Prices generally increase when interest rates
decline and decrease when interest rates rise. Prices of longer term securities
generally fluctuate more in response to interest rate changes than do shorter
term securities.
The debt securities in which these Portfolios may invest include securities
issued or guaranteed by the U.S. Government and its agencies or
instrumentalities and debt obligations issued by U.S. corporations. Such
securities may include mortgage-backed securities issued or guaranteed by U.S.
governmental entities or by private issuers. In addition, the Fundamental Value
and Global Opportunity Portfolios may invest in debt securities issued by
foreign corporations or issued or guaranteed by foreign governments (including
foreign states, provinces and municipalities), by agencies and
instrumentalities thereof or by international organizations designed or
supported by multiple governmental entities (which are not obligations of the
U.S. Government or foreign governments) to promote economic reconstruction or
development ("supranational entities") such as the World Bank.
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GNMA Certificates and Other Mortgage-Backed Government Securities. The U.S.
Government Securities and Global Opportunity Portfolios may invest in GNMA
Certificates and other mortgage-backed government securities. GNMA Certificates
are mortgage-backed securities of the modified pass-through type, which means
that both interest and principal payments (including prepayments) are passed
through monthly to the holder of the Certificate. The National Housing Act
provides that the full faith and credit of the United States is pledged to the
timely payment of principal and interest by GNMA of amounts due on these GNMA
Certificates. Each Certificate evidences an interest in a specific pool of
mortgage loans insured by the FHA or the Farmers Home Administration or
guaranteed by the Veterans Administration ("VA"). GNMA is a wholly-owned
corporate instrumentality of the United States within the Department of Housing
and Urban Development.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments which have maximum maturities of 30 years. The
average life is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as a result of prepayments or
refinancing of such mortgages. Such prepayments are passed through to the
registered holder with the regular monthly payments of principal and interest.
In addition, GNMA offers a pass-through security backed by adjustable-rate
mortgages. As prepayment rates vary widely, it is not possible to predict
accurately the average life of a particular pool. The actual yield of each GNMA
Certificate is influenced by the prepayment experience of the mortgage pool
underlying the certificate.
In addition to GNMA Certificates, the U.S. Government Securities and Global
Opportunity Portfolios may invest in mortgage-backed securities issued by FNMA
and by the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA, a federally-
chartered and privately-owned corporation, issues pass-through securities and
certificates representing an interest in a pool of FNMA pass-through securities
which are guaranteed as to payment of principal and interest by FNMA. FHLMC, a
corporate instrumentality of the United States, issues participation
certificates which represent an interest in mortgages from FHLMC's portfolio
and securities representing an interest in a pool of FHLMC participation
certificates. FHLMC guarantees the timely payment of interest and the ultimate
collection of principal. As is the case with GNMA Certificates, the actual
maturity of and realized yield on particular FNMA and FHLMC mortgage-backed
securities will vary based on the prepayment experience of the underlying pool
of mortgages. Securities guaranteed by FNMA and FHLMC are not backed by the
full faith and credit of the United States.
Mortgage-backed U.S. Government securities typically provide a higher
potential for current income than other types of U.S. Government securities;
however, U.S. Treasury bills, notes and bonds typically provide a higher
potential for capital appreciation than mortgage-backed securities.
Payments of principal of and interest on mortgage-backed securities are made
more frequently than are payments on conventional debt securities. In addition,
holders of mortgage-backed securities may receive unscheduled payments of
principal at any time representing prepayments on the underlying mortgage loans
or financial assets. Such prepayments may usually be made by the related
obligor without penalty. Prepayment rates are affected by changes in prevailing
interest rates and numerous other economic, geographic, social and other
factors. Changes in the rate of prepayments will generally affect the yield to
maturity of the security. Moreover, when the holder of the security attempts to
reinvest prepayments or even the scheduled payments of principal and interest,
it may receive a rate of interest which is higher or lower than the rate on the
mortgage-backed securities originally held. To the extent that mortgage-backed
securities are purchased at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the
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extent of the premium paid. If such securities are bought at a discount, both
scheduled payments of principal and unscheduled prepayments will increase
current and total returns of the Portfolio.
Stripped Mortgage-Backed Securities. The U.S. Government Securities and
Global Opportunity Portfolios may invest in stripped mortgage-backed securities
("SMBSs") issued by agencies or instrumentalities of the United States. SMBSs
are derivative multiclass mortgage-backed securities. SMBS arrangements
commonly involve two classes of securities that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common variety of SMBS is where one class (the principal-only or "PO" class)
receives some of the interest and most of the principal from the underlying
assets, while the other class (the interest-only or "IO" class) receives most
of the interest and the remainder of the principal. In the most extreme case,
the IO class receives all of the interest, while the PO class receives all of
the principal. While a Portfolio may purchase securities of a PO class, it is
more likely to purchase the securities of an IO class. The yield to maturity of
an IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying assets, and a rapid rate of principal
payments in excess of that considered in pricing the securities will have a
material adverse effect on an IO security's yield to maturity. If the
underlying mortgage assets experience greater than anticipated payments of
principal, a Portfolio may fail to recoup fully its initial investment in IOs.
In addition, there are certain types of IOs which represent the interest
portion of a particular class as opposed to the interest portion of the entire
pool. The sensitivity of this type of IO to interest rate fluctuations may be
increased because of the characteristics of the principal portion to which they
relate. As a result of the above factors, the Portfolios generally will
purchase IOs only as a component of so-called "synthetic" securities. This
means that purchases of IOs will be matched with certain purchases of other
securities such as inverse floating rate collateralized mortgage obligations
("CMOs") or fixed rate securities; as interest rates fall, presenting a greater
risk of unanticipated prepayments of principal, the negative effect on the
Portfolio because of its holdings of IOs should be diminished somewhat because
of the increased yield on the inverse floating rate CMOs or the increased
appreciation on the fixed rate securities. IOs and POs of SMBSs are considered
by the staff of the Commission to be illiquid securities and, consequently, as
long as the staff maintains this position, the Portfolio will not invest in IOs
or POs in an amount which, taken together with the Portfolio's other
investments in illiquid securities, exceeds 15% (10% to the extent required by
certain state laws) of the Portfolio's total assets.
Foreign Debt Securities. The obligations of foreign governmental entities
have various kinds of government support and include obligations issued or
guaranteed by foreign governmental entities with taxing power. These
obligations may or may not be supported by the full faith and credit of a
foreign government. The Global Opportunity Portfolio will invest in foreign
government securities of issuers considered stable by the Investment Adviser.
The Investment Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.
Portfolio Maturity. Neither the U.S. Government Securities Portfolio nor the
portion of the Global Opportunity or Growth Opportunity Portfolios invested in
debt securities is limited as to the maturities of its portfolio investments.
The Investment Adviser may adjust the average maturity of a Portfolio's
investments from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its assessment of
future interest rate patterns. Thus, at various times the average maturity of
the Portfolio may be relatively short (from under one year to five years, for
example) and at other times may be relatively long (over 10 years, for
example).
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Credit Quality. The Quality Bond Portfolio will invest primarily in
securities rated in the top three (typically A or better) rating categories of
a nationally recognized rating agency such as Moody's, S&P or Fitch, or in
securities that possess, in the judgment of the Investment Adviser, similar
credit characteristics.
The Investment Adviser considers the ratings assigned by nationally
recognized rating agencies as one of several factors in its independent credit
analysis of issuers. If a debt security in the Quality Bond Portfolio is
downgraded below A the Investment Adviser will consider factors such as price,
credit risk, market conditions and interest rates and will sell such security
only if, in the Investment Adviser's judgment, it is advantageous to do so.
The Global Opportunity Portfolio is authorized to invest without limitation
and the Growth Opportunity Portfolio is authorized to invest up to 5% of its
total assets in fixed income securities rated below Ba by Moody's or BB by S&P
or Fitch or in unrated securities which, in the Investment Adviser's judgment,
possess similar credit characteristics ("high yield bonds"). The Program's
Board of Directors has adopted a policy that the Global Opportunity Portfolio
will not invest more than 34% of its assets in obligations rated by a
nationally recognized rating agency below investment grade, or in obligations
deemed by the Investment Adviser to possess similar credit characteristics.
Investment in high yield bonds (which are sometimes referred to as "junk"
bonds) involves substantial risk. Investments in high yield bonds will be made
only when, in the judgment of the Investment Adviser, such securities provide
attractive total return potential, relative to the risk of such securities, as
compared to higher quality debt securities. Securities rated BB or lower by S&P
or Fitch or Ba or lower by Moody's are considered by those rating agencies to
have varying degrees of speculative characteristics. Consequently, although
high yield bonds can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated fixed income securities. The Global
Opportunity and Growth Opportunity Portfolios will not invest in debt
securities in the lowest rating categories (CC or lower for S&P or Fitch or Ca
or lower for Moody's) unless the Investment Adviser believes that the financial
condition of the issuer or the protection afforded the particular securities is
stronger than would otherwise be indicated by such low ratings. See Appendix
B-- "Ratings of Corporate Debt Securities" for additional information regarding
high yield bonds.
High yield bonds may be issued by less creditworthy companies or by larger,
highly leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. High yield bonds frequently are junior obligations
of their issuers, so that in the event of the issuer's bankruptcy, claims of
the holders of high yield bonds will be satisfied only after satisfaction of
the claims of senior security holders. While the high yield bonds in which the
Portfolios may invest normally do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after the Portfolios purchase a
particular security, in which case the Portfolios may experience losses and
incur costs.
High yield bonds tend to be more volatile than higher rated fixed income
securities so that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher rated fixed income securities. Like
higher rated fixed income securities, high yield bonds are generally purchased
and sold through dealers who make a market in such securities for their own
accounts. However, there are fewer dealers in the high yield bond market which
may be less liquid than the market for higher rated fixed income
29
<PAGE>
securities even under normal economic conditions. Also, there may be
significant disparities in the prices quoted for high yield bonds by various
dealers. Adverse economic conditions or investor perceptions (whether or not
based on economic fundamentals) may impair the liquidity of this market and may
cause the prices the Portfolio receives for its high yield bonds to be reduced,
or the Portfolios may experience difficulty in liquidating a portion of its
portfolio. Under such conditions, judgment may play a greater role in valuing
certain of the Portfolios' securities than in the case of securities trading in
a more liquid market.
INVESTMENTS IN SECURITIES DENOMINATED IN FOREIGN CURRENCIES
The Fundamental Value, Global Opportunity and Growth Opportunity Portfolios
may invest in securities denominated in currencies other than the U.S. dollar.
In selecting securities denominated in foreign currencies, the Investment
Adviser will consider, among other factors, the effect of movement in currency
exchange rates on the U.S. dollar value of such securities. An increase in the
value of a currency will increase the total return to the Portfolio of
securities denominated in such currency. Conversely, a decline in the value of
the currency will reduce the total return. The Investment Adviser may seek to
hedge all or a portion of a Portfolio's foreign securities through the use of
forward foreign currency contracts, currency options, futures contracts and
options thereon or derivative securities. See "Indexed and Inverse Securities"
and "Portfolio Strategies Involving Options and Futures" below and Appendix A
- -- "Options and Futures Transactions".
INVESTMENTS IN MONEY MARKET SECURITIES
The Global Opportunity Portfolio may invest a significant portion of its
assets in short-term, high quality debt instruments. In addition, for temporary
or defensive purposes or in anticipation of redemptions, each of the Portfolios
is authorized to invest up to 100% of its assets in such money market
instruments, including obligations of or guaranteed by the U.S. Government or
its instrumentalities or agencies, certificates of deposit, bankers'
acceptances and other bank obligations, commercial paper rated in the highest
category by a nationally recognized rating agency or other fixed income
securities deemed by the Investment Adviser to be consistent with the
objectives of the Portfolio, or the Portfolio may hold its assets in cash. The
obligations of commercial banks may be issued by U.S. banks, foreign branches
of U.S. banks ("Eurodollar" obligations) or U.S. branches of foreign banks
("Yankeedollar" obligations). Except during extraordinary periods, the Growth
Opportunity Portfolio would not expect that such securities or cash held for
redemptions would exceed 20% of its total assets.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED DELIVERY TRANSACTIONS
Each Portfolio may purchase securities on a when-issued or forward commitment
basis and may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by a Portfolio with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Portfolio at the time of entering into the
transaction. Although none of the Portfolios has established limits on the
percentage of its assets that may be committed in connection with such
transactions, each Portfolio will maintain with the Program's custodian a
segregated account of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of the
Portfolio's commitment in connection with such purchase transactions.
30
<PAGE>
STANDBY COMMITMENT AGREEMENTS
Each Portfolio may from time to time enter into standby commitment
agreements. Such agreements commit a Portfolio, for a stated period of time,
to purchase a stated amount of a fixed income security which may be issued and
sold to the Portfolio at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Portfolio is paid a commitment fee, regardless of whether
or not the security is ultimately issued, which typically is approximately
0.5% of the aggregate purchase price of the security which the Portfolio has
committed to purchase. A Portfolio will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price which is considered advantageous to the Portfolio. None of the
Portfolios will enter into a standby commitment with a remaining term in
excess of 45 days, and each Portfolio will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 15% (10% to the extent required
by certain state laws) of its total assets taken at the time of acquisition of
such commitment or security. The Portfolio will at all times maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount
equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and, if issued, the value of the security on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, a
Portfolio may bear the risk of a decline in the value of such security and may
not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security
reasonably can be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the related Portfolio's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS
Each Portfolio may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts may be entered into only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million. Under such agreements, the
other party agrees, upon entering into the contract with a Portfolio, to
repurchase the security at a mutually agreed upon time and price in a
specified currency, 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, although such return may be affected by
currency fluctuations. In the case of repurchase agreements, the prices at
which the trades are conducted do not reflect accrued interest on the
underlying obligation; whereas, in the case of purchase and sale contracts,
the prices take into account accrued interest. Such 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. In the case of a repurchase
agreement, as a purchaser, a Portfolio 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
Portfolio does not have the right to seek additional collateral
31
<PAGE>
in the case of purchase and sale contracts. 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 Portfolio but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
a Portfolio may suffer time delays and incur costs or possible losses in
connection with disposition of the collateral.
A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that the securities are owned by the
Portfolio. In the event of a default under such a repurchase agreement or
under a purchase and sale contract, instead of the contractual fixed rate, the
rate of return to the Portfolio would be dependent upon intervening
fluctuations of the market values of such securities and the accrued interest
on the securities. In such event, the Portfolio would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. A Portfolio may
not invest in repurchase agreements or purchase and sale contracts maturing in
more than seven days if such investments, together with the Portfolio's other
illiquid investments, would exceed 15% (10% to the extent required by certain
state laws) of the Portfolio's total assets.
INDEXED AND INVERSE SECURITIES
The Portfolios may invest in securities whose potential investment return is
based on the change in particular measurements of value or rate (an "index").
As an illustration, the Portfolios may invest in a security that pays interest
and returns principal based on the change in an index of interest rates or of
the value of a precious or industrial metal. Interest and principal payable on
a security may also be based on relative changes among particular indexes. In
addition, the Portfolios may invest in securities whose potential investment
return is inversely based on the change in particular indexes. For example,
the Portfolios may invest in securities that pay a higher rate of interest and
principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that the
Portfolios invest in such types of securities, they will be subject to the
risks associated with changes in the particular indexes, which may include
reduced or eliminated interest payments and losses of invested principal.
Indexed and inverse securities are currently issued by a number of U.S.
governmental agencies such as FHLMC and FNMA, as well as a number of other
financial institutions. To the extent the Portfolios invest in such
instruments, under current market conditions, they most likely will purchase
indexed and inverse securities issued by the above-mentioned U.S. governmental
agencies.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities.
The Portfolios believe that indexed securities, including inverse securities,
represent flexible portfolio management instruments that may allow the
Portfolios to seek potential investment return, hedge other portfolio
positions, or vary the degree of portfolio leverage relatively efficiently
under different market conditions.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio 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 U.S. Government. Such collateral 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
32
<PAGE>
policy of each Portfolio, and it may not be changed without the approval of the
holders of a majority of the Portfolio's outstanding voting securities, as
defined in the Investment Company Act. During the period of such a loan, the
Portfolio receives the income on the loaned securities and either receives the
income on the collateral or other compensation, i.e., negotiated loan premium
or fee, for entering into the loan and thereby increases its yield. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, a Portfolio 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.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Each Portfolio may engage in various portfolio strategies to seek to increase
its return through the use of listed or over-the-counter ("OTC") options on its
portfolio securities and to hedge its portfolio against adverse movements in
the markets in which it invests. Each Portfolio is authorized to write (i.e.,
sell) covered put and call options on its portfolio securities or securities in
which it anticipates investing and purchase put and call options on securities.
In addition, the Fundamental Value, Global Opportunity and Growth Opportunity
Portfolios may engage in transactions in stock index options, stock index
futures and related options on such futures and may deal in forward foreign
exchange transactions and foreign currency options and futures and related
options on such futures. The Quality Bond, U.S. Government Securities, Global
Opportunity and Growth Opportunity Portfolios may engage in transactions in
interest rate futures and related options on such futures. Each of these
portfolio strategies is described in more detail in "Appendix A--Options and
Futures Transactions" attached to this Prospectus and in the Statement of
Additional Information. Although certain risks are involved in options and
futures transactions (as discussed in the Appendix), the Investment Adviser
believes that, because the Portfolios will (i) write only covered options on
portfolio securities or securities in which they anticipate investing and (ii)
engage in other options and futures transactions only for hedging purposes, the
options and portfolio strategies of the Portfolios will not subject any
Portfolio to the risks frequently associated with the speculative use of
options and futures transactions. While each Portfolio's use of hedging
strategies is intended to reduce the volatility of the net asset value of
shares of that Portfolio, each Portfolio's net asset value will fluctuate.
There can be no assurance that any Portfolio's hedging transactions will be
effective. Furthermore, each Portfolio will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities
when movements in the equity or debt markets, interest rates or currency
exchange rates occur.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its total assets in illiquid
securities, although it will limit such investments to 10% of its total assets
to the extent required by state law. Pursuant to that restriction, the
Portfolios may not invest in securities that cannot readily be resold because
of legal or contractual restrictions or which cannot otherwise be marketed,
redeemed, put to the issuer or a third party, or which do not mature within
seven days, or which the Board of Directors of the Program has not determined
to be liquid pursuant to applicable law, if at the time of acquisition more
than 15% (or 10%, if state law so requires) of that Portfolio's total assets,
taken at market value, would be invested in such securities. Securities subject
to this restriction include repurchase agreements maturing in more than seven
days and securities the disposition of which is subject to other legal
restrictions, such as restrictions imposed by the Securities Act of 1933, as
amended (the "Securities Act"), on the resale of securities acquired in certain
private placements. If
33
<PAGE>
registration of these securities under the Securities Act is required, such
registration may not be readily accomplished, and if such securities may be
resold without registration, such resale may be permissible only in limited
quantities. In either event, a Portfolio may not be able to sell these
restricted securities at a time which, in the judgment of the Investment
Adviser, would be most opportune.
Although not a fundamental policy, each Portfolio will include OTC options
and securities underlying such options (to the extent provided under
"Restrictions on OTC Options" in Appendix A hereto) in calculating the amount
of its assets subject to the limitation on restricted securities. No Portfolio
will change or modify this policy prior to the change or modification by the
Commission staff of its positions regarding OTC options.
Notwithstanding the above limitation, each Portfolio may purchase 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 Program's Board of Directors, or the Investment Adviser
pursuant to guidelines adopted by the Board, continuously determines, based on
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 liquidity determinations. Since it is not possible to
predict with assurance exactly how this market for restricted securities
offered and sold under Rule 144A will develop, the Board of Directors will
monitor carefully each Portfolio'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 a Portfolio to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
INVESTMENT RESTRICTIONS
Each Portfolio's investment activities are subject to further restrictions
that are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of a Portfolio'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 each Portfolio's fundamental policies, a
Portfolio may not invest more than 25% of its assets, taken at market value at
the time of each investment, in the securities of issuers of any particular
industry (excluding the U.S. Government and its agencies or instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a non-
fundamental policy, no Portfolio may borrow amounts in excess of 10% of its
total assets, taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes, such as the redemption of
Portfolio shares. No Portfolio will purchase securities while borrowings exceed
5% of its assets. None of the Portfolios has a present intention to borrow
money in amounts exceeding 5% of its assets.
MANAGEMENT OF THE PROGRAM
BOARD OF DIRECTORS
The Board of Directors of the Program consists of six individuals, five of
whom are not "interested persons" of the Program as defined in the Investment
Company Act. The Directors of the Program are
34
<PAGE>
responsible for the overall supervision of the operations of the Program and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act.
The Directors of the Program are:
Arthur Zeikel*--President of the Investment Adviser and FAM; President and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML&Co. and Director of the Distributor.
Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee; and Member of the Investment Advisory Committee of the State of New
York Common Retirement Fund.
Walter Mintz--Special Limited Partner of Cumberland Associates (an investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--President of Silbanc Properties, Ltd. (real estate,
investment and consulting).
Stephen B. Swensrud--Principal of Fernwood Associates (financial
consultants).
- --------
* Interested person, as defined in the Investment Company Act, of the
Program.
MANAGEMENT AND ADVISORY ARRANGEMENTS
MLAM acts as the investment adviser to the Program and provides each
Portfolio with management and investment advisory services. The Investment
Adviser is owned and controlled by ML&Co., a financial services holding company
and the parent of Merrill Lynch. The Investment Adviser or its affiliates act
as investment adviser(s) to more than 130 other registered investment companies
and provide investment advisory services to individuals and institutions. As of
April 30, 1996, the Investment Adviser and its affiliates had a total of
approximately $207.0 billion in investment company and other portfolio assets
under management.
The investment advisory agreement with the Investment Adviser relating to
each Portfolio (each an "Investment Advisory Agreement") provides that, subject
to the direction of the Board of Directors of the Program, the Investment
Adviser is responsible for the actual management of that Portfolio and for the
review of that Portfolio'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 Investment Adviser,
subject to review by the Board of Directors. The Investment Adviser supplies
the portfolio managers for each Portfolio, who consider analyses from various
sources, make the necessary investment decisions and place transactions
accordingly. The Investment Adviser also is obligated to perform certain
administrative and management services for the Program and is required to
provide all the office
35
<PAGE>
space, facilities, equipment and personnel necessary to perform its duties
under each Investment Advisory Agreement. The Investment Adviser has access to
the total securities research, economic research and computer applications
facilities of Merrill Lynch and makes extensive use of these facilities.
Each Portfolio pays the Investment Adviser a monthly fee based on the
average daily value of that Portfolio's net assets at the following annual
rates:
<TABLE>
<CAPTION>
U.S.
FUNDAMENTAL QUALITY GOVERNMENT GLOBAL GROWTH
VALUE BOND SECURITIES OPPORTUNITY OPPORTUNITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
0.65% 0.50% 0.50% 0.75% 0.65%
</TABLE>
Each Investment Advisory Agreement obligates a Portfolio to pay certain
expenses incurred in its operations and a portion of the Program's general
administrative expenses allocated on the basis of the asset size of the
respective Portfolios. Expenses that will be borne directly by the Portfolios
include redemption expenses, expenses of portfolio transactions, shareholder
servicing costs, expenses of registering the shares under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), interest, certain taxes, charges of the Custodian and Transfer Agent
and other expenses attributable to a particular Portfolio. Expenses which will
be allocated on the basis of the size of the respective Portfolios include
directors' fees, legal expenses, state franchise taxes, auditing services,
costs of printing proxies, stock certificates, shareholder reports and
prospectuses (except to the extent paid by the Distributor), Securities and
Exchange Commission fees, accounting costs and other expenses properly payable
by the Program and allocable on the basis of the size of the respective
Portfolios. Accounting services are provided for the Portfolios by the
Investment Adviser and the Portfolios reimburse the Investment Adviser for its
costs in connection with such services.
Set forth in the table below is information for each Portfolio pertaining to
the Portfolio's investment advisory arrangements for the fiscal year ended
January 31, 1996. Information is not provided for Growth Opportunity Portfolio
since that Portfolio commenced operations on February 2, 1996.
<TABLE>
<CAPTION>
RATIO OF TOTAL EXPENSES, NET OF
REIMBURSEMENT, TO AVERAGE NET ASSETS
------------------------------------------------
BASED ON PAYMENT TO
AVERAGE NET INVESTMENT
ASSETS OF ADVISER FOR
MANAGEMENT APPROX. ($) ACCOUNTING
PORTFOLIO(1) FEE $ (IN MILLIONS) SERVICES ($)(1) CLASS A CLASS B CLASS C CLASS D
- ------------ ---------- ------------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fundamental Value Port-
folio.................. 128,082 19.7 50,776 1.54% 3.29% 3.38% 2.45%
Quality Bond Portfolio.. 23,114 4.6 16,948 .00 .79 .87 .19
U.S. Government Securi-
ties Portfolio......... 37,948 7.6 56,177 .00 .81 .86 .22
Global Opportunity Port-
folio.................. 146,953 19.6 55,145 2.01 3.50 3.58 2.67
</TABLE>
- --------
(1) The Investment Adviser waived the payment of a portion of the fee for the
period pursuant to state expense limitations and voluntarily waived the
remainder of the fee and reimbursed the Portfolios for a portion of other
expenses (excluding 12b-1 fees). The Investment Adviser may discontinue or
reduce such waiver of fees and/or assumption of expenses at any time without
notice.
Set forth below is information about the Portfolio Manager for each of the
Program's Portfolios. The Portfolio Manager is the individual who is primarily
responsible for the day to day management of the Portfolio.
Fundamental Value Portfolio--Kevin Rendino. Mr. Rendino has served as a Vice
President of the Investment Adviser since December 1993. Prior to that he was
a Senior Research Analyst from 1990 to 1992 and a Corporate Analyst from 1988
to 1990.
36
<PAGE>
Quality Bond Portfolio--Jay C. Harbeck. Mr. Harbeck has served as a Vice
President of the Investment Adviser since 1986 and as Portfolio Manager of the
Investment Adviser since 1992.
U.S. Government Securities Portfolio--Gregory Mark Maunz. Mr. Maunz has
served as a Vice President of the Investment Adviser since 1985 and as
Portfolio Manager of the Investment Adviser since 1984.
Global Opportunity Portfolio--Thomas R. Robinson. Mr. Robinson has served as
a Vice President of the Investment Adviser since 1995.
Growth Opportunity Portfolio--Lawrence R. Fuller. Mr. Fuller has served as a
Vice President of the Investment Adviser since 1992. From 1984 to 1992, Mr.
Fuller served as a Senior Vice President and Director of Benefit Capital
Management.
CODE OF ETHICS
The Board of Directors of the Program 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 Program within periods of trading by any Portfolio of the Program in
the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly-owned subsidiary of ML&Co., acts as the Program'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, each
Portfolio pays the Transfer Agent a fee of $11 per Class A and Class D
shareholder account and $14 per Class B and Class C shareholder account and
nominal miscellaneous fees (e.g., account closing fees) and reimburses the
Transfer Agent for out-of-pocket expenses incurred under the Transfer Agency
Agreement.
<TABLE>
<CAPTION>
AT APRIL 30, 1996
TRANSFER -------------------------------
AGENCY FEE PAID NUMBER OF SHAREHOLDER ACCOUNTS TRANSFER
FOR THE YEAR ENDED ------------------------------- AGENCY FEE
PORTFOLIO JANUARY 31, 1996 CLASS A CLASS B CLASS C CLASS D PAYABLE
- --------- ------------------ ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fundamental Value....... $106,156 102 8,200 4,194 927 $184,835
Quality Bond............ $ 16,039 15 1,431 685 139 $ 31,318
U.S. Government Securi-
ties................... $ 12,262 9 955 405 82 $ 20,041
Global Opportunity...... $ 74,788 81 7,350 3,247 663 $156,542
Growth Opportunity(1)... $ 0 43 1,786 1,073 177 $ 42,446
</TABLE>
- --------
(1) Transfer Agency Fee Paid information is not provided for Growth
Opportunity Portfolio since it commenced operations on February 2, 1996.
37
<PAGE>
PURCHASE OF SHARES
The Program offers shares solely to holders of IRAs for which Merrill Lynch
acts as custodian, including individual retirement rollover accounts, SEP-IRAs
and to CBA(R) and CMA (R) accounts established pursuant to the Uniform Gifts
to Minors Acts or the Uniform Transfers to Minors Acts (or similar state
statutes).
CONTINUOUS OFFERING
The Program currently is engaged in a continuous offering of the shares of
each Portfolio. The shares of the Portfolios are offered continuously for sale
by the Distributor and other eligible securities dealers (including Merrill
Lynch). Shares of the Portfolios may be purchased from securities dealers or
by mailing a purchase order directly to the Transfer Agent. During the
continuous offering of the shares of the Portfolios, the minimum initial
purchase is $100, and the minimum subsequent purchase is $1.
The Program is offering shares of the Portfolios 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 Portfolio
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 (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 as of 15
minutes after the close of business on the New York Stock Exchange, on the day
the orders are placed with the Distributor, provided the orders are received
by the Distributor prior to 30 minutes after the close of business on the New
York Stock Exchange on that day. If the purchase orders are not received by
the Distributor prior to 30 minutes after the close of business on the New
York Stock Exchange such orders shall be deemed received on the next business
day. The Program or the Distributor may suspend the continuous offering of any
Portfolio'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 Program.
Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a sale of shares to
such customers. Purchases directly through the Transfer Agent are not subject
to the processing fee.
Each Portfolio 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 Portfolio 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 9.
Shareholders considering transferring an IRA, CBA(R) account or CMA
SubAccount (SM) in which Program shares are held from Merrill Lynch to another
brokerage firm or financial institution should be aware that shares of the
Portfolios may only be held in a Merrill Lynch custodied IRA or a CBA(R)
account
38
<PAGE>
or CMA SubAccount (SM) established pursuant to the Uniform Gifts to Minors Acts
or Uniform Transfers to Minors Acts (or similar state statutes). Prior to any
such transfer, 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 exchange the shares for shares of another MLAM-advised
mutual fund pursuant to the exchange privilege. It is possible, however, that
the firm to which the account is to be transferred will not take delivery of
shares of such fund, in which case the shareholder would have to redeem these
shares (paying any applicable CDSC) so that the cash proceeds can be
transferred or continue to maintain an IRA, CBA(R) account or CMA
SubAccount (SM) at Merrill Lynch for those shares.
Cash balances of participants who elect to have such funds automatically
invested in shares of a Portfolio will be invested as follows. Cash balances
arising from the sale of securities held in the IRA account which do not
settle on the day of the transaction (such as most common and preferred stock
transactions) become available to the Program and will be invested in shares
of a Portfolio on the business day following the day that proceeds with
respect thereto are received in the IRA account. Proceeds giving rise to cash
balances from the sale of securities held in the IRA account settling on a
same day basis and from principal repayments on debt securities held in the
account become available to the Program and will be invested in shares of a
Portfolio on the next business day following receipt. Cash balances arising
from dividends or interest payments on securities held in the IRA account or
from a contribution to the IRA account are invested in shares of the
Portfolios on the business day following the date the payment is received in
the IRA account.
Merrill Lynch has advised the Program that it will not charge an annual
account fee upon any IRA, CBA(R) account or CMA SubAccount (SM) which is then
invested solely in one or more of the Program's Portfolios or in a money
market fund advised by the Investment Adviser or its affiliates. Merrill Lynch
has also advised the Program that it will not charge an annual account fee
upon any IRA which participates in the Merrill Lynch Asset Builder (SM) Service,
receives additional contributions of $250 annually and is invested solely in
one or more of the Program's Portfolios or a money market fund advised by the
Investment Adviser or its affiliates. If, however, a shareholder of any of the
Portfolios exchanges any of his or her shares of a Portfolio for shares of
another MLAM-advised mutual fund, Merrill Lynch will reinstate the IRA, CBA(R)
or CMA SubAccount (SM) annual account fee, as the case may be. For information
about current IRA fees charged by Merrill Lynch, consult the Merrill Lynch IRA
Disclosure Statement and the Merrill Lynch IRA Custodial Agreement. For
information about current CBA(R) fees charged by Merrill Lynch, consult the
Capital Builder(TM) Account Program description. For information about current
CMA SubAccount (SM) fees charged by Merrill Lynch, consult the Cash Management
Account(R) Program description.
Each Class A, Class B, Class C and Class D share of a Portfolio represents
an identical interest in the same investment portfolio and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Portfolio 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 a
Portfolio 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.
39
<PAGE>
See "Distribution Plans" below. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege". If pursuant to the exchange
privilege, shares of any Portfolio are exchanged for shares of a fund other
than a Portfolio of the Program or a money market fund advised by the
Investment Adviser or its affiliates, then the imposition of the IRA, CBA(R)
or CMA SubAccount (SM) annual account fee, as the case may be, may result. For
information about current IRA fees charged by Merrill Lynch, consult the
Merrill Lynch IRA Disclosure Statement and the Merrill Lynch IRA Custodial
Agreement. For information about current CBA (R) fees charged by Merrill
Lynch, consult the Capital Builder (TM) Account Agreement. For more
information about current CMA Subaccount (SM) fees charged by Merrill Lynch,
consult the Cash Management Account(R) Agreement.
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Program. The distribution-related
revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares. Investors are
advised that only Class A and Class D shares may be available for purchase
through securities dealers, other than Merrill Lynch, which are eligible to
sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
FUNDAMENTAL VALUE, GLOBAL OPPORTUNITY AND GROWTH OPPORTUNITY PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.75% B shares convert to D shares
four years at a rate of automatically after
4.0% during the first approximately eight
year, decreasing 1.0% years(/4/)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 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 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 in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead will be subject to a
1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of the Quality Bond and U.S. Government Securities
Portfolios and certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of a Portfolio are exchanged for Class B shares of another Portfolio or
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 on to the holding period for the shares
acquired.
40
<PAGE>
QUALITY BOND AND U.S. GOVERNMENT SECURITIES PORTFOLIOS
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/)(/3/)
- ----------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.50% B shares convert to D shares
four years at a rate of automatically after
4.0% during the first approximately ten
year, decreasing 1.0% years(/4/)
annually to 0.0%
- ----------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ----------------------------------------------------------------------------------------
D Maximum 4.00% 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 in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead will be subject to a
1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is modified. Also,
Class B shares of the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios and certain other MLAM-advised mutual funds into
which exchanges may be made have an eight-year conversion period. If Class
B shares of a Portfolio are exchanged for Class B shares of another
Portfolio or 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 on to the holding period
for the shares acquired.
41
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE, GLOBAL OPPORTUNITY
AND GROWTH OPPORTUNITY PORTFOLIOS
--------------------------------------------------
SALES LOAD AS A DISCOUNT TO
SALES LOAD AS A PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE 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>
<TABLE>
<CAPTION>
QUALITY BOND AND
U.S. GOVERNMENT SECURITIES PORTFOLIOS
-----------------------------------------------------
SALES LOAD AS A DISCOUNT TO
SALES LOAD PERCENTAGE* OF SELECT DEALERS
AS A PERCENTAGE NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OF OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Less than $25,000........ 4.00% 4.17% 3.75%
$25,000 but less than
$50,000................. 3.75 3.90 3.50
$50,000 but less than
$100,000................ 3.25 3.36 3.00
$100,000 but less than
$250,000................ 2.50 2.56 2.25
$250,000 but less than
$1,000,000.............. 1.50 1.52 1.25
$1,000,000 and more**.... 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 plans in
connection with certain investment programs. If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchase will be
subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Program will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
The following tables set forth information about the number of Class A and
Class D shares sold by each Portfolio for the fiscal year ended January 31,
1996, the aggregate net proceeds from such sales, the gross sales charges and
the amounts of such charges received by the Distributor and Merrill Lynch. No
CDSCs
42
<PAGE>
were paid to the Distributor with respect to redemption within one year of
purchase of Class A or Class D shares purchased subject to front-end sales
charge waivers. Information is not provided for Growth Opportunity Portfolio
since it commenced operations on February 2, 1996.
<TABLE>
<CAPTION>
GROSS SALES CHARGES
------------------------------------
NO. OF AGGREGATE PAID TO
CLASS A SHARES NET TOTAL PAID TO MERRILL
PORTFOLIO SOLD PROCEEDS ($) AMOUNT ($) DISTRIBUTOR ($) LYNCH ($)
- --------- -------------- ------------ ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Fundamental Value....... 211,092 2,121,694 96 5 91
Quality Bond............ 200,766 2,007,639 0 0 0
U.S. Government Securi-
ties................... 512,777 5,133,291 49 3 46
Global Opportunity...... 835,209 8,372,011 210 11 199
<CAPTION>
GROSS SALES CHARGES
------------------------------------
NO. OF AGGREGATE PAID TO
CLASS D SHARES NET TOTAL PAID TO MERRILL
PORTFOLIO SOLD PROCEEDS ($) AMOUNT ($) DISTRIBUTOR ($) LYNCH ($)
- --------- -------------- ------------ ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Fundamental Value....... 217,786 2,387,449 47,105 2,345 44,760
Quality Bond............ 22,296 223,184 2,829 192 2,637
U.S. Government Securi-
ties................... 23,396 243,530 3,074 203 2,871
Global Opportunity...... 129,359 1,346,418 19,543 959 18,584
</TABLE>
Eligible Class A Investors. Class A shares of each Portfolio are offered to
a limited group of investors and also will be issued upon reinvestment of
dividends on outstanding Class A shares of that Portfolio. Investors that
currently own Class A shares of a Portfolio in a shareholder account are
entitled to purchase additional Class A shares of that Portfolio in that
account. Class A shares may be purchased at net asset value by participants in
certain investment programs to which Merrill Lynch Trust Company provides
discretionary trustee services. In addition, Class A shares are offered at net
asset value to ML&Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including
the Program. Certain persons who acquired shares of certain MLAM-advised
closed-end funds who wish to reinvest the net proceeds from a sale of their
closed-end fund common shares in shares of the Program also may purchase Class
A shares of a Portfolio if certain conditions set forth in the Statement of
Additional Information are met. For example, Class A shares of the Program and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans available through employers
which provide such plans. Class A and Class D shares are offered at net asset
value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Program the net proceeds from a sale of certain of their shares
of common stock, pursuant to tender offers conducted by those funds.
43
<PAGE>
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, with respect to the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios, approximately eight years after Class B shares are
issued, and with respect to the Quality Bond and U.S. Government Securities
Portfolios, approximately ten 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 same
Portfolio 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 of each of the Portfolios are subject to ongoing account maintenance
and distribution fees as discussed below under "Distribution Plans". The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares of each Portfolio are sold without an initial
sales charge so that the Portfolio 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".
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 Program in connection with the sale of the Class B and Class C
shares of the Portfolios, 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 Program to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Class B shares of a Portfolio
will convert automatically into Class D shares of the same Portfolio
approximately eight years after issuance in the case of the Fundamental Value,
Global Opportunity and Growth Opportunity Portfolios and approximately ten
years after issuance in the case of the Quality Bond and U.S. Government
Securities Portfolios. Class D shares are subject to an account maintenance fee
but no distribution fee. Class B shares of certain MLAM-advised mutual funds
into which exchanges may be made convert into Class D shares automatically
after approximately eight years, and Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made convert into Class D
shares
44
<PAGE>
automatically after approximately ten years. If Class B shares of a Portfolio
are exchanged for Class B shares of another Portfolio or MLAM-advised mutual
fund, the conversion period applicable to Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked on to the holding period for the shares acquired.
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are
held in the MFA program will be included in determining the holding period of
Class B shares reacquired upon termination of participation in the MFA
program. See "Shareholder Services--Exchange Privilege" in the Statement of
Additional Information.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of a
Portfolio exercising the exchange privilege described under "Shareholder
Services --Exchange Privilege" will continue to be subject to that Portfolio's
CDSC schedule if such schedule is higher than the CDSC schedule relating to
the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
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>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
45
<PAGE>
For the fiscal year ended January 31, 1996, the Distributor received CDSCs
from the Portfolios with respect to redemption of Class B shares, all of which
was paid to Merrill Lynch as follows:
<TABLE>
<CAPTION>
CDSCS RECEIVED
PORTFOLIO BY DISTRIBUTOR ($)
--------- ------------------
<S> <C>
Fundamental Value......................................... 11,993
Quality Bond.............................................. 1,288
U.S. Government Securities................................ 2,636
Global Opportunity........................................ 12,061
</TABLE>
Information is not provided for Growth Opportunity Portfolio since it
commenced operations on February 2, 1996.
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 a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an IRA or following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
46
<PAGE>
For the fiscal year ended January 31, 1996, the Distributor received CDSCs
from the Portfolios with respect to redemption of Class C shares, all of which
were paid to Merrill Lynch, as follows:
<TABLE>
<CAPTION>
CDSCS RECEIVED
PORTFOLIO BY DISTRIBUTOR ($)
--------- ------------------
<S> <C>
Fundamental Value......................................... 2,371
Quality Bond.............................................. 224
U.S. Government Securities................................ 255
Global Opportunity........................................ 1,357
</TABLE>
Information is not provided for Growth Opportunity Portfolio since it
commenced operations on February 2, 1996.
Conversion of Class B Shares to Class D Shares. After approximately eight
years in the case of the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios and ten years in the case of the Quality Bond and U.S.
Government Securities Portfolios (the "Conversion Period"), Class B shares of a
Portfolio will be converted automatically into Class D shares of the same
Portfolio. 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 a Portfolio 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 that
Portfolio held in the account on the Conversion Date will be converted to Class
D shares of that Portfolio.
Share certificates for Class B shares of a Portfolio 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 on
to the holding period for the shares acquired.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A
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<PAGE>
shares were acquired through exchange of Class B shares (see "Shareholder
Services--Exchange Privilege" in the Statement of Additional Information), then
the holding period for such Class A shares will be "tacked" to the holding
period of the Class B shares originally held for purposes of calculating the
Conversion Period on Class B shares acquired upon termination of participation
in the MFA program.
DISTRIBUTION PLANS
The Program has adopted separate distribution plans on behalf of each of the
Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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
respective Portfolio also pays the Distributor a distribution fee relating to
the shares of the relevant class, accrued daily and paid monthly, (i) at the
annual rate of 0.75% of the average daily net assets attributable to the Class
B and Class C shares of the Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios or (ii) at the annual rates of 0.50% and 0.55% of the
average daily net assets attributable to the Class B and Class C shares,
respectively, of the Quality Bond and U.S. Government Securities Portfolios, 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 Portfolios, including payments to
financial consultants for selling Class B and Class C shares of that Portfolio.
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 Portfolios
in that the deferred sales charges provide for the financing of the
distribution of the Portfolio's Class B and Class C shares.
For the fiscal year ended January 31, 1996, the Portfolios paid the
Distributor the amounts set forth below under the Plans.
<TABLE>
<CAPTION>
CLASS D
CLASS B DISTRIBUTION CLASS C DISTRIBUTION DISTRIBUTION
PLAN PLAN PLAN
------------------------ ------------------------ ------------
ACCOUNT ACCOUNT ACCOUNT
MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE
PORTFOLIO FEES FEES FEES FEES FEES
- --------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fundamental Value....... $ 31,334 $94,003 $11,130 $33,388 $3,718
Quality Bond............ $ 4,590 $ 9,179 $ 1,438 $ 3,162 $ 348
U.S. Government Securi-
ties................... $ 3,923 $ 7,847 $ 1,347 $ 2,962 $ 245
Global Opportunity...... $ 22,632 $67,896 $ 6,131 $18,393 $2,015
</TABLE>
48
<PAGE>
Information is not provided for Growth Opportunity Portfolio since it
commenced operations on February 2, 1996.
Payments under the Distribution Plans are based upon a percentage of average
daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
The table below sets forth information, with respect to Class B and Class C
shares, concerning direct cash revenues and expenses for the period February 1,
1995 (commencement of operations) to December 31, 1995.
<TABLE>
<CAPTION>
AMOUNT BY WHICH AMOUNT BY WHICH
DIRECT CASH DIRECT CASH
EXPENSES EXCEEDED EXPENSES EXCEEDED
DIRECT CASH % OF CLASS B DIRECT CASH % OF CLASS C
REVENUES AS OF NET ASSETS AT REVENUES AS OF NET ASSETS AT
PORTFOLIO DECEMBER 31, 1995 ($) DECEMBER 31, 1995 DECEMBER 31, 1995 ($) DECEMBER 31, 1995
- --------- --------------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Fundamental Value....... 128,028 .65 8,039 .11
Quality Bond............ 22,909 .78 2,473 .23
U.S. Government Securi-
ties................... 18,885 .70 2,534 .26
Global Opportunity...... 68,291 .46 4,795 .11
</TABLE>
The table below sets forth information, with respect to Class B shares,
concerning fully allocated revenues and expenses for the period February 1,
1995 (commencement of operations) to December 31, 1995.
<TABLE>
<CAPTION>
AMOUNT BY WHICH FULLY
ALLOCATED
EXPENSES EXCEEDED
FULLY ALLOCATED % OF CLASS B
REVENUES AS OF NET ASSETS AT
PORTFOLIO DECEMBER 31, 1995 ($) DECEMBER 31, 1995
--------- --------------------- -----------------
<S> <C> <C>
Fundamental Value................. 601,000 3.03
Quality Bond...................... 95,000 3.23
U.S. Government Securities........ 81,000 3.01
Global Opportunity................ 394,000 2.67
</TABLE>
Information is not provided for Growth Opportunity Portfolio since it
commenced operations on February 2, 1996.
The Program 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
49
<PAGE>
there is no assurance that the Directors of the Program 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".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
Portfolios' distribution fees and the CDSCs but not the account maintenance
fees. The maximum sales charge rule is applied separately to each Portfolio
and to each class. As applicable to the Portfolios, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by
each Portfolio 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
interest charges at any time. To the extent payments would exceed the
voluntary maximum, the Portfolio in question will not make further payments of
the distribution fee with respect to Class B shares, and any CDSCs will be
paid to the Portfolio rather than to the Distributor; however, the Portfolio
will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
Distributions from an IRA to a participant prior to the time the participant
reaches age 59 1/2 may subject the participant to income and excise taxes. See
"Taxes". There are no adverse tax consequences resulting from redemptions of
shares of the Portfolios where the redemption proceeds remain in the IRA
account and are otherwise invested. Shareholders should consult their tax
advisers concerning tax consequences resulting from redemptions of shares of
the Portfolios. Shareholders should be aware, however, that redemption of
shares of a Portfolio and reinvestment of the proceeds in shares of another
fund advised by the Investment Adviser or an affiliate may subject the
investor's IRA to an annual IRA account fee or the investor's CBA(R) or CMA
SubAccount (SM) account to the annual CBA(R) or CMA SubAccount (SM) fee, as the
case may be. For information about the current IRA fees charged by Merrill
Lynch, consult the Merrill Lynch IRA Disclosure Statement and the Merrill
Lynch IRA Custodial Agreement. For information about the current CBA(R) fees
charged by Merrill Lynch, consult the Capital Builder (TM) Account Program
description. For information about the current CMA SubAccount (SM) fees charged
by Merrill Lynch, consult the Cash Management Account (R) Program description.
50
<PAGE>
The Program is required to redeem for cash shares of each Portfolio of the
Program at the request of shareholders. The redemption price is the net asset
value per share next determined after the initial receipt by Merrill Lynch of
proper notice of redemption, as described below. If such notice is received by
Merrill Lynch prior to the determination of net asset value (15 minutes after
the close of business on the New York Stock Exchange), the redemption will be
effective on that day and payment generally will be made on the next business
day. If the notice is received after the determination of net asset value on
any day, the redemption will be effective on the next business day and payment
will be made on the second business day after receipt of the notice.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. Accrued but unpaid
dividends will be paid on the payable date next following the date of
redemption.
Any shareholder may redeem shares of the Portfolios by submitting a written
notice of redemption to Merrill Lynch. Participants in the Program should
contact their Merrill Lynch financial consultant to effect such redemptions.
Redemption requests should not be sent to the Program or to the Transfer
Agent. In the case of an IRA account, the notice must bear the signature of
the person in whose name the IRA is maintained, signed exactly as his or her
name appears on the IRA adoption agreement; and in the case of a CBA (R)
account or CMA SubAccount (SM), the notice must bear the signature of the
individual named as custodian for the account.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of a
Portfolio have a one-time privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of that Portfolio at net asset
value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege is a one-time privilege and may be exercised by the
Class A or Class D shareholder only the first time such shareholder makes a
redemption. 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 process. The reinstatement privilege may
be exercised through the investor's Merrill Lynch financial consultant within
30 days after the date the redemption was accepted.
SHAREHOLDER SERVICES
The Program offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Program by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch.
Investment Account. A shareholder who maintains his or her account through a
Merrill Lynch-custodied IRA will receive information regarding activity in his
or her Merrill Lynch IRA as part of the Merrill Lynch retirement account
statement. A shareholder who maintains his or her account through the CBA(R)
or CMA (R) program will receive information regarding activity in the CBA(R)
account or CMA SubAccount (SM) as part of his or her CBA(R) or CMA (R)
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestments of ordinary income
dividends and long-term capital gains distributions. Shareholders considering
transferring an IRA, CBA(R) account or CMA SubAccount (SM) in which Program
shares are held from Merrill Lynch to another brokerage firm or financial
institution should be aware that Program shares may only be held in a Merrill
Lynch-custodied IRA or in a CBA(R) account or CMA SubAccount (SM) established
pursuant to the Uniform Gifts to Minors Acts or Uniform Transfers to Minors
Acts (or other similar state statutes). Prior to any such transfer, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be
51
<PAGE>
transferred to the account at the new firm or exchange the shares for shares
of another mutual fund advised by the Investment Adviser or its affiliates
pursuant to the exchange privilege. It is possible, however, that the firm to
which the account is to be transferred will not take delivery of shares of
such fund, and then the shareholder would have to redeem these shares so that
the cash proceeds can be transferred or such shareholder must continue to
maintain a retirement account or a CBA (R) account or CMA SubAccount (SM) at
Merrill Lynch for those shares. In addition, shareholders considering
transferring the holdings in their IRA, CBA(R) account or CMA SubAccount (SM) to
a Merrill Lynch brokerage account should be aware that because Program shares
may only be held in a Merrill Lynch-custodied IRA or in a CBA(R) account or
CMA SubAccount (SM) established pursuant to the Uniform Gifts to Minors Acts or
Uniform Transfers to Minors Acts (or other similar state statutes), the shares
will also in this instance have to be redeemed prior to such transfer or
exchanged for another mutual fund advised by the Investment Adviser or its
affiliates.
Exchange Privilege. Shareholders of each Portfolio have an exchange
privilege with each other Portfolio of the Program, with certain money market
funds advised by the Investment Adviser or its affiliates and with certain
other MLAM-advised mutual funds. There is currently no limitation on the
number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules
of the Commission. If, however, a shareholder exchanges any of his or her
shares of a Portfolio for shares of another MLAM-advised mutual fund, Merrill
Lynch will reinstate the IRA annual account fee, the CBA (R) account fee or
CMA SubAccount (SM) fee, as the case may be. For information about the current
IRA fees charged by Merrill Lynch, consult the Merrill Lynch IRA Disclosure
Statement and the Merrill Lynch IRA Custodial Agreement. For information about
the current CBA (R) fees charged by Merrill Lynch, consult the Capital
Builder (TM) Account Program description. For information about the current
CMA SubAccount (SM) fees charged by Merrill Lynch, consult the Cash Management
Account (R) Program description.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of a Portfolio for Class A shares of a second
Portfolio or MLAM-advised mutual fund if the shareholder holds any Class A
shares of the second Portfolio or fund in his account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second Portfolio or fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second Portfolio or MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second
Portfolio or fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second Portfolio or fund,
the shareholder will receive Class D shares of the second Portfolio or fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second Portfolio or 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 Portfolio or fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second Portfolio or fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchanged with shares of the
same class of another Portfolio or MLAM-advised mutual fund.
52
<PAGE>
Shares of the Portfolios which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Portfolio. 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 Portfolio is tacked on to the holding period of
the newly acquired shares of the other Portfolio or fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM- advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, 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 a Portfolio exercising the exchange privilege will
continue to be subject to the Portfolio'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 a Portfolio acquired through use of the exchange privilege
will be subject to the Portfolio'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.
Merrill Lynch has advised the Program that it will not charge an annual
account fee upon any IRA, CBA (R) account or CMA SubAccount SM which is then
invested solely in one or more of the Program's Portfolios or a money market
fund advised by the Investment Adviser or its affiliates. In this regard,
exchange of Portfolio shares for shares of a fund other than a Portfolio of
the Program or a money market fund advised by the Investment Adviser or its
affiliates may result in the imposition of an annual IRA, CBA (R) or CMA
SubAccount SM fee, as the case may be. For information about the current IRA
fees charged by Merrill Lynch, consult the Merrill Lynch IRA Disclosure
Statement and the Merrill Lynch IRA Custodial Agreement. For information about
the current fees charged by Merrill Lynch for maintaining a CBA (R) account,
consult the Capital Builder (TM) Account Program description. For information
about the current fees charged by Merrill Lynch for maintaining a CMA
SubAccount SM, consult the Cash Management Account (R) Program description.
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 of a Portfolio are reinvested
automatically in full and fractional shares of that Portfolio, at the net
asset value per share of the respective Portfolio next determined on the ex-
dividend date of such dividend or distribution in the case of the Fundamental
Value, Global Opportunity and Growth Opportunity Portfolios and at the close
of business on the monthly payment date for such dividends and distributions
in the case of the Quality Bond and U.S. Government Securities Portfolios. A
shareholder may, at any time, by written notification to Merrill Lynch, elect
to have subsequent dividends or both dividends and capital gains distributions
held in his or her account as a cash balance rather than reinvested.
53
<PAGE>
Systematic Redemption Plans. At age 59 1/2, a Class A or Class D shareholder
whose shares are held in an IRA account may elect to receive systematic
redemption payments from his or her account in the form of payments by check
or through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. A Class A or Class D shareholder may
elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual
or annual basis through the Systematic Redemption Program, subject to certain
conditions. See "Taxes" for consequences of withdrawals from IRA accounts
prior to attaining age 59 1/2.
Automatic Investment Plans. Merrill Lynch offers an automated funding
service which permits regular current year IRA contributions of up to $2,000
per year to be made to IRAs and an automated investment program which may be
used for automated subsequent purchases of shares of the Program. Investors
holding their Program shares in a CBA(R) account or CMA SubAccount SM may
arrange to have periodic investments made in shares of the Portfolios in such
account in amounts of $100 or more through the CMA(R)/CBA(R) Automated
Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Program,
the Investment Adviser is primarily responsible for the Program's portfolio
decisions and the execution of the Program's portfolio transactions. With
respect to such transactions, the Investment Adviser seeks to obtain the best
results for each Portfolio, taking into account such factors as price
(including the applicable fee, brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm
involved, the firm's risk in positioning a block of securities and the
provision of supplemental investment research by the firm. While the
Investment Adviser generally seeks reasonably competitive fees, commissions or
spreads, the Portfolios will not necessarily be paying the lowest fee,
commission or spread available. The Board of Directors of the Program has
adopted procedures to ensure that brokerage transactions with affiliated
persons, including the frequency of such transactions, the receipt of
commissions payable and the selection of the broker effecting the
transactions, are fair and reasonable to the Program's shareholders.
The fixed income securities and certain equity securities in which the
Portfolios will invest are traded in the over-the-counter markets, and where
possible the Portfolios intend to deal directly with the dealers who make
markets in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Under the Investment Company
Act, except as permitted by exemptive order, persons affiliated with the
Program are prohibited from dealing with any Portfolio 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, the Portfolios will not deal with affiliated persons, including
Merrill Lynch and its affiliates, in connection with such transactions. In
addition, the Portfolios may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch is a
member except pursuant to procedures approved by the Board of Directors of the
Program which comply with rules adopted by the Commission. Affiliated persons
of the Program may serve as its broker in over-the-counter transactions
conducted on an agency basis.
No Portfolio has any obligation to deal with any broker or dealer in the
execution of its portfolio transactions. Subject to obtaining the best price
and execution, securities firms, including Merrill Lynch,
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<PAGE>
which provide supplemental investment research to the Investment Adviser may
receive orders for transactions by the Portfolios. Information so received is
in addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. Supplemental investment research
received by the Investment Adviser also may be used in connection with other
investment advisory accounts of the Investment Adviser and its affiliates. Each
Portfolio will pay brokerage fees to Merrill Lynch in connection with portfolio
transactions executed on its behalf by Merrill Lynch.
The Program anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States generally will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States although the
Portfolios will endeavor to achieve the best net results in effecting such
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
PERFORMANCE DATA
From time to time the Program may include each Portfolio's average annual
total return and, in the case of the Quality Bond and U.S. Government
Securities Portfolios, yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return and yield are computed separately for each
Portfolio in accordance with formulas specified by the Commission.
Average annual total return quotations for each Portfolio 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 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. Dividends paid by a Portfolio with respect to all
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution fees and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Portfolios will include performance data for all classes of shares
of the Portfolio in any advertisement or information including performance data
of the Portfolio.
The Program also may quote each Portfolio's total return and aggregate total
return performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return
55
<PAGE>
data generally will be lower than average 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 reduced
sales charges in the case of Class A and Class D shares or waiver of the CDSC
in the case of Class B 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". Each Portfolio'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
Program at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding in the Portfolio during the
period that were entitled to receive dividends multiplied by (c) the maximum
offering price/net asset value per share of that Portfolio on the last day of
the period.
The following sets forth the yield for the Class A, Class B, Class C and
Class D shares of the Portfolios indicated for the 30-day period ended January
31, 1996.
<TABLE>
<CAPTION>
PORTFOLIO CLASS A CLASS B CLASS C CLASS D
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Quality Bond.............................. 5.64% 5.12% 5.07% 5.40%
U.S. Government Securities................ 6.38% 5.90% 5.85% 6.14%
</TABLE>
Total return figures and yield figures are based on each Portfolio's
historical performance and are not intended to indicate future performance.
Each Portfolio's total return will vary depending on market conditions, the
securities comprising such Portfolio's holdings, the Portfolio's operating
expenses and the amount of realized and unrealized net capital gains or losses
during the period. The value of an investment in any Portfolio will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost.
On occasion, a Portfolio may compare its performance to that of the Standard
& Poor's 500 Composite Stock Price Index, The Financial Times/Standard & Poor's
Actuarial World Indices, the Morgan Stanley Capital International Indices, the
Dow Jones Industrial Average, or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S.
News & World Report, Business Week, CDA Investment Technology, Inc., Forbes
Magazine and Fortune Magazine. As with other performance data, performance
comparisons should not be considered indicative of the Portfolio's relative
performance for any future period.
TAXES
FEDERAL
RICs. The following is a general summary of the treatment of regulated
investment companies ("RICs") and their shareholders under the Internal Revenue
Code of 1986, as amended (the "Code"). The Program intends to continue to
qualify each of the Portfolios for the special tax treatment afforded RICs
under the Code. If it so qualifies, each Portfolio (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
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B, Class C and Class D shareholders. The Program intends to cause each
Portfolio to distribute substantially all of such income.
Dividends paid by a Portfolio 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 ordinarily 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 ordinarily taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Portfolio shares.
Any loss upon the sale or exchange of Portfolio shares held for six months or
less, however, will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
a Portfolio's earnings and profits will first reduce the adjusted tax basis of
a holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Dividends are ordinarily taxable to shareholders even though
they are reinvested in additional shares of the Portfolio.
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 Program or who, to the Program'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.
IRAs. With the exception of CBA (R) accounts and CMA SubAccounts SM
established pursuant to the Uniform Gifts to Minors Acts or the Uniform
Transfers to Minors Acts (or similar state statutes), investment in the
Portfolios is limited to participants in IRAs for which Merrill Lynch acts as
passive custodian. Accordingly, the general description of the tax treatment
of RICs as set forth above is qualified for the IRA participants with respect
to the special tax treatment afforded IRAs under the Code. Under the Code,
neither ordinary income dividends nor capital gain dividends represent current
income to shareholders holding shares through an IRA. Rather, distributions
from an IRA will be taxable as ordinary income at the rate applicable to the
participant at the time of the distribution. Such distributions would include
(i) any pre-tax contributions to the IRA (including pre-tax contributions that
have been rolled over from another IRA or qualified retirement plan), and (ii)
dividends (whether or not such dividends are classified as ordinary income or
capital gain dividends). In addition to ordinary income tax, participants may
be subject to the imposition of excise taxes on any distributed amount,
including: (i) a 10 percent excise tax on any amount withdrawn from an IRA
prior to the participant's attainment of age 59 1/2; and (ii) a 15 percent
excise tax on the amount of any "excess distributions" (generally, amounts in
excess of $150,000) made from the IRA and any other IRA or qualified
retirement plan annually.
Under certain limited circumstances (for example, if an individual for whose
benefit an IRA is established engages in any transaction prohibited under
Section 4975 of the Code with respect to such account), the IRA could cease to
be treated as an IRA as of the first day of such taxable year that such
transaction occurred. If an IRA through which a shareholder holds Portfolio
shares becomes ineligible for the special treatment afforded IRAs under the
Code, such shareholder will be treated as having received a distribution on
such first day of the taxable year from the IRA in an amount equal to the fair
market value of all assets in the account. Thus, the shareholder would be
taxed currently on (i) the amount of any pre-tax
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<PAGE>
contributions and previously untaxed dividends held within the account, and
(ii) all ordinary income and capital gain dividends paid by a Portfolio
subsequent to such event, whether such dividends are received in cash or
reinvested in additional shares. These ordinary income and capital gain
dividends also might be subject to state and local taxes. In the event of IRA
disqualification, shareholders also could be subject to the excise taxes
described above. Additionally, IRA disqualification may subject a nonresident
alien shareholder to a 30% United States withholding tax on ordinary income
dividends paid by a Portfolio unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law.
Dividends and interest received by the Global Opportunity Portfolio and, to a
lesser extent, the Fundamental Value and Growth Opportunity Portfolios 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 of their participation in an IRA, shareholders
will not be able to credit or deduct such taxes in computing their taxable
incomes. However, in the event of IRA disqualification, as discussed above,
shareholders of the Global Opportunity Portfolio might be entitled to a credit
or deduction with respect to their proportionate shares of foreign taxes paid
by the Portfolio, subject to certain conditions and limitations in the Code, if
the Portfolio is eligible and makes an election with the Internal Revenue
Service. It is unlikely, however, that either the Fundamental Value or the
Growth Opportunity Portfolio will be able to make this election.
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.
STATE
Ordinary income and capital gain dividends on RIC shares held in a
disqualified IRA or outside of an IRA also may 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. Generally, however,
states exempt from state income taxation dividends on shares held within an
IRA, and commence taxation on such amounts when actually distributed from an
IRA. Such amounts are generally treated as ordinary income.
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 a Portfolio of the Program.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Program's intention to distribute substantially all of the net
investment income, if any, of each Portfolio. The net investment income of the
Quality Bond and U.S. Government Securities Portfolios is declared as dividends
daily immediately prior to the determination of the net asset value of each
Portfolio on
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<PAGE>
that day. The net investment income of the Quality Bond and U.S. Government
Securities Portfolios for dividend purposes consists of interest and dividends
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of net asset value. Dividends from net investment
income of the Fundamental Value, Global Opportunity and Growth Opportunity
Portfolios will be declared at least annually. All net long-term and short-term
capital gains, if any, including gains from option and futures contract
transactions, will be distributed by each Portfolio at least annually. The per
share dividends on each class of shares of each Portfolio will be reduced as a
result of any account maintenance, distribution and transfer agency fees
applicable to that class. Dividends and distributions on all Portfolios will be
reinvested in additional full and fractional shares of the Portfolio at net
asset value unless the shareholder elects to receive such dividends as cash in
his or her account. Expenses of each Portfolio including the investment
advisory fees, distribution and account maintenance fees with respect to Class
B and Class C shares, and account maintenance fees with respect to Class D
shares, are accrued daily. Shares will accrue dividends as long as they are
issued and outstanding. Shares are issued and outstanding as of the settlement
date of a purchase order to the settlement date of a redemption order.
Dividends and distributions paid by a Portfolio may be reinvested
automatically in shares of the same Portfolio, at net asset value without a
sales charge. Shareholders may elect in writing to receive any such dividends
or distributions, or both, as cash in their accounts. Dividends and
distributions are, for tax purposes, treated by shareholders as described above
whether they are reinvested in shares of a Portfolio or held in their accounts
as a cash balance.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the investments of the Global Opportunity Portfolio, and
to a lesser extent, the Fundamental Value and Growth Opportunity Portfolios,
may increase or decrease the amount of such Portfolio's income available for
distribution. If such losses exceed other income during a taxable year, (a) the
related Portfolio would not be able to make any ordinary income dividend
distributions, and (b) distributions made before the losses were realized would
be recharacterized as returns of capital to shareholders, rather than as
ordinary income dividends, reducing each shareholder's tax basis in the
Portfolio shares for Federal income tax purposes. If in any fiscal year the
Fundamental Value, Global Opportunity or Growth Opportunity Portfolio has net
income from certain foreign currency transactions, such income will be
distributed annually.
The per share dividends and distributions on Class B, Class C and Class D
shares will be lower than the per share dividends and distributions on Class A
shares as a result of the effect of the account maintenance, distribution and
higher transfer agency fees applicable with respect to the Class B and Class C
shares and the account maintenance fees with respect to the Class D shares. See
"Additional Information--Determination of Net Asset Value".
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio is determined once daily
15 minutes after the close of business on the New York Stock Exchange
(generally 4:00 p.m., New York time) on each day during which the New York
Stock Exchange is open for trading and, under certain circumstances, on other
days. 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 per share of a Portfolio is computed by dividing the sum of the value of
the securities held by such Portfolio plus any cash or other assets (including
interest and dividends accrued but not yet received) minus
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<PAGE>
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory fees payable to the Investment Adviser, are accrued daily.
The Program employs Merrill Lynch Securities Pricing Service ("MLSPS"), an
affiliate of the Investment Adviser, to provide certain securities prices for
the Portfolios. For the fiscal year ended January 31, 1996, the Program paid
MLSPS $1,543 for the securities price quotations to compute the net asset value
of the portfolios.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. When a Portfolio writes a call option, the amount of the
premium received is recorded on the books of the Portfolio as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last asked price. Options purchased
by a Portfolio are valued at their last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-counter
market, the last bid price. Securities and assets for which market quotations
are not readily available are valued at fair market value as determined in good
faith by or under the direction of the Board of Directors of the Program.
The Program values corporate debt securities, mortgage-backed securities,
municipal securities, asset-backed securities and other debt securities on the
basis of valuations provided by dealers or by a pricing service which uses
information with respect to transactions in such securities, quotations from
dealers, market transactions in comparable securities, various relationships
between securities and yield to maturity. Portfolio securities (other than
short-term obligations but including listed issues) may be valued on the basis
of prices furnished by one or more pricing services which determine prices for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Obligations with remaining maturities of 60 days or less are valued at
amortized cost unless this method no longer produces fair valuations.
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 the 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.
Option Accounting Principles. When a Portfolio sells an option, an amount
equal to the premium received by the Portfolio is included in that Portfolio's
Statement of Assets and Liabilities as a deferred credit.
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<PAGE>
The amount of such liability subsequently will be marked-to-market to reflect
the current market value of the option written. If current market value exceeds
the premium received there is an unrealized loss; conversely, if the premium
exceeds current market value there is an unrealized gain. The current market
value of a traded option is the last sale price or, in the absence of a sale,
the last offering price. If an option expires on its stipulated expiration date
or if a Portfolio enters into a closing purchase transaction, the affected
Portfolio 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 Program will realize a gain or loss from the sale of the
underlying security and the proceeds of sales are increased by the premium
originally received.
ORGANIZATION OF THE PROGRAM
The Program was incorporated under Maryland law on May 12, 1994 under the
name "Merrill Lynch Retirement Asset Builder Program, Inc." On July 20, 1995
the Program changed its name to Merrill Lynch Asset Builder Program, Inc. The
Program is an open-end management investment company comprised of separate
series ("Series"), each of which is a separate portfolio offering shares to
selected groups of purchasers. Each Series is to be managed independently. At
the date of this Prospectus, the Program has authorized capital of 200,000,000
shares of Common Stock, par value $0.10 per share, of which 125,000,000 shares
has been designated as follows:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF
CLASS A CLASS B CLASS C CLASS D
COMMON COMMON COMMON COMMON
PORTFOLIO STOCK STOCK STOCK STOCK
- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fundamental Value....................... 6,250,000 6,250,000 6,250,000 6,250,000
Quality Bond............................ 6,250,000 6,250,000 6,250,000 6,250,000
U.S. Government Securities.............. 6,250,000 6,250,000 6,250,000 6,250,000
Global Opportunity...................... 6,250,000 6,250,000 6,250,000 6,250,000
Growth Opportunity...................... 6,250,000 6,250,000 6,250,000 6,250,000
</TABLE>
The Directors of the Program may classify and reclassify the shares of the
Program into additional Series or classes of common stock at a future date
without shareholder approval. Shares of Class A, Class B, Class C and Class D
Common Stock of each Portfolio represent interests in the same assets of that
Portfolio 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".
Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Directors (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders may, in accordance with the Articles of Incorporation
of the Program, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Program will be
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<PAGE>
required to call a special meeting of shareholders of a Series in accordance
with the requirements of the Investment Company Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of
a Series. Except as set forth above, the Directors shall continue to hold
office and appoint successor Directors. Each issued and outstanding share is
entitled to participate equally in dividends and distributions declared by the
respective Series and in net assets of such Series upon liquidation or
dissolution remaining after satisfaction of outstanding liabilities except
that, as noted above, Class B, Class C and Class D shares of each Series bear
certain additional expenses. The obligations and liabilities of a particular
Series are restricted to the assets of that Series and do not extend to the
assets of the Program generally. Shares of each Series represent an interest
only in that Series and not in any other Series of the Program. The shares of
each Series, when issued, will be fully-paid and non-assessable by the Program.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Program at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX A: OPTIONS AND FUTURES TRANSACTIONS
As described under "Other Investment Policies and Practices of the
Portfolios--Portfolio Strategies Involving Options and Futures", each Portfolio
is authorized to engage in various portfolio management strategies involving
options, futures and options on futures. These strategies are described in
detail below:
Writing Covered Options. Each Portfolio 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 a Portfolio in return for a premium
gives another party a right to buy specified securities owned by the Portfolio
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, a Portfolio gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, the
Portfolio's ability to sell the underlying security will be limited while the
option is in effect unless the Portfolio effects a closing purchase
transaction. A closing purchase transaction cancels out the Portfolio's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
Each Portfolio also may write put options which give the holder of the option
the right to sell the underlying security to the Portfolio at the stated
exercise price. A Portfolio will receive a premium for writing a put option,
which increases the Portfolio's return. The Portfolios write only covered put
options, which means that so long as the Portfolio 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 or equity 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 Portfolio 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 exercise for as long as
the option is outstanding. A Portfolio may engage in closing transactions in
order to terminate put options that it has written.
Purchasing Options. Each Portfolio is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option, a Portfolio has a right to sell the underlying security at the exercise
price, thus limiting the Portfolio's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction, and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Portfolio'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, a Portfolio 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. A Portfolio 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 Portfolio would exceed 5% of the market value of the Portfolio's
total assets.
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Stock Index Options. The Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios are authorized to engage in transactions in stock index
options. These Portfolios may purchase or write put and call options on stock
indexes to hedge against the risks of market-wide stock price movements in the
securities in which either Portfolio invests. Options on indexes are similar to
options on securities, except that on exercise or assignment, the parties to
the contract pay or receive an amount of cash equal to the difference between
the closing value of the index and the exercise price of the option times a
specified multiple. A Portfolio may invest in stock index options based on a
broad market index, e.g., the S&P 500 Index, or on a narrow index representing
an industry or market segment, e.g., the AMEX Oil & Gas Index.
Stock Index Futures and Interest Rate Futures Contracts. The Fundamental
Value, Global Opportunity and Growth Opportunity Portfolios may purchase and
sell stock index futures contracts, and the Quality Bond, Global Opportunity,
U.S. Government Securities and Growth Opportunity Portfolios may purchase and
sell interest rate futures contracts, as a hedge against adverse changes in the
market value of portfolio securities, as described below. Stock index futures
contracts and interest rate futures contracts are herein together referred to
as "futures contracts".
A futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a financial instrument for a set price on a future date. The terms of a
futures contract require either actual delivery of the financial instrument
underlying the contract or, in the case of a stock index futures contract, a
cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time of its settlement. The
Fundamental Value, Global Opportunity and Growth Opportunity Portfolios may
effect transactions in stock index futures contracts in connection with the
equity securities in which they invest; the Quality Bond, Global Opportunity,
U.S. Government Securities and Growth Opportunity Portfolios may invest in
interest rate futures contracts in connection with the debt securities in which
they invest. Transactions by a Portfolio in futures contracts are subject to
limitations as described below under "Restrictions on the Use of Futures
Transactions".
The Portfolios may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of such
Portfolio's securities that might otherwise result. When a Portfolio is not
fully invested in the securities markets and anticipates a significant advance,
it may purchase futures in order to gain rapid market exposure. This technique
generally will allow the Portfolios to gain exposure to a market in a manner
which is more efficient than purchasing individual securities and may in part
or entirely offset increases in the cost of securities in such market that the
Portfolio ultimately purchases. As such purchases are made, an equivalent
amount of futures contracts will be terminated by offsetting sales. The Program
does not consider purchases of futures contracts by the Portfolios to be a
speculative practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, each Portfolio will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a futures contract or the purchase of a call option
or the writing of a put option on a future, but under unusual circumstances
(e.g., a Portfolio experiences a significant amount of redemptions), a long
futures position may be terminated without the corresponding purchase of
securities.
Each Portfolio also has authority to purchase and write call and put options
on futures contracts (and, in the case of the Fundamental Value, Global
Opportunity and Growth Opportunity Portfolios, stock indexes) in connection
with its hedging (including anticipatory hedging) activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which a
Portfolio enters into futures transactions. A Portfolio may purchase put
options or
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<PAGE>
write call options on futures contracts or stock indexes rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, a Portfolio may purchase call options, or
write put options on futures contracts or stock indexes, as a substitute for
the purchase of such futures contract to hedge against the increased cost
resulting from an increase in the market value of securities which the
Portfolio intends to purchase.
Each Portfolio may engage in options and futures transactions on U.S. (and,
in the case of the Fundamental Value, Global Opportunity and Growth Opportunity
Portfolios, foreign) exchanges and in the over-the-counter markets ("OTC
options"). In general, exchange-traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options are two-party contracts with prices and terms negotiated by the buyer
and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
Foreign Currency Hedging. The Fundamental Value, Global Opportunity and
Growth Opportunity Portfolios are authorized to deal in forward foreign
exchange among currencies of the different countries in which they will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. Foreign currency hedging is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date (up to one year) and price set at the time
of the contract. The Fundamental Value, Global Opportunity and Growth
Opportunity Portfolios' dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Portfolio accruing in
connection with the purchase and sale of its portfolio securities, the sale and
redemption of shares of the Portfolio or the payment of dividends and
distributions by the Portfolio. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. No Portfolio will speculate in forward foreign exchange.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Portfolio to hedge against a devaluation that is
so generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The Fundamental Value, Global Opportunity and Growth Opportunity Portfolios
also are authorized to purchase or sell listed or OTC foreign currency options,
foreign currency futures and related options on foreign currency futures as a
short or long hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Portfolio, sold by the Portfolio but not
yet delivered, or committed or anticipated to be purchased by the Portfolio. As
an illustration, a Portfolio may use such techniques to hedge the stated value
in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Portfolio may purchase a foreign currency put
option enabling it to sell a specified amount of yen for dollars at a specified
price by a
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future date. To the extent the hedge is successful, a loss in the value of the
yen relative to the dollar will tend to be offset by an increase in the value
of the put option. To offset, in whole or in part, the cost of acquiring such a
put option, the Portfolio may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price
by a future date (a technique called a "straddle"). By selling such call option
in this illustration, the Portfolio gives up the opportunity to profit without
limit from increases in the relative value of the yen to the dollar. The
Investment Adviser believes that "straddles" of the type which may be utilized
by the Fundamental Value, Global Opportunity and Growth Opportunity Portfolios
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade or futures exchanges.
Neither the Fundamental Value, the Global Opportunity nor the Growth
Opportunity Portfolio will speculate in foreign currency options, futures or
related options. Accordingly, none of these Portfolios will hedge a currency
substantially in excess of the market value of securities which it has
committed or anticipates to purchase which are denominated in such currency
and, in the case of securities which have been sold by the Portfolio but not
yet delivered, the proceeds thereof in its denominated currency. The
Fundamental Value, Global Opportunity and Growth Opportunity Portfolios each
are limited regarding potential net liabilities from foreign currency options,
futures or related options to no more than 20% of such Portfolio's total
assets.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission (the "CFTC") applicable to the Portfolios provide
that the futures trading activities described herein will not result in any
Portfolio being deemed a "commodity pool" as defined under such regulations if
each Portfolio adheres to certain restrictions. In particular, a Portfolio may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Portfolio's
holdings, after taking into account unrealized profits and unrealized losses on
any such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When a Portfolio purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account in the name of the Portfolio with the
Program's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures contract is unleveraged.
Restrictions on OTC Options. The Portfolios may engage in OTC options,
including OTC stock index options, OTC foreign currency options and options on
foreign currency futures, only with such banks or dealers which have capital of
at least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million.
The staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, each Portfolio has adopted an investment policy
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pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Portfolio, the market value of the underlying securities covered by OTC call
options currently outstanding which were sold by the Portfolio and margin
deposits on the Portfolio's existing OTC options on futures contracts exceed
15% (10% to the extent required by certain state laws) of the total assets of
the Portfolio, taken at market value, together with all other assets of the
Portfolio which are illiquid or are not otherwise readily marketable. However,
if the OTC option is sold by the Portfolio to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Portfolio has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Portfolio will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of each Portfolio and may be amended by the Directors
of the Program without the approval of the Portfolio's shareholders. However,
no Portfolio will change or modify this policy prior to the change or
modification by the SEC staff of its position.
Options on GNMA Certificates. The following information relates to unique
characteristics of options on GNMA Certificates. Since the remaining principal
balance of GNMA Certificates declines each month as a result of mortgage
payments, the U.S. Government Securities Portfolio, as a writer of a GNMA call
holding GNMA Certificates as "cover" to satisfy its delivery obligation in the
event of exercise, may find that the GNMA Certificates it holds no longer have
a sufficient remaining principal balance for this purpose. Should this occur,
the Portfolio will purchase additional GNMA Certificates from the same pool (if
obtainable) or other GNMA Certificates in the cash market in order to maintain
its "cover".
A GNMA Certificate held by the Portfolio to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are
originated under the FHA/VA loan ceiling in effect at any given time. If this
should occur, the Portfolio will no longer be covered, and the Portfolio will
either enter into a closing purchase transaction or replace such Certificate
with a certificate which represents cover. When the Portfolio closes its
position or replaces such Certificate, it may realize an unanticipated loss and
incur transaction costs.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge a Portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the price of the
hedged securities or currencies, the Portfolio will experience a gain or loss
which will not be completely offset by movements in the price of the subject of
the hedge. The successful use of options and futures also depends on the
Investment Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Portfolio may purchase or sell stock index options
or futures contracts in a greater dollar amount than the hedged securities if
the volatility of the hedged securities is historically greater than the
volatility of the stock index options or futures contracts. Conversely, the
Portfolio may purchase or sell fewer stock index options or futures contracts
if the volatility of the price of the hedged securities is historically less
than that of the stock index options or futures contracts. The risk of
imperfect
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correlation generally tends to diminish as the maturity date of the stock index
option or futures contract approaches.
The Portfolios intend to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, the Investment Adviser believes the Portfolio can
receive on each business day at least two independent bids or offers. However,
there can be no assurance that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. The inability to close options and futures positions also could have
an adverse impact on the Portfolio's ability to hedge effectively its
portfolio. There is also the risk of loss by the Portfolio of margin deposits
or collateral in the event of bankruptcy of a broker with whom the Portfolio
has an open position in an option, a futures contract or related option.
The exchanges on which the Portfolios intend to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Portfolios'
holdings.
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APPENDIX B: RATINGS OF CORPORATE DEBT SECURITIES
(INCLUDING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES)
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
</TABLE>
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<TABLE>
<S> <C>
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
Plus (+) or
minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
c The letter c indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
L The letter L indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter L indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. The investor should exercise his
own judgment with respect to such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
N.R. Not rated.
</TABLE>
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Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or based on
other circumstances.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE RATINGS
AaaBonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
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Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
BaaBonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CaaBonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that
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such obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a rated
issuer or issued in conformity with any applicable law. Moody's employs the
following three designations, all judged to be investment grade, to indicate
the relative repayment ability of rated issuers.
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. PRIME-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, in assigning ratings to
such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
DESCRIPTION OF FITCH INVESTORS SERVICES, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
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Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security. Fitch ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not audit or verify
the truth or accuracy of such information. Ratings may be changed, suspended,
or withdrawn as a result of changes in, or the unavailability of, information
or for other reasons.
AAABonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBBBonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving UP ARROW
Stable LEFT/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP/DOWN ARROW
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
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NR INDICATES THAT FITCH DOES NOT RATE THE SPECIFIC ISSUE
Conditional: A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive" indicating a potential
upgrade. "Negative" for potential downgrade, or "Evolving" where ratings may be
raised or lowered. FitchAlert is relatively short-term, and should be resolved
within 12 months.
DESCRIPTION OF FITCH'S INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-4Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC
The symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10286
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE PROGRAM, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 3
Prospectus Summary........................................................ 7
Merrill Lynch Select PricingSM System..................................... 9
Financial Highlights...................................................... 14
Risk Factors and Special Considerations................................... 18
Investment Objectives and Policies........................................ 20
Fundamental Value Portfolio.............................................. 21
Quality Bond Portfolio................................................... 21
U.S. Government Securities Portfolio..................................... 22
Global Opportunity Portfolio............................................. 23
Growth Opportunity Portfolio............................................. 24
Other Investment Policies and Practices of the Portfolios................. 25
Investments in Equity Securities......................................... 25
Investments in Debt Securities........................................... 26
Investments in Securities Denominated in Foreign Currencies.............. 30
Investments in Money Market Securities................................... 30
When-Issued Securities, Forward Commitments and Delayed Delivery
Transactions............................................................ 30
Standby Commitment Agreements............................................ 31
Repurchase Agreements and Purchase and Sale Contracts.................... 31
Indexed and Inverse Securities........................................... 32
Lending of Portfolio Securities.......................................... 32
Portfolio Strategies Involving Options and Futures....................... 33
Illiquid Securities...................................................... 33
Investment Restrictions.................................................. 34
Management of the Program................................................. 34
Board of Directors....................................................... 34
Management and Advisory Arrangements..................................... 35
Code of Ethics........................................................... 37
Transfer Agency Services................................................. 37
Purchase of Shares........................................................ 38
Continuous Offering...................................................... 38
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 42
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 44
Distribution Plans....................................................... 48
Limitations on the Payment of Deferred Sales Charges..................... 50
Redemption of Shares...................................................... 50
Reinstatement Privilege--Class A and Class D Shares...................... 51
Shareholder Services...................................................... 51
Portfolio Transactions and Brokerage...................................... 54
Performance Data.......................................................... 55
Taxes..................................................................... 56
Federal.................................................................. 56
State.................................................................... 58
Additional Information.................................................... 58
Dividends and Distributions.............................................. 58
Determination of Net Asset Value......................................... 59
Organization of the Program.............................................. 61
Shareholder Reports...................................................... 62
Shareholder Inquiries.................................................... 62
Appendix A--Options and Futures Transactions.............................. 63
Appendix B--Ratings of Corporate Debt Securities.......................... 69
</TABLE>
Code # 18471-0596
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Builder Program, Inc.
[ART]
PROSPECTUS
May 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
MERRILL LYNCH FUNDAMENTAL VALUE MERRILL LYNCH U.S. GOVERNMENT SECURITIES
PORTFOLIO PORTFOLIO
MERRILL LYNCH QUALITY BOND MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO PORTFOLIO
MERRILL LYNCH GROWTH OPPORTUNITY PORTFOLIO
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
---------------
Merrill Lynch Asset Builder Program, Inc. (the "Program") is a
professionally managed, open-end investment company. The Program consists of
five separate portfolios: the Merrill Lynch Fundamental Value Portfolio (the
"Fundamental Value Portfolio"), the Merrill Lynch Quality Bond Portfolio (the
"Quality Bond Portfolio"), the Merrill Lynch U.S. Government Securities
Portfolio (the "U.S. Government Securities Portfolio"), the Merrill Lynch
Global Opportunity Portfolio (the "Global Opportunity Portfolio") and the
Merrill Lynch Growth Opportunity Portfolio (the "Growth Opportunity
Portfolio") (each a "Portfolio"). Each Portfolio has its own separate
investment objectives and may employ a variety of instruments and techniques
to enhance income and to hedge against market risk and, in the case of the
Fundamental Value, Global Opportunity and Growth Opportunity Portfolios,
currency risk.
The Fundamental Value Portfolio is a diversified portfolio seeking capital
appreciation and, secondarily, income by investing in securities, primarily
equities, that the management of the Portfolio believes are undervalued and
therefore represent investment value.
The Quality Bond Portfolio is a diversified portfolio seeking income and,
secondarily, capital appreciation by investing primarily in long-term
corporate bonds that are rated A or better by a nationally recognized rating
agency such as Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's") and Fitch Investors Services, Inc. ("Fitch"), or
that possess, in the judgment of the Investment Adviser, similar credit
characteristics.
The U.S. Government Securities Portfolio is a diversified portfolio seeking
high current return by investing in U.S. Government and government agency
securities, including Government National Mortgage Association ("GNMA")
mortgage-backed securities and other mortgage-backed government securities.
The Global Opportunity Portfolio is a diversified portfolio seeking high
total investment return through a fully-managed investment policy utilizing
United States and foreign equity, debt and money market securities, the
combination of which will be varied from time to time, both with respect to
types of securities and markets, in response to changing market and economic
trends.
Growth Opportunity Portfolio is a non-diversified portfolio seeking growth
of capital and, secondarily, income by investing in a portfolio of equity
securities placing principal emphasis on those securities which management of
the Portfolio believes to be undervalued.
---------------
Each portfolio is a separate series of the Program issuing its own shares.
Shares of each Portfolio are available for purchase solely by holders of the
individual retirement plans, individual retirement rollover accounts and
simplified employee pension plans (collectively "IRAs") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acts as custodian
and CBA(SM) accounts or CMA SubAccounts (SM) established pursuant to the Uniform
Gifts to Minors Acts or the Uniform Transfers to Minors Acts (or similar state
statutes). For a description of the IRAs, see Appendix A to this Statement of
Additional Information.
Pursuant to the Merrill Lynch Select Pricing (SM) System, each Portfolio
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.
---------------
This Statement of Additional Information of the Program is not a prospectus
and should be read in conjunction with the prospectus of the Program, dated
May 29, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Program at the above telephone number or address.
This Statement of Additional Information has been incorporated by reference
into the Prospectus.
---------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
---------------
The date of this Statement of Additional Information is May 29, 1996.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Program consists of five separate Portfolios: the Fundamental Value
Portfolio, the Quality Bond Portfolio, the U.S. Government Securities
Portfolio, the Global Opportunity Portfolio and the Growth Opportunity
Portfolio, each with its own separate investment objectives. Each of the
Portfolios pursues its investment objectives through separate investment
policies. Reference is made to "Investment Objectives and Policies" in the
Prospectus for a discussion of the investment objectives and policies of each
Portfolio.
FUNDAMENTAL VALUE PORTFOLIO
The Fundamental Value Portfolio seeks capital appreciation and, secondarily,
income by investing in securities, primarily (i.e., at least 65% of the
Portfolio's assets) in equities, that the Investment Adviser believes are
undervalued and therefore represent investment value.
Portfolio Turnover. The rate of portfolio turnover is not a limiting factor
and, given the Portfolio's investment policies, it is anticipated that there
may be periods when high portfolio turnover will exist. The use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover. The Portfolio 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. Although the Portfolio anticipates that its annual portfolio
turnover rates should not exceed 100%, the turnover rate may vary greatly from
year to year or during periods within a year. The portfolio turnover rate for
each of the Portfolios is calculated by dividing the lesser of the Portfolio's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all securities with maturities at the time of acquisition of one year
or less) by the monthly average value of the securities in the portfolio during
the year. For the fiscal year ended January 31, 1996, the portfolio turnover
rate of the Portfolio was 51.37%.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio seeks a high level of current income through
investment primarily in securities rated in the top three rating categories of
a nationally recognized rating agency such as Moody's, S&P or Fitch or in
securities that possess, in the judgment of the Investment Adviser, similar
credit characteristics. The Quality Bond Portfolio seeks to achieve its
objectives by investing in a diversified portfolio of fixed income securities,
including corporate bonds and notes, convertible and nonconvertible debt
securities and preferred stock and government obligations.
Portfolio Turnover. The rate of portfolio turnover is not a limiting factor
when management deems it appropriate to purchase or sell securities. The
Portfolio expects that its annual turnover rate should not generally exceed
100%; however, during periods when interest rates fluctuate significantly, as
they have during the past few years, the portfolio turnover rate may be
substantially higher. In any particular year, however, market conditions could
result in portfolio activity at a greater or lesser rate than anticipated. For
the fiscal year ended January 31, 1996, the portfolio turnover rate of the
Portfolio was 86.68%.
U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio seeks a high current return through
investments in U.S. Government and Government agency securities ("U.S.
Government securities"), including GNMA mortgage-backed certificates, and other
mortgage-backed government securities.
2
<PAGE>
While the Portfolio has authority to invest in all U.S. Government
securities, it is anticipated that under certain market conditions, a
significant portion of its portfolio of U.S. Government securities may consist
of GNMA mortgage-backed certificates ("GNMA Certificates") and other U.S.
Government securities representing ownership interests in mortgage pools. The
Portfolio is authorized to acquire all types of U.S. Government securities
representing ownership interests in mortgage pools which are presently issued
or which may be issued in the future. In this regard, GNMA recently began
offering a pass-through security backed by adjustable-rate mortgages. These
securities bear interest at a rate which is adjusted either quarterly or
annually. The prepayment experience of the mortgages underlying these
securities may vary from that for fixed-rate mortgages. These securities are
eligible for purchase by the Portfolio.
Portfolio Turnover. The Investment Adviser will effect portfolio transactions
without regard to any holding period if, in its judgment, such transactions are
advisable in light of a change in general market, economic or financial
conditions. While the Portfolio anticipates that its annual turnover rate
should not exceed 400% under normal conditions, it is impossible to predict
portfolio turnover rates. A high portfolio turnover rate involves
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Portfolio. See
"Portfolio Transactions and Brokerage--Portfolio Turnover". For the fiscal year
ended January 31, 1996, the portfolio turnover rate of the Portfolio was
113.05%.
GLOBAL OPPORTUNITY PORTFOLIO
The Portfolio's investment objective is to seek a high total investment
return through a fully-managed investment policy utilizing United States and
foreign equity, debt and money market securities, the combination of which will
be varied from time to time both with respect to types of securities and
markets, in response to changing market and economic trends.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Portfolio. If such restrictions should be reinstituted, it might become
necessary for the Portfolio to invest all or substantially all of its assets in
U.S. securities. In such event, the Portfolio would review its investment
objective and investment policies to determine whether changes are appropriate.
Any changes in the investment objective or fundamental policies set forth under
"Investment Restrictions" below would require the approval of the holders of a
majority of the Portfolio's outstanding voting securities.
The Portfolio's ability and decisions to purchase or sell portfolio
securities may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Because the shares of the Portfolio
are redeemable on a daily basis on each day the Portfolio determines its net
asset value in U.S. dollars, the Portfolio intends to manage its portfolio so
as to give reasonable assurance that it will be able to obtain U.S. dollars to
the extent necessary to meet anticipated redemptions. See "Redemption of
Shares". Under present conditions, the Portfolio does not believe that these
considerations will have any significant effect on its portfolio strategy,
although there can be no assurance in this regard.
Portfolio Turnover. While it is the policy of the Portfolio generally not to
engage in trading for short-term gains, the Investment Adviser will effect
portfolio transactions without regard to holding period if, in its judgment,
such transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or due to general market,
economic or financial conditions. Accordingly, while
3
<PAGE>
the Portfolio anticipates that its annual turnover rate should not exceed 200%
under normal conditions, it is impossible to predict portfolio turnover rates.
A high rate of portfolio turnover results in correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Portfolio. See "Portfolio Transactions and
Brokerage--Portfolio Turnover". For the fiscal year ended January 31, 1996 the
portfolio turnover rate of the Portfolio was 83.14%.
GROWTH OPPORTUNITY PORTFOLIO
The investment objective of the Portfolio is to seek growth of capital. The
Portfolio will seek to achieve its investment objective by investing in a
portfolio of equity securities, placing particular emphasis on those securities
that have exhibited above-average growth rates in earnings.
Non-Diversified Status. The Growth Opportunity Portfolio is classified as
non-diversified within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which means that the Portfolio is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Portfolio's investments are limited,
however, in order to qualify for the special tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Taxes". To qualify, the Portfolio will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Portfolio's total assets will be invested in the securities of a single issuer
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Portfolio will not own more than 10% of
the outstanding voting securities of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Portfolio assumes large positions in the securities of a
small number of issuers, the Portfolio's net asset value may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the
Portfolio may be more susceptible to any single economic, political or
regulatory occurrence than a diversified company.
Portfolio Turnover. While the Portfolio 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 Portfolio anticipates that its annual
turnover rate should not exceed 150% under normal conditions, it is impossible
to predict portfolio turnover rates. A high rate of portfolio turnover results
in correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Portfolio.
All of the Portfolios are subject to the Federal income tax requirement that
less than 30% of the Portfolio's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
OTHER INVESTMENT POLICIES AND PRACTICES OF THE PORTFOLIOS
Writing of Covered Call Options. Each Portfolio may from time to time write
(i.e., sell) covered call options on its portfolio securities and enter into
closing purchase transactions with respect to certain of such
4
<PAGE>
options. A call option is considered covered where the writer of the option
owns the underlying securities. By writing a covered call option, the
Portfolio, in return for the premium income realized from the sale of the
option may give up the opportunity to profit from a price increase in the
underlying security above the option exercise price. In addition, the Portfolio
will not be able to sell the underlying security until the option expires, is
exercised or the Program effects a closing purchase transaction as described
below. A closing purchase transaction cancels out the Program'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. If the option expires
unexercised, the Program realizes a gain in the amount of the premium received
for the option which may be offset by a decline in the market price of the
underlying security during the option period. The use of covered call options
is not a primary investment technique of any of the Portfolios and such options
normally will be written on underlying securities as to which management does
not anticipate significant short-term capital appreciation. In its use of
options, the Program's investment adviser has access to personnel of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with extensive
experience in options research and strategy. No Portfolio may write covered
options on underlying securities exceeding 15% of that Portfolio's total
assets.
All options referred to herein and in the Program's Prospectus are options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. An option 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. The option period normally ranges from three to
nine months from the date the option is written. For writing an option, the
Program receives a premium, which is the price of such option on the exchange
on which it is traded. The exercise price of the option may be below, equal to,
or above the current market value of the underlying security at the time the
option is written.
The writer may terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected 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.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction ordinarily will be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Portfolio will
have incurred a loss in the transaction. An option may be closed out only on an
exchange which provides a secondary market for an option of the same series and
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer will be subject to the risk of market decline in the
underlying security during such period. A Portfolio will write an option on a
particular security only if management believes that a liquid secondary market
will exist on an exchange for options of the same series which will permit the
Portfolio to make a closing purchase transaction in order to close out its
position.
Due to the relatively short time that exchanges have been dealing with
options, options involve risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures, including restriction of certain types of orders.
5
<PAGE>
Investment Restrictions. In addition to the investment restrictions set forth
in the Prospectus, each of the Portfolios has adopted the following
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Portfolio'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). The Portfolios may not:
1. Make any investment inconsistent with the Portfolio's classification
as a diversified company under the Investment Company Act. This investment
restriction does not apply to Growth Opportunity Portfolio which is non-
diversified. See "Investment Objectives and Policies--Growth Opportunity
Portfolio".)
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, a Portfolio 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 a Portfolio 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 Program'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) a Portfolio 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) a Portfolio, to the
extent permitted by applicable law, may borrow up to an additional 5% of
its total assets for temporary purposes (currently Ohio regulations
prohibit any borrowing in excess of 33 1/3 of the Portfolio's total assets)
(iii) a Portfolio may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities and (iv) a
Portfolio may purchase securities on margin to the extent permitted by
applicable law. A Portfolio may not pledge its assets other than to secure
such borrowings or, to the extent permitted by such Portfolio's investment
policies as set forth in the Program's 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 a Portfolio
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 a Portfolio may do so in accordance with applicable law and
the Program's Prospectus and Statement of Additional
6
<PAGE>
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act.
Additional investment restrictions adopted by the Portfolios, which may be
changed by the Program's Board of Directors, without approval of the Program's
shareholders, provide that the Portfolios may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. Applicable law
currently allows the Portfolios to purchase the securities of other
investment companies if immediately thereafter not more than (i) 3% of the
total outstanding voting stock of such company is owned by the Portfolio,
(ii) 5% of the Portfolio's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Portfolio's total
assets, taken at market value, would be invested in such securities, and
(iv) the Portfolio, together with other investment companies having the
same investment adviser and companies controlled by such companies, owns
not more than 10% of the total outstanding stock of any one closed-end
investment company. Investments by the Portfolios in wholly-owned
investment entities created under the laws of certain countries will not be
deemed an investment in other investment companies.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
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 Program has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which a
Portfolio's shares are registered or qualified for sale require a lower
limitation, the Portfolio will observe such limitation. As of the date
hereof, therefore, a Portfolio will not invest more than 10% of its total
assets in securities which are subject to this investment restriction (c).
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A security") and determined to be liquid by the Program's Board
of Directors are not subject to the limitations set forth in this
investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Portfolio's net assets; included within such limitation, but not to
exceed 2% of the Portfolio's net assets, are warrants which are not listed
on the New York Stock Exchange or American Stock Exchange or a major
foreign exchange. For purposes of this restriction, warrants acquired by
the Portfolio in units or attached to securities may be deemed to be
without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Portfolio's total assets would be invested in such
securities. This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Program, the officers and general partner of
the Investment Adviser, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
7
<PAGE>
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that a Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Program's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 10% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Portfolio shares. A Portfolio will not
purchase securities while borrowings exceed 5% (taken at market value) of
its total assets.
Portfolio securities of the Portfolios generally may not be purchased from,
sold or loaned to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless pursuant to a
rule or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Program, the Portfolios are prohibited
from engaging in certain transactions involving such firm or its affiliates
except for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Portfolios are prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firms
or any of their affiliates participate as an underwriter or dealer.
Investment in Foreign Issuers. The Fundamental Value, Global Opportunity and
Growth Opportunity Portfolios may invest in securities of foreign issuers.
Foreign companies may not be subject to uniform accounting and auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to domestic issuers. Securities of foreign issuers may be less
liquid and more volatile than securities of United States issuers. Investment
in foreign securities also involves certain risks, including fluctuations in
foreign exchange rates, political and economic developments and the possible
imposition of exchange controls.
8
<PAGE>
MANAGEMENT OF THE PROGRAM
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio managers of
the Program, including their ages and 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 (63)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1991.
Joe Grills (61)--Director(2)--183 Soundview Lane, New Canaan, Connecticut
06840. 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 from 1986 to 1993; Member of the
Investment Advisory Committee of the State of New York Common Retirement Fund;
Director, Duke Management Company and the LaSalle Street Fund.
Walter Mintz (67)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Robert S. Salomon, Jr. (59)--Director (2)(3)--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 Inc from 1992 to 1995;
Chairman of Salomon Brothers equity mutual funds from 1992 to 1995; Director of
Stock Research and U.S. Equity Strategist at Salomon Brothers Inc from 1975 to
1991.
Melvin R. Seiden (65)--Director(2)--780 Third Avenue, New York, New York
10017. President 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 (62)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Principal of Fernwood Associates (financial consultants).
Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President
of the Investment Adviser and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and a Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
N. John Hewitt (61)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1976; Senior Vice President of Princeton
Services since 1993.
Norman R. Harvey (62)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
9
<PAGE>
Thomas R. Robinson (52)--Vice President(1)(2)--Senior Portfolio Manager of
the Investment Adviser since November 1995; Manager of International Equity
Strategy of ML & Co.'s Global Securities Research and Economics Group from
1989 to 1995.
Jay C. Harbeck (61)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1986.
Kevin Rendino (28)--Vice President(1)(2)--Vice President of the Investment
Adviser since December 1993; Senior Research Analyst from 1990 to 1992;
Corporate Analyst from 1988 to 1990.
Gregory Mark Maunz (43)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1985 and Portfolio Manager since 1984.
Lawrence R. Fuller (54)--Portfolio Manager(1)--Vice President of the
Investment Adviser since 1992; Senior Vice President and Director of Benefit
Capital Management from 1984 to 1992.
Donald C. Burke (35)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer since 1984.
Mark B. Goldfus (49)--Secretary(1)(2)--Vice President of the Investment
Adviser since 1985.
- --------
(1) Interested person, as defined in the Investment Company Act, of the
Program.
(2) Such Director or officer is a director or officer of certain other
investment companies for which the Investment Adviser or its affiliates
act as investment adviser(s). See "Compensation of Directors" below.
(3) On January 17, 1996, Robert S. Salomon, Jr. was elected as a Director of
the Program to fill the vacancy created by the retirement of Harry Woolf,
who retired as Director, effective December 31, 1995, pursuant to the
Program's retirement policy.
At April 30, 1996, the Directors and officers of the Program as a group (17
persons) owned an aggregate of less than 1% of the outstanding shares of the
Program. At that date, Mr. Zeikel, a Director and officer of the Program, and
the other officers of the Program owned less than 1/4 of 1% of the outstanding
Common Stock of ML & Co.
COMPENSATION OF DIRECTORS
Pursuant to the terms of the Program's investment advisory agreement with
the Investment Adviser relating to each Portfolio (each an "Investment
Advisory Agreement"), the Investment Adviser pays all compensation of officers
and employees of the Program as well as the fees of all Directors of the
Program who are affiliated persons of ML & Co. or its subsidiaries. The
Program pays each unaffiliated Director an annual fee of $1,500 plus a fee of
$250 for each meeting attended and reimburses each Director for actual out-of-
pocket expenses relating to attendance at meetings. Additionally, the Program
has established an Audit Committee of the Board of Directors of which all of
the unaffiliated Directors are members. Each member of such committee receives
an annual fee of $1,500 plus a fee of $250 for each meeting attended and is
reimbursed for actual out-of-pocket expenses related to attendance at
meetings. Fees and expenses paid to the unaffiliated Directors by the
Portfolios for the fiscal year ended January 31, 1996, were allocated to each
Portfolio on the basis of the size of the Portfolio: Fundamental Value
Portfolio, $6,061; Quality Bond Portfolio, $2,199; U.S. Government Securities
Portfolio, $5,528 and Global Opportunity Portfolio, $10,901. Information is
not provided for the Growth Opportunity Portfolio since it commenced
operations on February 2, 1996.
10
<PAGE>
The following table sets forth for the fiscal year ended January 31, 1996,
compensation paid by the Program to the unaffiliated Directors, and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the unaffiliated Directors.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED AS FROM MLAM/FAM
ESTIMATED COMPENSATION PART OF PROGRAM ADVISED FUNDS
NAME OF DIRECTOR FROM PROGRAM EXPENSES PAID TO DIRECTORS
---------------- ---------------------- --------------------- ------------------
<S> <C> <C> <C>
Joe Grills(/1/)......... $5,350 None $153,883
Walter Mintz(/1/)....... $5,350 None $153,883
Robert S. Salomon,
Jr.(/1/)(/2/).......... $ 500 None $ 0
Melvin R. Seiden(/1/)... $5,350 None $153,883
Stephen B.
Swensrud(/1/).......... $4,850 None $161,883
Harry Woolf(/1/)........ $4,850 None $153,883
</TABLE>
- --------
(1) In addition to the Program, the Directors serve on the boards of MLAM/FAM
Advised Funds as follows: Joe Grills (33 funds and portfolios), Walter
Mintz (33 funds and portfolios), Robert S. Salomon (33 funds and
portfolios), Melvin R. Seiden (33 funds and portfolios), Stephen B.
Swensrud (41 funds and portfolios) and Harry Woolf (33 funds and
portfolios) prior to his retirement, effective December 31, 1995, pursuant
to the Program's retirement policy.
(2) Mr. Salomon was elected a Director of the Program on January 17, 1996.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Program--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Program.
The Investment Advisory Agreements provide that, subject to the direction of
the Board of Directors of the Program, the Investment Adviser is responsible
for the actual management of that Portfolio and for the review of that
Portfolio'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 Investment Adviser, subject to review
by the Board of Directors. The Investment Adviser supplies the portfolio
managers for each Portfolio who consider analyses from various sources, make
the necessary investment decisions and place transactions accordingly. The
Investment Adviser also is obligated to perform certain administrative and
management services for the Portfolios and is required to provide all the
office space, facilities, equipment and personnel necessary to perform its
duties under the Investment Advisory Agreement. The Investment Adviser has
access to the total securities research, economic research and computer
applications facilities of Merrill Lynch and makes extensive use of these
facilities.
Securities held by the Portfolios also may be held by or be appropriate
investments for other funds for which the Investment Adviser or its affiliates
act as adviser or by investment advisory clients of the Investment Adviser.
Because of different investment 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 for the Program
or other funds for which the Investment Adviser or its affiliates act as
investment adviser or for their advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Investment Adviser or its affiliates during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
11
<PAGE>
As compensation for its services to the Portfolios, the Investment Adviser
will receive from each Portfolio a monthly fee based on the average daily
value of that Portfolio's net assets at the following annual rates:
<TABLE>
<CAPTION>
U.S. GOVERNMENT GLOBAL GROWTH
FUNDAMENTAL VALUE QUALITY BOND SECURITIES OPPORTUNITY OPPORTUNITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C>
0.65% 0.50% 0.50% 0.75% 0.65%
</TABLE>
The State of California imposes limitations on the expenses of the Program.
At the date of this Statement of Additional Information, the limitations
require that the Investment Adviser reimburse the Program in an amount
necessary to prevent the aggregate ordinary operating expenses of the Program
(excluding interest, taxes, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding in any fiscal year 2.5% of
the Program's first $30 million of average daily net assets, 2.0% of the next
$70 million of average daily net assets and 1.5% of the remaining average
daily net assets. No fee payment will be made to the Investment Adviser during
any fiscal year which will cause such expenses to exceed the pro rata expense
limitation at the time of such payment.
The table below sets forth for the fiscal year ended January 31, 1996, the
total advisory fee paid by each Portfolio to the Investment Adviser
(information is not provided for Growth Opportunity Portfolio which commenced
operations on February 2, 1996):
<TABLE>
<CAPTION>
PORTFOLIO FEE AMOUNT ($)
--------- --------------
<S> <C>
Fundamental Value(/1/)..................................... 128,082
Quality Bond(/2/).......................................... 23,114
U.S. Government Securities(/2/)............................ 37,948
Global Opportunity(/3/).................................... 146,953
</TABLE>
- --------
(1) The Investment Adviser reimbursed $23,907 of the advisory fee.
(2) The Investment Adviser reimbursed the Portfolio for all of the advisory
fee. In addition, the Investment Adviser reimbursed the Quality Bond
Portfolio for $93,347 of certain other expenses (excluding 12b-1 fees) and
U.S. Government Securities Portfolio for 156,230 of certain other expenses
(excluding 12b-1 fees).
(3) The Investment Adviser reimbursed $33,240 of certain other expenses
(excluding 12b-1 fees).
Each Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Portfolios connected
with investment and economic research, trading and investment management of
the Portfolios, as well as the fees of all Directors of the Program who are
affiliated persons of ML & Co. or any of its subsidiaries. Each Portfolio pays
all other expenses incurred in its operations and a portion of the Program's
general administrative expenses allocated on the basis of the asset size of
the respective Portfolios. Expenses that will be borne directly by the
Portfolios include redemption expenses, expenses of portfolio transactions,
shareholder servicing costs, expenses of registering the shares under Federal
and state securities laws, pricing costs (including the daily calculation of
net asset value), interest, certain taxes, charges of the Custodian and
Transfer Agent and other expenses attributable to the particular Portfolio.
Expenses which will be allocated on the basis of the size of the respective
Portfolios include directors' fees, legal expenses, state franchise taxes,
auditing services, costs of printing proxies, stock certificates, shareholder
reports and prospectuses (except to the extent paid by the Distributor),
Securities and Exchange Commission fees, accounting costs and other expenses
properly payable by the Portfolios and allocable on the basis of the size of
the respective Portfolios. Accounting services are provided for the Portfolios
by the Investment Adviser and the Portfolios reimburse the Investment Adviser
for its costs in connection with such services. As required by the
Distribution
12
<PAGE>
Agreements, the Distributor will pay certain of the expenses of the Portfolios
incurred in connection with the offering of shares of each Portfolio,
including the expenses of printing the prospectuses and statements of
additional information used in connection with the continuous offering of
shares by the Portfolios.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their power to exercise a controlling
influence over its investment policies.
Duration and Termination. Unless earlier terminated as described below, the
Investment Advisory Agreement for each Portfolio will remain in effect from
year to year if approved annually (a) by the Board of Directors of the Program
or by a majority of the outstanding shares of the subject Portfolio and (b) by
a majority of the Directors who are not parties to such contract or interested
persons (as defined in the Investment Company Act) of any such party. Such
contract is not assignable and may be terminated without penalty on 60 days'
written notice at the option of either party or by the vote of the
shareholders of the Portfolios.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" and "Redemption of Shares" in the
Prospectus for certain information as to the purchase of shares of the
Portfolios.
The Program will offer shares solely to holders of IRAs for which Merrill
Lynch acts as custodian and to CBA (SM) accounts and CMA SubAccounts (SM)
established pursuant to the Uniform Gifts to Minors Acts or the Uniform
Transfers to Minors Acts (or similar state statutes). The minimum initial
purchase in any Portfolio is $100 and the minimum subsequent purchase in any
Portfolio is $1.
The Distributor, a subsidiary of the Investment Adviser, acts as the
distributor of the shares of the Program. The applicable offering price for
purchase orders is based on the net asset value of the Portfolio 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 (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 New York Stock Exchange, on
the day the orders are placed with the Distributor, provided the orders are
received by the Distributor prior to 30 minutes after the close of business on
the New York Stock Exchange on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the New York Stock Exchange, such orders shall be deemed received on the next
business day. Any order may be rejected by the Distributor or the Program. The
Program or the Distributor may suspend the continuous offering of any
Portfolio's shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to
time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale of
shares to such customers.
Each Portfolio 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
13
<PAGE>
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 each
Portfolio represents identical interests in the investment portfolio of that
Portfolio 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. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Investment Adviser, or its affiliate, FAM. Funds advised
by the Investment Adviser or FAM which use the Merrill Lynch Select PricingSM
System are referred to herein as "MLAM-advised mutual funds".
The Program has entered into separate distribution agreements with the
Distributor on behalf of each Portfolio in connection with the continuous
offering of each class of shares of each of the Portfolios (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 Portfolios. 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 charge for the sale of Class A shares of the Fundamental
Value Portfolio for the fiscal year ended January 31, 1996 was $96, of which
$5 and $91 were received by the Distributor and Merrill Lynch, respectively.
The gross sales charge for the sale of Class A shares of the U.S. Government
Securities Portfolio for the fiscal year ended January 31, 1996 was $49, of
which $3 and $46 were received by the Distributor and Merrill Lynch,
respectively. The gross sales charge for the sale of Class A shares of the
Global Opportunity Portfolio for the fiscal year ended January 31, 1996 was
$210, of which $11 and $199 were received by the Distributor and Merrill
Lynch, respectively. The gross sales charge for the sale of Class D shares of
the Fundamental Value Portfolio for the fiscal year ended January 31, 1996 was
$47,105, of which $2,345 and $44,760 were received by the Distributor and
Merrill Lynch, respectively. The gross sales charge for the sale of Class D
shares of the Quality Bond Portfolio for the fiscal year ended January 31,
1996, was $2,829, of which $192 and $2,637 were received by the Distributor
and Merrill Lynch, respectively. The gross sales charge for the sale of Class
D shares of the U.S. Government Securities Portfolio for the fiscal year ended
January 31, 1996, was $3,074, of which $203 and $2,871 were received by the
Distributor and Merrill Lynch, respectively. The gross sales charge for the
sale of Class D shares of the Global Opportunity Portfolio for the fiscal year
ended January 31, 1996, was $19,543, of which $959 and $18,584 were received
by the Distributor and Merrill Lynch, respectively.
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 Portfolios, refers to a single purchase by
14
<PAGE>
an individual, or to concurrent purchases, which in the aggregate are at least
equal to the prescribed amounts, by an individual, his spouse and their
children under the age of 21 years purchasing shares for his or their own
account and to single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account (including a
pension, profit-sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Code) although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Portfolio 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.
Closed-End Fund Investment Option. Class A shares of the Portfolios 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 Portfolios
and other MLAM-advised mutual funds ("Eligible Class D shares"), if the
following conditions are met. First, the sale of the closed-end fund shares
must be made through Merrill Lynch, and the net proceeds therefrom must be
immediately reinvested in Eligible Class A or Class D shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of a Portfolio. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of a Portfolio and shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund, Inc. will receive Class D shares of a Portfolio, except that
shareholders already owning Class A shares of a Portfolio 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
a Portfolio. 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 Portfolio on such day.
15
<PAGE>
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 Portfolios 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 Program and of other MLAM-advised mutual funds.
For any such right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing, or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Purchase Privilege of Certain Persons. Directors of the Program, directors
and trustees of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries" when used herein with respect to ML &
Co. includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees may
purchase Class A shares of the Portfolios at net asset value.
Class D shares of the Portfolios are 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
it will purchase Class D shares of the Portfolio with proceeds from a
redemption of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the
Portfolio, and the proceeds from the redemption had been maintained in the
interim in cash or a money market fund.
Class D shares of the Portfolios 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, if the following conditions are
satisfied: first, the investor must purchase Class D shares of a Portfolio
with proceeds from a redemption of shares of such other mutual fund and such
fund was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice of termination.
Class D shares of the Portfolios 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 a Portfolio with proceeds from the 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.
16
<PAGE>
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.
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") regarding the account
maintenance and/or distribution fees paid by the Portfolios 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 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 Portfolio and its related class of shareholder. 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 Program, 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 a
reasonable likelihood that such Distribution Plan will benefit the Portfolio
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 Portfolio. A Distribution Plan cannot
be amended to increase materially the amount to be spent by the Portfolio
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 Portfolio
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-backed 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 Portfolios, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Portfolios 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
17
<PAGE>
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 Portfolio will not make further
payments of the distribution fee with respect to Class B shares, and any CDSCs
will be paid to the Portfolio rather than to the Distributor, however, the
Portfolio 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,
1996 indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule with respect to Class B and Class C shares and the
Distributor's voluntary maximum with respect to Class B shares, for the
periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JANUARY 31, 1996
---------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD FEBRUARY 1, 1995
(COMMENCEMENT OF
OPERATIONS) TO JANUARY
31, 1996:
Under NASD Rule as
Adopted
Fundamental Value Port-
folio.................. $14,559 $910 $49 $959 $106 $853 $157
Quality Bond Portfolio.. $ 2,202 $138 $ 8 $146 $ 10 $136 $ 15
Global Opportunity Port-
folio.................. $ 9,544 $597 $29 $626 $ 80 $546 $121
U.S. Government Securi-
ties Portfolio......... $ 2,201 $138 $ 7 $145 $ 10 $135 $ 15
Under Distributor's Vol-
untary Waiver
Fundamental Value Port-
folio.................. $14,559 $910 $73 $983 $106 $877 $157
Quality Bond Portfolio.. $ 2,202 $138 $10 $146 $ 10 $136 $ 15
Global Opportunity Port-
folio.................. $ 9,544 $597 $47 $646 $ 80 $566 $121
U.S. Government Securi-
ties Portfolio......... $ 2,201 $138 $10 $155 $ 10 $145 $ 15
CLASS C SHARES, FOR THE
PERIOD FEBRUARY 1, 1995
(COMMENCEMENT OF
OPERATIONS) TO JANUARY
31, 1996:
Under NASD Rule as
Adopted
Fundamental Value Port-
folio.................. $ 7,146 $447 $24 $471 $ 36 $435 $ 60
Quality Bond Portfolio.. $ 1,075 $ 67 $ 3 $ 70 $ 3 $ 67 $ 6
Global Opportunity Port-
folio.................. $ 4,129 $258 $13 $271 $ 20 $251 $ 36
U.S. Government Securi-
ties Portfolio......... $ 963 $ 60 $ 3 $ 63 $ 3 $ 60 $ 6
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
18
<PAGE>
As described in Appendix A, there are three types of self-directed plans
which are eligible to invest in the Portfolios: the individual retirement
account, the individual retirement rollover account ("IRRA") and the
Simplified Employee Pension Plan ("SEP-IRA") (collectively, "IRAs"). Although
the amount which may be contributed to an IRA account in any one year is
subject to certain limitations, assets already in an IRA account may be
invested in the Portfolios without regard to such limitations.
Shareholders considering transferring an IRA, CBA (R) account or CMA
SubAccount SM in which Program shares are held from Merrill Lynch to another
brokerage firm or financial institution should be aware that Program shares
may only be held in a Merrill Lynch custodied IRA, or in a CBA (R) account or
CMA SubAccount SM established pursuant to the Uniform Gifts to Minors Acts or
Uniform Transfers to Minors Acts (or other similar state statutes). Prior to
any such transfer, 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 exchange the shares for shares of another mutual fund
advised by the Investment Adviser or its affiliates pursuant to the exchange
privilege. It is possible, however, that the firm to which the account is to
be transferred will not take delivery of shares of such fund, and then the
shareholder would have to redeem these shares so that the cash proceeds can be
transferred or continue to maintain an IRA, CBA (R) account or CMA
SubAccount SM at Merrill Lynch for those shares.
Cash balances of participants who elect to have such funds automatically
invested in shares of a Portfolio will be invested as follows. Cash balances
arising from the sale of securities held in the account which do not settle on
the day of the transaction (such as most common and preferred stock
transactions) become available to the Program and will be invested in shares
of a Portfolio on the business day following the day that proceeds with
respect thereto are received in the account. Proceeds giving rise to cash
balances from the sale of securities held in the account settling on a same
day basis and from principal repayments on debt securities held in the account
become available to the Program and will be invested in shares of a Portfolio
on the next business day following receipt. Cash balances arising from
dividends or interest payments on securities held in the account or from a
contribution to the IRA account or a deposit into the CBA (R) account or CMA
SubAccount SM are invested in shares of the Portfolios on the business day
following the date the payment is received in the account.
Merrill Lynch has advised the Program that it will not charge an annual
account fee upon any IRA, CBA (R) account or CMA SubAccount SM which is then
invested solely in one or more of the Program's Portfolios or in a money
market fund advised by the Investment Adviser or its affiliates. If, however,
a shareholder of any of the Portfolios exchanges any of his or her shares of a
Portfolio for shares of another fund advised by the Investment Adviser or its
affiliates, other than shares of a Portfolio or a money market fund advised by
the Investment Adviser or its affiliates, then Merrill Lynch will reinstate
the IRA, CBA (R) or CMA SubAccount SM annual account fee, as the case may be.
For information about the current IRA fees charged by Merrill Lynch, consult
the Merrill Lynch IRA Disclosure Statement and the Merrill Lynch IRA Custodial
Agreement. For information about current CBA (R) fees charged by Merrill
Lynch, consult the Capital Builder (TM) Account Program description. For
information about current CMA SubAccount SM fees charged by Merrill Lynch,
consult the Cash Management Account (R) Program description.
19
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of shares of the Portfolios.
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 New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission (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 any Portfolio is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Portfolios.
Distributions from an IRA account to a participant prior to the time the
participant reaches age 59 1/2 may subject the participant to income and excise
taxes. See "Dividends, Distributions and Taxes". There are, however, no adverse
tax consequences resulting from redemptions of shares of the Portfolios where
the redemption proceeds remain in the IRA account and are otherwise invested.
The Program is required to redeem for cash all shares of each Portfolio of
the Program. The redemption price is the net asset value per share next
determined after the initial receipt of proper notice of redemption as
described below. If such notice is received by Merrill Lynch prior to the
determination of net asset value on any day (15 minutes after the close of
business on the New York Stock Exchange), the redemption will be effective on
that day and payment generally will be made on the next business day. If the
notice is received after the determination of net asset value on any day, the
redemption will be effective on the next business day and payment will be made
on the second business day after receipt of the notice. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption. Accrued but unpaid dividends will be
paid on the payable date next following the date of redemption.
Any shareholder may redeem shares of the Portfolios by submitting a written
notice of redemption to Merrill Lynch. Participants in the Program should
contact their Merrill Lynch financial consultant to effect such redemptions.
Redemption requests should not be sent to the Program or to its Transfer Agent.
In the case of an IRA account, the notice must bear the signature of the person
in whose name the IRA is maintained, signed exactly as his or her name appears
on the IRA adoption agreement. In the case of a CBA (R) or CMA (R) account, the
notice must bear the signature of the person named as custodian for the
account.
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 (i) on redemptions of Class B shares in connection with
certain post-retirement withdrawals from an IRA or other retirement plan or
(ii) on redemptions of Class B shares following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are: (a) any
partial or complete redemption in connection with a tax-free distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life
20
<PAGE>
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 year ended January 31,
1996, the Distributor received CDSCs of $11,993 and $2,371, with respect to
redemptions of Class B and Class C shares of Fundamental Value Portfolio, all
of which was paid to Merrill Lynch. For the fiscal year ended January 31, 1996
the Distributor received CDSCs of $1,288 and $224, with respect to redemptions
of Class B and Class C shares of Quality Bond Portfolio, all of which was paid
to Merrill Lynch. For the fiscal year ended January 31, 1996, the Distributor
received CDSCs of $12,061 and $1,357, with respect to redemptions of Class B
and Class C shares of Global Opportunity Portfolio, all of which was paid to
Merrill Lynch. For the fiscal year ended January 31, 1996, the Distributor
received CDSCs of $2,636 and $255, with respect to redemptions of Class B and
Class C shares of U.S. Government Securities Portfolio, all of which was paid
to Merrill Lynch.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Portfolio Transactions and Brokerage" in the
Prospectus. Subject to policies established by the Board of Directors of the
Program, the Investment Adviser is primarily responsible for the portfolio
decisions of each of the Portfolios and the placing of the portfolio
transactions for each of the Portfolios. With respect to such transactions, the
Investment Adviser seeks to obtain the best net results for each Portfolio,
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 Portfolios will not necessarily be paying the
lowest commission or spread available. Transactions with respect to the
securities of small and emerging growth companies in which the Fundamental
Value and Growth Opportunity Portfolios may invest may involve specialized
services on the part of the broker or dealer and thereby entail higher
commissions or spreads than would be the case with transactions involving more
widely traded securities of more established companies. The Portfolios have no
obligation to deal with any broker in the execution of transactions for their
portfolio securities. In addition, consistent with the Rules of Fair Practice
of the NASD and policies established by the Directors of the Program, the
Investment Adviser may consider sales of shares of the Portfolios as a factor
in the selection of brokers or dealers to execute portfolio transactions for
the Portfolios.
The Program has been informed by Merrill Lynch that it will in no way, at any
time, attempt to influence or control the placing by the Investment Adviser or
by the Program of orders for brokerage transactions. Brokers and dealers,
including Merrill Lynch, who provide supplemental investment research (such as
securities and economic research and market forecasts) to the Investment
Adviser may receive orders for transactions by the Portfolios. If, in the
judgment of the Investment Adviser, a Portfolio will be benefited by such
supplemental research services, the Investment Adviser is authorized to pay
commissions to brokers furnishing such services which are in excess of
commissions which another broker may charge for the same transaction.
Information so received is in addition to and not in lieu of the services
required to be performed
21
<PAGE>
by the Investment Adviser under the Investment Advisory Agreement with the
Program, and the expenses of the Investment Adviser will not necessarily be
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 Portfolios also may invest in securities traded in the over-the-counter
market. Transactions in the over-the-counter market generally are principal
transactions with dealers and the costs of such transactions involve dealer
spreads. With respect to the over-the-counter transactions, the Portfolios,
where possible, will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually act as principals for
their own account. On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the Quality Bond and the U.S.
Government Securities Portfolios will consist primarily of dealer or
underwriter spreads.
Under the Investment Company Act, persons affiliated with the Program are
prohibited from dealing with the Portfolios 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 over-the-counter market
usually involve transactions with dealers acting as principal for their own
account, affiliated persons of the Program, including Merrill Lynch, may not
serve as the Program's dealer in connection with such transactions. See
"Investment Objectives and Policies--Investment Restrictions". However,
affiliated persons of the Program may serve as its broker in the over-the-
counter transactions conducted on an agency basis.
The ability and decisions of the Global Opportunity, Fundamental Value and
Growth Opportunity Portfolios to purchase or sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets. Because the shares of the Portfolios are redeemable on a daily basis
in U.S. dollars, the Global Opportunity, Fundamental Value and Growth
Opportunity Portfolios intend to manage their portfolios so as to give
reasonable assurance that they will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
portfolio strategies.
The Global Opportunity, Fundamental Value and Growth Opportunity Portfolios
anticipate that brokerage transactions involving securities of companies
domiciled in countries other than the U.S. will be conducted primarily on the
principal stock exchanges of such countries. Brokerage commissions and other
transaction costs on foreign stock exchange transactions are generally higher
than in the U.S., although the Global Opportunity, Fundamental Value and Growth
Opportunity Portfolios will endeavor to achieve the best net results in
effecting the transactions. There is generally less governmental supervision
and regulation of foreign stock exchanges and brokers than in the U.S.
The Board of Directors of the Program has considered the possibilities of
seeking to recapture for the benefit of the Program brokerage commissions,
dealer spreads and other expenses of possible portfolio transactions, such as
underwriting commissions and tender offer solicitation fees, by conducting such
portfolio transactions through affiliated entities, including Merrill Lynch.
For example, brokerage commissions received by Merrill Lynch could be offset
against the advisory fee payable by the Program to
22
<PAGE>
the Investment Adviser. After considering all factors deemed relevant, the
Board made a determination not to seek such recapture. The Board will
reconsider this matter from time to time. The Investment Adviser has arranged
for the Program's custodian to receive any tender offer solicitation fees on
behalf of the Program payable with respect to portfolio securities of the
Program.
The Global Opportunity, Fundamental Value and Growth Opportunity Portfolios
may invest in the securities of foreign issuers in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or other
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by 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.
Section 11(a) of the Securities Exchange Act of 1934 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 Portfolios in any
of the portfolio transactions executed on any such securities exchange of which
it is a member, appropriate consents have been obtained from the Program, and
annual statements as to aggregate compensation will be provided to the
Portfolios. The Commission has the authority to issue regulations to broaden
the prohibition contained in Section 11(a) to extend to transactions executed
otherwise than on a national securities exchange. While there is no indication
that it will do so, the Commission could under this authority issue regulations
at any time which would prohibit affiliates from executing portfolio
transactions for the Portfolios on foreign securities exchanges.
For the fiscal year ended January 31, 1996, the Fundamental Value Portfolio
paid total brokerage commissions of $98,736, of which $2,890, or 2.9%, was paid
to Merrill Lynch for effecting 4.0% of the aggregate dollar amount of
transactions in which the Portfolio paid brokerage commissions. For the fiscal
year ended January 31, 1996, the Global Opportunity Portfolio paid total
brokerage commissions of $77,410, of which $10,690, or 13.8%, was paid to
Merrill Lynch for effecting 15.1% of the aggregate dollar amount of
transactions in which the Portfolio paid brokerage commissions. For the fiscal
year ended January 31, 1996, the Quality Bond Portfolio and the U.S. Government
Securities Portfolio paid no brokerage commissions.
PORTFOLIO TURNOVER
Each Portfolio intends to comply with the various requirements of the
Internal Revenue Code so as to qualify as a "regulated investment company"
thereunder. See "Dividends, Distributions and Taxes". Among such requirements
is a limitation to less than 30% on the amount of gross income which the
Portfolios may
23
<PAGE>
derive from gain on the sale or other disposition of securities held for less
than three months. Accordingly, the Portfolios' ability to effect certain
portfolio transactions may be limited.
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 each Portfolio is determined once daily Monday
through Friday 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time) on each day during which the New
York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. Each Portfolio also will
determine its net asset value on any day in which there is sufficient trading
in its portfolio securities that the net asset value might be affected
materially, but only if on any such day the Portfolio is required to sell or
redeem shares. The net asset value per share of a Portfolio is computed by
dividing the sum of the value of the securities held by the Portfolio plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees and distribution fees, are
accrued daily. The per share net asset value of the Class B, Class C and Class
D shares of a Portfolio generally will be lower than the per share net asset
value of the Class A shares of the same Portfolio 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 Portfolio. 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 over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the
time of valuation. Securities and assets for which market quotations are not
readily available are valued at fair market value as determined in good faith
by or under the direction of the Board of Directors of the Program.
Option Accounting Principles. When a Portfolio writes a call option, the
amount of the premium received is recorded on the books of the Portfolio as an
asset and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based upon
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price. Options
purchased by a Portfolio are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the last bid price.
24
<PAGE>
SHAREHOLDER SERVICES
The Program offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of
such services, copies of the various plans described below and instructions as
to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Program by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
A shareholder who maintains his or her account through a Merrill Lynch-
custodied IRA will receive information regarding activity in his or her
Merrill Lynch IRA as part of the Merrill Lynch retirement account statement. A
shareholder who maintains his or her account through the CBA(R) or CMA (R)
program will receive information regarding activity in the CBA(R) account or
CMA SubAccount SM as part of his CBA(R) or CMA (R) statement. Shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestments of ordinary income dividends and long-term capital
gains distributions. Shareholders considering transferring an IRA, CBA(R)
account or CMA SubAccount SM in which Program shares are held from Merrill
Lynch to another brokerage firm or financial institution should be aware that
Program shares may only be held in a Merrill Lynch-custodied IRA, or in a
CBA(R) account or CMA SubAccount SM established pursuant to the Uniform Gifts
to Minors Acts or Uniform Transfers to Minors Acts (or other similar state
statutes). Prior to any such transfer, 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 exchange the shares for shares
of another mutual fund advised by the Investment Adviser or its affiliates
pursuant to the exchange privilege. It is possible, however, that the firm to
which the account is to be transferred will not take delivery of shares of
such fund, and then the shareholder would have to redeem these shares so that
the cash proceeds can be transferred or such shareholder must continue to
maintain a retirement account at Merrill Lynch for those shares. In addition,
shareholders considering transferring the holdings in their IRA, CBA(R)
account or CMA SubAccount SM to a Merrill Lynch brokerage account should be
aware that because Program shares may only be held in a Merrill Lynch-
custodied IRA, or in a CBA(R) account or CMA SubAccount SM established
pursuant to the Uniform Gifts to Minors Acts or Uniform Transfers to Minors
Acts (or other similar state statutes), the shares will also in this instance
have to be redeemed prior to such transfer or exchanged for another mutual
fund advised by the Investment Adviser or its affiliates.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions of a Portfolio are reinvested
automatically in full and fractional shares of that Portfolio, at the net
asset value per share, of the respective Portfolio next determined on the ex-
dividend date of such dividend or distribution. A shareholder may, at any
time, by written notification to Merrill Lynch, elect to have subsequent
dividends or both dividends and capital gains distributions paid in cash and
held in such shareholder's account rather than reinvested.
SYSTEMATIC REDEMPTION AND AUTOMATIC INVESTMENT PLANS
At age 59 1/2, a Class A or Class D shareholder whose shares are held in an
IRA account, may elect to receive systematic redemption payments from his or
her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
25
<PAGE>
quarterly basis. Investors holding their Program shares in a CBA (R) account
or CMA SubAccount (SM) may arrange to have periodic investments made in shares
of the Portfolios in such account in amounts of $100 or more through the
CMA (R)/CBA (R) Automated Investment Program. See "Dividends, Distributions
and Taxes" for consequences of withdrawals from IRA accounts prior to age 59
1/2. In addition, Merrill Lynch offers an automated funding service which
permits regular current year IRA contributions of up to $2,000 per year to be
made to IRAs and an automated investment program which may be used for
automated subsequent purchases of shares of the Program.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of each of the Portfolios have an
exchange privilege with each other Portfolio of the Program and certain other
MLAM-advised mutual funds. If, however, a shareholder of any of the Portfolios
exchanges any of his or her shares of a Portfolio for shares of another MLAM-
advised mutual fund, Merrill Lynch will reinstate the IRA, CBA (R) or CMA
SubAccount (SM) annual account fee, as the case may be. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of a
Portfolio for Class A shares of a second Portfolio or another MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second
Portfolio or fund in his account in which the exchange is made at the time of
the exchange or is otherwise eligible to purchase Class A shares of the second
Portfolio or fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second Portfolio or MLAM-advised mutual fund, but does not
hold Class A shares of the second Portfolio or fund in his account at the time
of the exchange and is not otherwise eligible to acquire Class A shares of the
second Portfolio or fund, the shareholder will receive Class D shares of the
second Portfolio or fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second Portfolio or 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 Portfolio or fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of
the second Portfolio or fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other Portfolios or 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 Program is tacked on to the holding period of
the newly acquired shares of the other fund as more fully described below.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds as follows: Class A shares
may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for 15 days. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another Portfolio or 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
26
<PAGE>
A or Class D shares and the sales charge payable at the time of the exchange on
the new Class A or Class D shares. With respect to outstanding Class A or Class
D shares as to which previous exchanges have taken place, the "sales charge
previously paid" shall include the aggregate of the sales charges paid with
respect to such Class A or Class D shares in the initial purchase and any
subsequent exchange. Class A or Class D shares issued pursuant to dividend
reinvestment are sold on a no-load basis in each of the funds offering Class A
or Class D shares. For purposes of the exchange privilege, Class A and Class D
shares acquired through dividend reinvestment shall be deemed to have been sold
with a sales charge equal to the sales charge previously paid on the Class A or
Class D shares on which the dividend was paid. Based on this formula, Class A
and Class D shares of a Portfolio generally may be exchanged into the Class A
or Class D shares of the other Portfolios or 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 or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of a Portfolio exercising the exchange privilege will continue to
be subject to the Portfolio'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 a Portfolio acquired through
use of the exchange privilege will be subject to the Portfolio'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 on to the holding period of the new Class B or Class C
shares. For example, an investor may exchange Class B shares of a Portfolio for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Portfolio 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
Portfolio Class B shares to the three year holding period for the Special Value
Fund Class B shares, the investor will be deemed to have held the new Class B
shares for more than five years.
Shareholders also may exchange shares of a Portfolio into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of a
Portfolio may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of a Portfolio for shares of Merrill
Lynch Institutional Fund ("Institutional Fund") after having held the Portfolio
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 Portfolio 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
27
<PAGE>
Class B shares of a fund which the shareholder continued to hold for an
additional two and 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 Program of the exchange.
Shareholders of the Portfolios, 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 Program
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 Program reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Reference is made to "Additional Information--Dividends and Distributions" in
the Prospectus.
FEDERAL TAX
RICs. The following is a general summary of the treatment of regulated
investment companies ("RICs") and their shareholders under the Internal Revenue
Code of 1986, as amended (the "Code"). The Program intends to continue to
qualify each of the Portfolios for the special tax treatment afforded RICs
under the Code. If it so qualifies, each Portfolio (but not its shareholders)
will be subject to Federal income tax with respect to the net ordinary income
and net realized capital gains which it distributes to Class A, Class B, Class
C and Class D shareholders. The Program intends to cause each Portfolio to
distribute substantially all of such income.
Each Portfolio of the Program is treated as a separate corporation for
Federal income tax purposes. Each Portfolio therefore is considered to be a
separate entity in determining its treatment under the rules for RICs described
in the Prospectus. Losses in one Portfolio do not offset gains in another
Portfolio, and the requirements (other than certain organizational
requirements) for qualifying for RIC status will be determined at the Portfolio
level rather than the Program level.
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 Program intends to cause each Portfolio
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 each Portfolio's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such event, the
Portfolios will be liable for the tax only on the amount by which they do not
meet the foregoing distribution requirements.
28
<PAGE>
Dividends paid by a Portfolio 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 ordinarily 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 ordinarily taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Portfolio shares.
Any loss upon the sale or exchange of Portfolio shares held for six months or
less, however, will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
a Portfolio'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
ordinarily constitute capital gains to such holder (assuming the shares are
held as a capital asset). Dividends are ordinarily taxable to shareholders
even though they are reinvested in additional shares of the Portfolio.
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 Program or who, to the Program'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.
IRAs. With the exception of CBA (R) accounts and CMA SubAccounts SM
established pursuant to the Uniform Gifts to Minors Acts or the Uniform
Transfers to Minors Acts (or similar state statutes), investment in the
Portfolios is limited to participants in IRAs for which Merrill Lynch acts as
passive custodian. Accordingly, the general description of the tax treatment
of RICs as set forth above is qualified for the IRA participants with respect
to the special tax treatment afforded IRAs under the Code. Under the Code,
neither ordinary income dividends nor capital gain dividends represent current
income to shareholders holding shares through an IRA. Rather, distributions
from an IRA will be taxable as ordinary income at the rate applicable to the
participant at the time of the distribution. Such distributions would include
(i) any pre-tax contributions to the IRA (including pre-tax contributions that
have been rolled over from another IRA or qualified retirement plan), and (ii)
dividends (whether or not such dividends are classified as ordinary income or
capital gain dividends). In addition to ordinary income tax, participants may
be subject to the imposition of excise taxes on any distributed amount,
including: (i) a 10 percent excise tax on any amount withdrawn from an IRA
prior to the participant's attainment of age 59 1/2; and (ii) a 15 percent
excise tax on the amount of any "excess distributions" (generally, amounts in
excess of $150,000) made from the IRA and any other IRA or qualified
retirement plan annually.
Under certain limited circumstances (for example, if an individual for whose
benefit an IRA is established engages in any transaction prohibited under
Section 4975 of the Code with respect to such account), the IRA could cease to
be treated as an IRA as of the first day of such taxable year that such
transaction occurred. If an IRA through which a shareholder holds Portfolio
shares becomes ineligible for the special treatment afforded IRAs under the
Code, such shareholder will be treated as having received a distribution on
such first day of the taxable year from the IRA in an amount equal to the fair
market value of all assets in the account. Thus, the shareholder would be
taxed currently on (i) the amount of any pre-tax contributions and previously
untaxed dividends held within the account, and (ii) all ordinary income and
capital gain dividends paid by the Portfolios subsequent to such event,
whether such dividends are received
29
<PAGE>
in cash or reinvested in additional shares. These ordinary income and capital
gain dividends also might be subject to state and local taxes. In the event of
IRA disqualification, shareholders also could be subject to the excise taxes
described above. Additionally, IRA disqualification may subject a nonresident
alien shareholder to a 30% United States withholding tax on ordinary income
dividends paid by a Portfolio unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law.
Dividends and interest received by the Global Opportunity Portfolio and, to a
lesser extent, the Fundamental Value and Growth Opportunity Portfolios, 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 of their participation in an IRA, shareholders
will not be able to credit or deduct such taxes in computing their taxable
incomes. However, in the event of IRA disqualification, as discussed above,
shareholders of the Global Opportunity Portfolio might be entitled to a credit
or deduction with respect to their proportionate shares of foreign taxes paid
by the Portfolio, subject to certain conditions and limitations in the Code, if
the Portfolio is eligible and makes an election with the Internal Revenue
Service. It is unlikely, however, that either the Fundamental Value or the
Growth Opportunity Portfolio will be able to make this election.
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.
STATE TAX
Ordinary income and capital gain dividends on RIC shares held in a
disqualified IRA or outside of an IRA 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. Generally, however,
states exempt from state income taxation dividends on shares held within an
IRA, and commence taxation on amounts actually distributed from an IRA. Such
amounts are generally treated as ordinary income.
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 Program.
30
<PAGE>
PERFORMANCE DATA
From time to time the Program may include each Portfolio's average total
return and other total return data, as well as yield for the Quality Bond and
U.S. Government Securities Portfolios, in advertisements or information
furnished to present or prospective shareholders. Total return and yield
figures are based on each Portfolio's historical performance and are not
intended to indicate future performance. Average annual total return and yield
are determined separately for Class A, Class B, Class C and Class D shares of
each Portfolio in accordance with formulae specified by the Commission.
Average annual total return quotations for each Portfolio 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 Program also may quote each Portfolio's total return and aggregate total
return performance data for various specified time periods. 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 rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average rates of return reflect compounding of return; aggregate
total return data generally will be higher than average annual total return
since the aggregate rates of return reflect compounding over a longer period of
time. The Program'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 a Portfolio at the beginning of each
specified period.
Yield quotations for a Portfolio are computed based on a 30-day period by
dividing (a) the net income based on the yield of each security earned during
the period by (b) the average daily number of shares outstanding in each
Portfolio during the period that were entitled to receive dividends (c)
multiplied by the maximum offering price/net asset value per share of that
Portfolio on the last day of the period.
Total return figures and yield figures are based on each Portfolio's
historical performance and are not intended to indicate future performance.
Each Portfolio's total return will vary depending on market conditions, the
securities comprising such Portfolio's holdings, the Portfolio's operating
expenses and the amount of realized and unrealized net capital gains or losses
during the period. The value of an investment in any Portfolio will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost.
On occasion, a Portfolio may compare its performance to that of the Standard
& Poor's 500 Composite Stock Price Index, The Financial Times/Standard & Poor's
Actuarial World Indices, the Morgan Stanley Capital International Indices, the
Dow Jones Industrial Average, or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S.
News & World Report,
31
<PAGE>
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine. As with other performance data, performance comparisons should not be
considered indicative of the Portfolio's relative performance for any future
period.
Set forth below is the total return information for the Class A, Class B,
Class C and Class D shares of each of the Portfolios for the periods indicated.
Information is not provided for Growth Opportunity Portfolio since it commenced
operations on February 2, 1996.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
FUNDAMENTAL VALUE PORT-
FOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 13.84% $1,137.90 14.94% $ 1,148.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 20.10% $1,201.00 18.89% $ 1,188.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 13.79% $1,137.90 14.89% $ 1,148.90
QUALITY BOND PORTFOLIO
- ----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 4.87% $1,048.50 4.36% $ 1,043.50
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 9.22% $1,092.20 8.35% $ 1,083.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 4.85% $1,048.50 4.35% $ 1,043.50
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURI-
TIES PORTFOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 10.84% $1,108.00 10.55% $1,105.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 15.42% $1,154.20 14.52% $1,145.20
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 10.80% $1,108.00 10.52% $1,105.20
GLOBAL OPPORTUNITY PORT-
FOLIO
- ------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 5.33% $1,053.10 5.90% $1,058.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 11.15% $1,111.50 9.89% $1,098.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 5.31% $1,053.10 5.89% $1,058.90
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
FUNDAMENTAL VALUE PORT-
FOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 17.95% $1,178.90 13.64% $1,136.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 18.89% $1,188.90 19.90% $1,199.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 17.89% $1,178.90 13.60% $1,136.00
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
QUALITY BOND PORTFOLIO
- ----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 7.29% $1,072.70 4.63% $1,046.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 8.27% $1,082.70 8.98% $1,089.80
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 7.27% $1,072.70 4.62% $1,046.20
U.S. GOVERNMENT SECURI-
TIES PORTFOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 13.38% $1,133.50 10.52% $1,104.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 14.35% $1,143.50 15.09% $1,150.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 13.35% $1,133.50 10.49% $1,104.90
GLOBAL OPPORTUNITY PORT-
FOLIO
- ------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 8.83% $1,088.10 5.00% $1,049.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 9.81% $1,098.10 10.80% $1,108.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 8.81% $1,088.10 4.98% $1,049.80
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC in the case of Class B shares applicable to
certain investors, as described under "Purchase of Shares" and "Redemption of
Shares", respectively, the total return data quoted by the Program in
advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may take into account the waiver of 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 is deducted.
34
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Program was incorporated under Maryland law on May 12, 1994. As of the
date of this Statement of Additional Information, the Program has an authorized
capital of 200,000,000 shares of Common Stock, par value $0.10 per share, of
which 125,000,000 have been designated as follows: Fundamental Value Portfolio
Series Common Stock which consists of 6,250,000 Class A shares, 6,250,000 Class
B shares, 6,250,000 Class C shares and 6,250,000 Class D shares; Quality Bond
Portfolio Series Common Stock which consists of 6,250,000 Class A shares,
6,250,000 Class B shares, 6,250,000 Class C shares and 6,250,000 Class D
shares; U.S. Government Securities Portfolio Series Common Stock which consists
of 6,250,000 Class A shares, 6,250,000 Class B shares, 6,250,000 Class C shares
and 6,250,000 Class D shares; Global Opportunity Portfolio Series Common Stock
which consists of 6,250,000 Class A shares, 6,250,000 Class B shares, 6,250,000
Class C shares and 6,250,000 Class D shares; and Growth Opportunity Portfolio
Series Common Stock which consists of 6,250,000 Class A shares, 6,250,000 Class
B shares, 6,250,000 Class C shares and 6,250,000 Class D shares. The Board of
Directors of the Program may classify and reclassify the shares of a Portfolio
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 Program does not intend
to hold meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
10% of the outstanding shares of the Program. Voting rights for Directors are
not cumulative. Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Redemption rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Program and in the net assets of
the Program on liquidation or dissolution after satisfaction of outstanding
liabilities. Stock certificates are issued by the Transfer Agent only on
specific request. Certificates for fractional shares are not issued in any
case.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Portfolio shares, based on the value of each
Portfolio's net assets and number of shares outstanding as of January 31, 1996,
is calculated as set forth below (information is not provided for Growth
Opportunity Portfolio since it commenced operations on February 2, 1996):
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE PORTFOLIO GLOBAL OPPORTUNITY PORTFOLIO
-------------------------------------------- -----------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
-------- ----------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets.............. $120,673 $20,989,210 $7,990,024 $ 2,470,856 $3,025,048 $16,116,487 $ 4,770,236 $ 1,512,902
======== =========== ========== =========== ========== =========== =========== ===========
Number of Shares
Outstanding............ 10,341 1,817,144 691,852 212,095 279,647 1,497,764 443,560 140,061
======== =========== ========== =========== ========== =========== =========== ===========
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 11.67 $ 11.55 $ 11.55 $ 11.65 $ 10.82 $ 10.76 $ 10.75 $ 10.80
Sales Charge(1)......... .65* ** ** .65* .60* ** ** .60*
-------- ----------- ---------- ----------- ---------- ----------- ----------- -----------
Offering Price.......... $ 12.32 $ 11.55 $ 11.55 $ 12.30 $ 11.42 $ 10.76 $ 10.75 $ 11.40
======== =========== ========== =========== ========== =========== =========== ===========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
QUALITY BOND PORTFOLIO U.S. GOVERNMENT SECURITIES PORTFOLIO
------------------------------------------ -------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
---------- ---------- ---------- -------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets.............. $2,195,379 $3,048,998 $1,123,370 $220,826 $5,463,061 $ 3,042,922 $1,089,443 $181,932
========== ========== ========== ======== ========== =========== ========== ========
Number of Shares
Outstanding............ 213,698 296,940 109,412 21,505 521,489 290,485 104,027 17,359
========== ========== ========== ======== ========== =========== ========== ========
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 10.27 $ 10.27 $ 10.27 $ 10.27 $ 10.48 $ 10.48 $ 10.47 $ 10.48
Sales Charge(1)......... .43* ** ** .43* .44* ** ** .44*
---------- ---------- ---------- -------- ---------- ----------- ---------- --------
Offering Price.......... $ 10.70 $ 10.27 $ 10.27 $ 10.70 $ 10.92 $ 10.48 $ 10.47 $ 10.92
========== ========== ========== ======== ========== =========== ========== ========
</TABLE>
- --------
(1) For Class A and Class D shares of each Portfolio as follows: Fundamental
Value and Global Opportunity Portfolios, 5.25% of offering price (5.54% of
net asset value per share); Quality Bond and U.S. Government Securities
Portfolios, 4.00% of offering price (4.17% of net asset value per share).
* Rounded to the nearest one-hundredth percent, assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Program. The selection of
independent auditors is subject to approval by the independent Directors of
the Program. The independent auditors are responsible for auditing the annual
financial statements of the Program.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, acts as Custodian of the Program's assets. The Custodian is responsible
for safeguarding and controlling the Program's cash and securities, handling
the receipt and delivery of securities and collecting interest and dividends
on the Program's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Program's transfer agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Program--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Program.
REPORTS TO SHAREHOLDERS
The fiscal year of the Program ends on January 31 of each year. The Program
will send to its shareholders at least semiannually reports showing the
Program's portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to shareholders
each year.
36
<PAGE>
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto which the Program 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, ML & Co. has granted the Program 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 Program at any time or to grant the use of such
name to any other company, and the Program has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
Certain Record Holders. On May 14, 1996, the Merrill Lynch Group, Inc., P.O.
Box 9000, Princeton, New Jersey 08543-9000, owned of record the following
percentages of the outstanding shares of Class A Common Stock of the Portfolios
indicated:
<TABLE>
<CAPTION>
PERCENT PERCENT
PORTFOLIO OF CLASS OF PORTFOLIO
--------- -------- ------------
<S> <C> <C>
Quality Bond..................................... 99.29% 28.24%
U.S. Government Securities....................... 99.08% 49.33%
Growth Opportunity............................... 98.64% 24.69%
</TABLE>
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Growth Opportunity Portfolio of
Merrill Lynch Asset Builder Program, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Growth Opportunity Portfolio (the "Portfolio") of the Merrill Lynch Asset
Builder Program, Inc. as of January 31, 1996. This financial statement is the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on the financial statement based upon our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of the Portfolio as of January 31, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 22, 1996
38
<PAGE>
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
GROWTH OPPORTUNITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1996
<TABLE>
<S> <C>
Assets:
Cash................................................................ $ 4,000
Prepaid Registration Fees .......................................... 96,900
Deferred organization costs......................................... 23,240
--------
Total assets.......................................................... 124,140
Liabilities:
Liabilities and accrued expenses.................................... 120,140
--------
Net Assets ........................................................... $ 4,000
========
Net Assets Consist Of:
Class A Shares of Common Stock, $.10 par value, 6,250,000 shares au- $ 10
thorized...........................................................
Class B Shares of Common Stock, $.10 par value, 6,250,000 shares au- 10
thorized...........................................................
Class C Shares of Common Stock, $.10 par value, 6,250,000 shares au- 10
thorized...........................................................
Class D Shares of Common Stock, $.10 par value, 6,250,000 shares au- 10
thorized...........................................................
Paid-in Capital in excess of par.................................... 3,960
--------
Net Assets ........................................................... $ 4,000
========
Net Asset Value Per Share:
Class A--Based on net assets of $1,000 and 100 shares outstanding... $ 10.00
========
Class B--Based on net assets of $1,000 and 100 shares outstanding... $ 10.00
========
Class C--Based on net assets of $1,000 and 100 shares outstanding... $ 10.00
========
Class D--Based on net assets of $1,000 and 100 shares outstanding... $ 10.00
========
</TABLE>
- --------
Notes to Statement of Assets and Liabilities
(1) Growth Opportunity Portfolio (the "Portfolio") is one of the five
portfolios of Merrill Lynch Asset Builder Program, Inc. (the "Program")
which was organized as a Maryland corporation on May 12, 1994. The Program
is registered under the Investment Company Act of 1940 as an open-end
investment company.
(2) The Portfolio has entered into an Investment Advisory Agreement (the
"Investment Advisory Agreement") with Merrill Lynch Asset Management (the
"Investment Adviser"), and distribution agreements (the "Distribution
Agreements") with Merrill Lynch Funds Distributor, Inc. (the
"Distributor"). (See "Management and Advisory Arrangements" in the
Statement of Additional Information.) Certain officers and/or directors of
the Program are officers and/or directors of the Investment Adviser and/or
the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the
date the Portfolio commences operations not exceeding five years. In the
event that the Investment Adviser (or any subsequent holder) redeems any
of its original shares prior to the end of the five-year period, the
proceeds of the redemption payable in respect of such shares shall be
reduced by the pro rata share (based on the proportionate share of the
original shares redeemed to the total number of original shares
outstanding at the time of redemption) of the unamortized deferred
organization expenses as of the date of such redemption. In the event that
the Portfolio is liquidated prior to the end of the five-year period, the
Investment Adviser (or any subsequent holder) shall bear the unamortized
deferred organization expenses.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Asset Builder Program,
Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Fundamental Value, Global
Opportunity, Quality Bond and U.S. Government Securities Portfolios of the
Merrill Lynch Asset Builder Program, Inc. as of January 31, 1996, the related
statements of operations and changes in net assets and the financial highlights
for the year ended January 31, 1996. These financial statements and financial
highlights are the responsibility of the Program's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit 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. Our procedures included confirmation of securities owned at January
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of the Fundamental
Value, Global Opportunity, Quality Bond, and US Governments Securities
Portfolios of Merrill Lynch Asset Builder Program, Inc. as of January 31, 1996,
the results of their operations, the changes in their net assets and the
financial highlights for the year ended January 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
March 14, 1996
40
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Fundamental Value Portfolio
LATIN Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina Oil--International 30,000 Yacimientos Petroliferos Fiscales
S.A. (Sponsored) (ADR)* $ 541,850 $ 678,750 2.2%
Total Investments in Argentina 541,850 678,750 2.2
Total Investments in Latin America 541,850 678,750 2.2
NORTH
AMERICA
United Auto--Related 45,000 ++National Auto Credit, Inc. 491,931 551,250 1.8
States
Automotive 10,000 Ford Motor Co. 266,380 296,250 0.9
10,000 General Motors Corp. 422,423 526,250 1.7
----------- ----------- ------
688,803 822,500 2.6
Banking 15,000 Bankers Trust New York Corp. 955,408 973,125 3.1
5,000 NationsBank Corp. 331,550 349,375 1.1
7,000 Norwest Corp. 224,104 240,625 0.8
----------- ----------- ------
1,511,062 1,563,125 5.0
Cable 50,000 ++Century Communications Corp. 418,750 381,250 1.2
Capital Goods 5,000 Eaton Corp. 259,915 290,000 0.9
Chemicals 7,000 Olin Corp. 506,329 576,625 1.8
Conglomerates 40,000 ++ADT Ltd. 477,625 580,000 1.8
Environmental 100,000 ++Allwaste Inc. 550,879 475,000 1.5
Services
Farm & Construction 15,000 Deere & Co. 432,225 562,500 1.8
Equipment
Financial Services 8,000 Student Loan Marketing Association 284,105 589,000 1.9
Home Builders 30,000 ++Beazer Homes USA, Inc. 489,300 581,250 1.8
</TABLE>
41
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
NORTH Fundamental Value Portfolio (concluded)
AMERICA Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Hotels 41,400 ++John Q. Hammons Hotels, Inc. $ 508,238 $ 419,175 1.3%
States
(concluded) Information 10,000 International Business Machines Corp. 891,940 1,087,500 3.4
Processing 60,000 ++Tandem Computers, Inc. 672,118 562,500 1.8
----------- ----------- ------
1,564,058 1,650,000 5.2
Insurance 15,000 TIG Holdings, Ltd. 339,105 416,250 1.3
Medical Services 75,000 ++Applied Bioscience International Inc. 388,612 534,375 1.7
15,000 ++Foundation Health Corp. 474,225 648,750 2.1
----------- ----------- ------
862,837 1,183,125 3.8
Metals--Non-Ferrous 20,000 ASARCO Inc. 554,351 635,000 2.0
Oil--Domestic 50,000 ++American Exploration Co. 540,000 581,250 1.8
25,000 Occidental Petroleum Corp. 553,375 537,500 1.7
----------- ----------- ------
1,093,375 1,118,750 3.5
Oil/Gas Producers 60,000 ++Swift Energy Co. 514,699 720,000 2.3
Oil Refiners 60,000 Total Petroleum (North America) Ltd. 683,773 528,750 1.7
Oil--Related 30,000 ++TETRA Technologies, Inc. 364,150 472,500 1.5
Paper & Forest 14,000 International Paper Co. 532,450 572,250 1.8
Products
Pharmaceuticals 5,000 Bristol-Myers Squibb Co. 316,560 442,500 1.4
Photography 10,000 Eastman Kodak Co. 675,700 733,750 2.3
Real Estate 20,000 Bay Apartment Communities, Inc. 356,450 477,500 1.5
Investment Trusts 20,000 Camden Property Trust 450,613 482,500 1.5
20,000 Evans Withycombe Residential, Inc. 404,875 437,500 1.4
25,000 FelCor Suite Hotels, Inc. 662,500 740,625 2.3
----------- ----------- ------
1,874,438 2,138,125 6.7
Restaurants 30,000 Darden Restaurants, Inc. 329,558 345,000 1.1
Retail 130,000 Charming Shoppes, Inc. 481,193 349,375 1.1
25,000 Dillard Department Stores Inc. 682,325 725,000 2.3
55,000 Woolworth Corp. 712,736 618,750 2.0
----------- ----------- ------
1,876,254 1,693,125 5.4
Savings & Loans 60,000 ++Greater New York Savings Bank 574,667 705,000 2.2
40,000 Klamath First Bancorp, Inc. 519,485 520,000 1.6
20,000 Washington Mutual Savings Bank 417,984 602,500 1.9
----------- ----------- ------
1,512,136 1,827,500 5.7
Semiconductors 25,000 ++National Semiconductor Corp. 523,623 431,250 1.4
Steel 10,300 ++Lone Star Technologies, Inc. 83,688 99,138 0.3
20,000 USX-US Steel Group 616,525 712,500 2.3
50,000 ++WHX Corp. 534,467 681,250 2.2
----------- ----------- ------
1,234,680 1,492,888 4.8
</TABLE>
42
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Technology 44,100 ++Computervision Corp. 513,108 545,737 1.7
45,000 ++Exabyte Corp. 630,075 607,500 1.9
90,000 ++Micronics Computers, Inc. 420,582 281,250 0.9
25,000 ++Storage Technology Corp. 578,074 662,500 2.1
45,000 ++SyQuest Technology, Inc. 502,325 337,500 1.1
30,000 ++Western Digital Corp. 513,861 555,000 1.8
----------- ----------- ------
3,158,025 2,989,487 9.5
Telecommunications 20,000 COMSAT Corporation 467,496 375,000 1.2
20,000 MCI Communications Corp. 436,950 570,000 1.8
----------- ----------- ------
904,446 945,000 3.0
Textiles 25,000 ++Burlington Industries, Inc. 281,265 318,750 1.0
Total Investments in the
United States 25,814,645 28,045,675 88.8
Total Investments in North America 25,814,645 28,045,675 88.8
SHORT-TERM Face
SECURITIES Amount
Commercial Paper** $1,225,000 General Electric Capital Corp.,
5.90% due 2/01/1996 1,225,000 1,225,000 3.9
US Government 500,000 Federal Home Loan Bank, 5.42%
& Agency due 2/05/1996 499,699 499,699 1.5
Obligations** 1,000,000 Federal National Mortgage
Association, 5.42% due 2/13/1996 998,193 998,193 3.2
----------- ----------- ------
1,497,892 1,497,892 4.7
Total Investments in Short-Term
Securities 2,722,892 2,722,892 8.6
Total Investments $29,079,387 31,447,317 99.6
===========
Other Assets Less Liabilities 123,446 0.4
----------- ------
Net Assets $31,570,763 100.0%
=========== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
rates paid at the time of purchase by the Portfolio.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
43
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Global Opportunity Portfolio
Face Value Percent of
COUNTRY Industries Amount* Corporate Bonds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Canada Cellular US$ 100,000 Rogers Communication, Inc., 10.875%
Telephones due 4/15/2004 $ 100,250 $ 106,000 0.4%
Chemicals 100,000 Acetex Corporation, 9.75% due
10/01/2003 (b) 99,563 103,500 0.4
Conglomerates 200,000 Sherritt Gordon Ltd., 9.75% due
4/01/2003 192,500 216,750 0.9
Energy 100,000 Gulf Canada Resources, Ltd.,
9.25% due 1/15/2004 95,000 104,500 0.4
Financial Services 100,000 Groupe L'TEE Videotron, 10.625%
due 2/15/2005 99,375 109,250 0.4
Total Corporate Bonds in Canada 586,688 640,000 2.5
United Broadcasting & 125,000 The Katz Corp., 12.75% due 11/15/2002 129,625 138,750 0.6
States Publishing
Building & 100,000 Del E. Webb Corporation, 9.75% due
Construction 3/01/2003 86,000 102,000 0.4
Business 356,000 Bell Cablemedia PLC, 11.875% due
Publishing 9/15/2005 (a) (b) 208,907 234,515 0.9
Chemicals 205,000 G-I Holdings Inc., 11.64% due
10/01/1998 (a) 151,731 164,513 0.6
Communications 300,000 PanAmSat L.P., 11.08% due
8/01/2003 (a) 224,733 255,750 1.0
Consumer Products 280,000 Coleman Holdings, Inc., 9.96% due
5/27/1998 (a) 219,593 230,300 0.9
Cosmetics 100,000 Revlon Consumer Products Corp.,
9.375% due 4/01/2001 90,085 101,000 0.4
Energy 200,000 Maxus Energy Corp., 9.875% due
10/15/2002 182,250 204,000 0.8
250,000 Oleoducts Central S.A., 9.35%
due 9/01/2005 250,000 255,000 1.0
----------- ----------- ------
432,250 459,000 1.8
Entertainment 100,000 Marvel III Holdings, Inc., 9.125%
due 2/15/1998 93,500 93,000 0.4
Financial 200,000 Reliance Group Holdings, Inc.,
Services 9.75% due 11/15/2003 192,750 207,000 0.8
Health Care 100,000 Tenet Healthcare Corp., 10.125%
due 3/01/2005 100,000 112,000 0.5
Hotels 100,000 John Q. Hammons Hotels, Inc.,
8.875% due 2/15/2004 89,750 100,000 0.4
Hotels & Casinos 200,000 Bally's Park Place Funding Corp.,
9.25% due 3/15/2004 182,000 205,000 0.8
100,000 Host Marriott Hospitality, Inc.,
9.50% due 5/15/2005 96,490 103,000 0.4
200,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 177,500 212,000 0.8
----------- ----------- ------
455,990 520,000 2.0
Industrial 100,000 Repap Wisconsin, Inc., 9.25% due
2/01/2002 89,500 96,250 0.4
Industrial--Energy 100,000 TransTexas Gas Corp., 11.50% due
6/15/2002 100,000 102,500 0.4
Metal & Mining 50,000 Kaiser Aluminum & Chemical Corp.,
12.75% due 2/01/2003 52,250 55,500 0.2
Steel 100,000 WCI Steel, Inc., 10.50% due 3/01/2002 97,000 99,375 0.4
Textiles 100,000 WestPoint Stevens, Inc., 9.375%
due 12/15/2005 98,250 100,250 0.4
Transport 100,000 Eletson Holdings, Inc., 9.25% due
Services 11/15/2003 94,360 100,500 0.4
Transportation 100,000 Viking Star Shipping Co., 9.625%
due 7/15/2003 96,000 105,000 0.4
Utilities 95,000 Beaver Valley Funding Co., 8.625%
due 6/01/2007 77,900 88,410 0.4
100,000 CTC Mansfield Funding Corp., 11.125%
due 9/30/2016 98,750 106,455 0.4
----------- ----------- ------
176,650 194,865 0.8
</TABLE>
44
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Total Corporate Bonds in the
United States 3,278,924 3,572,068 14.1
Total Investments in Corporate
Bonds 3,865,612 4,212,068 16.6
Foreign Government Obligations
Canada C$ 800,000 Canadian Government Bond, 7.25%
due 6/01/2003 563,965 595,784 2.3
Total Foreign Government
Obligations in Canada 563,965 595,784 2.3
United Kingdom Pound 400,000 United Kingdom Treasury Gilt, 8%
Sterling due 6/10/2003 627,464 631,935 2.5
Total Foreign Government Obligations
in the United Kingdom 627,464 631,935 2.5
Total Investments in Foreign
Government Obligations 1,191,429 1,227,719 4.8
Total Investments in Corporate
Bonds and Foreign Government
Obligations 5,057,041 5,439,787 21.4
Shares
Held US Stocks
United Aerospace & Defense 2,500 United Technologies Corporation 174,848 256,563 1.0
States
Airlines 1,000 Boeing Company (The) 73,254 77,625 0.3
Appliances 3,000 Whirlpool Corporation 173,678 163,125 0.6
Automobiles 5,400 Ford Motor Co. 144,378 159,975 0.6
1,800 General Motors Corp. 92,649 99,900 0.4
----------- ----------- ------
237,027 259,875 1.0
Banking 1,600 Bank of New York Company, Inc. (The) 75,613 82,000 0.3
1,100 Citicorp 80,029 81,263 0.3
----------- ----------- ------
155,642 163,263 0.6
Chemicals 2,900 Eastman Chemical Co. 159,485 191,762 0.8
Diversified 3,500 Corning Inc. 97,383 109,375 0.4
Electronic/Instruments 1,400 Texas Instruments Inc. 84,098 65,100 0.3
Engineering & 2,000 Foster Wheeler Corporation 87,844 88,250 0.3
Construction
Hardware Products 4,500 Stanley Works (The) 180,743 231,750 0.9
Health Care--HMOs 10,000 ++Humana Inc. 212,450 276,250 1.1
Hospital Supplies 5,000 Abbott Laboratories 185,467 211,250 0.8
Insurance 1,300 Aetna Life & Casualty Company 96,747 96,850 0.4
2,000 Allstate Corp. 81,864 87,250 0.3
2,000 National Re Corp. 66,103 72,250 0.3
----------- ----------- ------
244,714 256,350 1.0
Manufacturing 6,000 Fisher Scientific International Inc. 188,659 211,500 0.8
Oil & Gas Producers 2,000 Enron Corp. 75,530 74,000 0.3
Oil Service 8,500 Dresser Industries, Inc. 178,223 221,000 0.9
1,800 Schlumberger Ltd., Inc. 95,976 126,225 0.5
----------- ----------- ------
274,199 347,225 1.4
</TABLE>
45
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Global Opportunity Portfolio (continued)
Shares Value Percent of
COUNTRY Industries Held US Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Petroleum 2,500 Pennzoil Company $ 100,457 $ 101,562 0.4%
States
(concluded) Pharmaceuticals 3,100 Merck & Co., Inc. 128,460 217,775 0.9
Photography 3,000 Eastman Kodak Company 160,085 220,125 0.9
Pollution Control 9,000 Wheelabrator Technologies Inc. 140,505 145,125 0.6
Retail Trade 2,200 Sears, Roebuck & Co. 87,701 91,300 0.4
Telecommunications 3,700 AT&T Corp. 191,509 247,437 1.0
2,600 Bell Atlantic Corporation 140,051 179,075 0.7
----------- ----------- ------
331,560 426,512 1.7
Total Stocks in the United States 3,553,789 4,185,662 16.5
Foreign Stocks
Argentina Banking 7,080 Banco de Galicia y Buenos
Aires S.A. (ADR)** 106,800 181,425 0.7
5,750 Banco Frances del Rio de la
Plata S.A. (ADR)** 80,350 168,187 0.7
----------- ----------- ------
187,150 349,612 1.4
Petroleum 6,700 Yacimientos Petroliferos Fiscales
S.A. (Sponsored)(ADR)** 134,514 151,587 0.6
Total Stocks in Argentina 321,664 501,199 2.0
Brazil Telecommunications 3,000 Telecomunicacoes Brasileiras
S.A.--Telebras PN (ADR)** 164,018 167,250 0.7
Total Stocks in Brazil 164,018 167,250 0.7
Canada Conglomerates 10,800 Canadian Pacific Limited (ADR)** 165,958 210,600 0.8
Telecommunications 4,800 Northern Telecom Ltd. 171,686 216,000 0.8
Total Stocks in Canada 337,644 426,600 1.6
France Tires 2,500 ++Compagnie Generale des Establisse-
ments Michelin S.A. (Class B) 104,193 106,193 0.4
Total Stocks in France 104,193 106,193 0.4
Germany Electronics 300 Siemens AG 143,480 170,291 0.7
Machinery & 450 Mannesmann AG 127,844 156,189 0.6
Equipment
Multi-Industry 300 Preussag AG 91,752 88,805 0.3
Total Stocks in Germany 363,076 415,285 1.6
Hong Kong Banking 10,000 HSBC Holdings Ltd. 161,000 165,559 0.6
Telecommunications 9,000 Hong Kong Telecommunications
Ltd. (ADR)** 160,490 171,000 0.7
Total Stocks in Hong Kong 321,490 336,559 1.3
Indonesia Telecommunications 3,000 P.T. Indonesian Satellite Corp.
(ADR)** 95,430 121,500 0.5
Total Stocks in Indonesia 95,430 121,500 0.5
</TABLE>
46
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Italy Telecommunications 50,000 Societa Finanziara Telefonica
S.p.A. (STET) 146,511 156,675 0.6
Total Stocks in Italy 146,511 156,675 0.6
Japan Banking & 8,000 Sanwa Bank, Ltd. 158,426 151,183 0.6
Financial
Building & 12,000 Maeda Corp. 133,874 123,491 0.5
Construction 15,000 Okumura Corp. 134,507 137,384 0.5
----------- ----------- ------
268,381 260,875 1.0
Capital Goods 17,000 Hitachi Cable Ltd. 129,552 127,234 0.5
21,000 Mitsubishi Heavy Industries, Ltd. 144,773 166,798 0.7
----------- ----------- ------
274,325 294,032 1.2
Consumer-- 8,000 Matsushita Electric Industrial
Electronics Co., Ltd. 116,780 133,221 0.5
Electrical 19,000 Mitsubishi Electric Corp. 137,527 137,758 0.5
Equipment
Electronics 3,000 Rohm Company Ltd. 141,942 166,152 0.7
Financial 9,000 Mitsubishi Trust and Banking Corp. 151,523 139,770 0.6
Services 6,000 Nomura Securities Co., Ltd. 122,069 130,227 0.5
----------- ----------- ------
273,592 269,997 1.1
Insurance 13,000 Tokio Marine & Fire Insurance
Co., Ltd. 143,259 162,971 0.6
Machinery 2,000 SMC Corporation 98,090 141,080 0.6
Photography 6,000 Canon Inc. 88,100 113,388 0.4
Printing & 9,000 Dai Nippon Printing Co., Ltd. 144,952 154,084 0.6
Publishing
Textiles 22,000 Toray Industries Inc. 139,370 143,250 0.6
Trading 16,000 Kamigumi Co., Ltd. 136,552 155,674 0.6
13,000 Sumitomo Corp. 124,539 134,999 0.5
----------- ----------- ------
261,091 290,673 1.1
Warehouse & 5,000 Mitsui-Soko 40,029 39,527 0.2
Storage
Total Stocks in Japan 2,285,864 2,458,191 9.7
Mexico Beverages 1,300 Panamerican Beverages Inc. (ADR)** 50,818 51,350 0.2
Total Stocks in Mexico 50,818 51,350 0.2
Netherlands Appliances 5,000 Singer Co. N.V. (c) 133,935 141,250 0.6
Electrical Equipment 3,200 Philips Electronics N.V. 124,063 127,754 0.5
Petroleum 1,300 Royal Dutch Petroleum N.V. (ADR)** 153,715 180,700 0.7
Total Stocks in the Netherlands 411,713 449,704 1.8
Philippines Beverages 2,000 San Miguel Corp. (Class B) 7,652 7,564 0.0
Telecommunications 2,000 Philippine Long Distance Telephone
Co. (ADR)** 141,453 129,000 0.5
Total Stocks in the Philippines 149,105 136,564 0.5
Spain Petroleum 4,800 Repsol S.A. (ADR)** 143,703 167,400 0.7
Total Stocks in Spain 143,703 167,400 0.7
Switzerland Electrical Equipment 150 BBC Brown Boveri & Cie (Bearer) 140,031 172,905 0.7
Pharmaceuticals 3,000 Sandoz AG (ADR)** 129,917 130,125 0.5
Total Stocks in Switzerland 269,948 303,030 1.2
</TABLE>
47
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Global Opportunity Portfolio (concluded)
Shares Value Percent of
COUNTRY Industries Held Foreign Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Business Services 9,000 GKN PLC $ 92,846 $ 112,525 0.5%
Kingdom
Chemicals 2,200 Imperial Chemical Industries PLC (
ADR)** 100,782 109,725 0.4
Electrical 20,000 General Electric Co. PLC (Ordinary) 97,276 109,626 0.4
Equipment
Total Stocks in the United Kingdom 290,904 331,876 1.3
Total Investments in Foreign Stocks 5,456,081 6,129,376 24.1
Total Investments in US &
Foreign Stocks 9,009,870 10,315,038 40.6
SHORT-TERM Face
SECURITIES Amount Short-Term Securities
US Government US$ 6,540,000 Federal Home Loan Mortgage Corp.,
& Agency 5.80% due 2/01/1996 6,540,000 6,540,000 25.7
Obligations*** 3,000,000 US Treasury Bill, 5.35% due
2/08/1996 2,996,879 2,996,700 11.8
Total Investments in Short-Term
Securities 9,536,879 9,536,700 37.5
Total Investments $23,603,790 25,291,525 99.5
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts++++ 19,398 0.1
Other Assets Less Liabilities 113,750 0.4
----------- ------
Net Assets $25,424,673 100.0%
=========== ======
<FN>
*Denominated in US dollars unless otherwise indicated.
**American Depositary Receipts (ADR).
***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 Portfolio.
++Non-income producing security.
++++Forward foreign exchange contracts sold as of January 31, 1996
were as follows:
<CAPTION>
Foreign Expiration Unrealized
Currency Sold Date Appreciation
<C> <S> <C>
YEN 180,000,000 July 1996 $19,398
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts Sold
(US$ Commitment--$1,721,078) $19,398
=======
(a)Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Portfolio.
(b)Restricted security as to resale. The value of the Portfolio's
investment in restricted securities was approximately $338,000,
representing 1.3% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Acetex Corporation, 9.75%
due 10/01/2003 9/22/1995 $ 99,563 $103,500
Bell Cablemedia PLC, 11.875%
due 9/15/2005 9/13/1995 208,907 234,515
Total $308,470 $338,015
======== ========
(c)Consistent with the general policy of the Securities and Exchange
Commission, the nationality or domicile of an issuer for
determination of foreign issuer status may be (i) the country under
whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) the country in
which the issuer derives a significant proportion (at least 50%) of
vits revenue or profits from goods produced or sold, investments
made, or services performed in the country, or in which at least 50%
of the assets of the issuer are situated.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Quality Bond Portfolio
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Bonds & Notes Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Banking BBB+ A3 $115,000 ++Bangkok Metropolitan Bank Public Company
- --4.2% Limited, 7.25% due 9/15/2005 $ 113,956 $ 119,164
A- A3 150,000 First Bank System, Inc., 6.875% due 9/15/2007 148,611 155,874
---------- ----------
262,567 275,038
Financial A A2 200,000 Bear Stearns Co., 6.75% due 8/15/2000 198,730 206,640
Services A A2 150,000 Dean Witter, Discover & Co., 6.30% due 1/15/2006 149,340 149,728
- --7.8% A- A3 150,000 Smith Barney Holdings, 6.875% due 6/15/2005 148,485 154,428
---------- ----------
496,555 510,796
Financial A+ A1 200,000 Ford Motor Credit Co., 6.25% due 11/08/2000 199,154 203,770
Services-- A- A3 150,000 General Motors Acceptance Corp., 7.85% due 3/05/1997 153,815 153,972
Captive--5.4% ---------- ----------
352,969 357,742
Financial AA- Aa3 200,000 Associates Corp. of North America, 5.25%
Services-- due 9/01/1998 193,918 199,312
Consumer--3.0%
Industrial-- A- A2 150,000 American Home Products Corporation, 7.90%
Consumer due 2/15/2005 162,417 168,406
Goods--7.6% AA- A1 100,000 Anheuser-Busch Co., Inc., 8.75% due 12/01/1999 107,905 111,060
A+ A1 100,000 Bass America, Inc., 8.125% due 3/31/2002 105,928 111,773
BBB A2 100,000 Sears, Roebuck & Co., 9.25% due 4/15/1998 106,444 107,791
---------- ----------
482,694 499,030
Industrial AA- Aa3 175,000 BP America Inc., 9.375% due 11/01/2000 200,263 201,919
- --Energy A+ A1 175,000 Texaco Capital Inc., 8.625% due 11/15/2031 205,665 218,138
- --6.4% ---------- ----------
405,928 420,057
Industrial-- AA- Aa2 100,000 Archer-Daniels-Midland Co., 8.125% due 6/01/2012 111,874 114,027
Other--5.7% A- A3 150,000 Carnival Cruise Lines, Inc., 7.70% due 7/15/2004 156,745 161,640
BBB+ A3 100,000 Harris Corporation, 7% due 1/15/2026 99,503 100,416
---------- ----------
368,122 376,083
Supra- AAA Aaa 200,000 Asian Development Bank, 6.125% due 3/09/2004 198,300 203,650
national AAA Aaa 166,000 International Bank for Reconstruction &
- --6.5% Development, 12.375% due 10/15/2002 222,483 226,565
---------- ----------
420,783 430,215
US Government US Treasury Notes:
Obligations AAA Aaa 250,000 5.875% due 6/30/2000 245,039 256,368
- --17.4% AAA Aaa 250,000 6.375% due 8/15/2002 256,250 263,360
AAA Aaa 350,000 6.50% due 5/15/2005 359,297 372,092
AAA Aaa 250,000 5.875% due 11/15/2005 254,687 255,352
---------- ----------
1,115,273 1,147,172
</TABLE>
49
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Quality Bond Portfolio
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Bonds & Notes Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Utilities A A2 $200,000 Central Power & Light Co., 6% due 10/01/1997 $ 200,622 $ 202,362
- --Electric AA- A1 250,000 Northern States Power Company, 7.125% due
- --9.7% 7/01/2025 254,800 264,047
A A2 150,000 Virginia Electric & Power Co., 8.625% due
10/01/2024 166,200 172,287
---------- ----------
621,622 638,696
Yankees-- A+ A1 250,000 Mass Transit Railway Corporation, 7.25%
Corporates due 10/01/2005 260,325 259,255
- --5.5% A+ A1 100,000 Pohang Iron & Steel Company, Ltd., 7.375%
due 5/15/2005 101,816 106,076
---------- ----------
362,141 365,331
Yankees-- A+ A2 150,000 Province of Quebec, 7.125% due 2/09/2024 150,195 150,044
Sovereigns
- --2.3%
Total Investments in Bonds & Notes--81.5% 5,232,767 5,369,516
SHORT-TERM
SECURITIES Issue
Commercial 263,000 General Electric Capital Corp., 5.90%
Paper*--6.3% due 2/01/1996 263,000 263,000
150,000 National Fleet Funding Corp., 5.50% due
3/01/1996 149,336 149,336
---------- ----------
412,336 412,336
US Government & 186,000 Federal Home Loan Mortgage Corp., 5.50%
Agency Obliga- due 2/05/1996 185,886 185,886
tions*--11.1% Federal National Mortgage Association:
250,000 5.37% due 2/16/1996 249,441 249,441
300,000 5.35% due 2/21/1996 299,108 299,108
---------- ----------
734,435 734,435
Total Investments in Short-Term
Securities--17.4% 1,146,771 1,146,771
Total Investments--98.9% $6,379,538 6,516,287
==========
Other Assets Less Liabilities--1.1% 72,286
----------
Net Assets--100.0% $6,588,573
==========
<FN>
++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $119,000,
representing 1.8% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Bangkok Metropolitan Bank Public
Company Limited, 7.25% due 9/15/2005 9/22/1995 $113,956 $119,164
Total $113,956 $119,164
======== ========
*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 Portfolio.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
US Government Securities Portfolio
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
<S> <S> <C> <C> <C> <C>
US Federal Home Loan Mortgage Corporation $2,000,000 6.50 % 1/10/2020 $ 2,018,120
Government Federal Home Loan Mortgage Corporation 1,986,085 7.50 8/01/2025--10/01/2025 2,037,583
& Agency Federal Home Loan Mortgage Corporation 1,951,724 11.50 6/01/2019 2,201,662
Mortgage Government National Mortgage Association 1,953,508 7.50 12/15/2022--10/01/2025 2,010,883
- -Backed
Obligations*
- --84.5%
Total US Government & Agency Mortgage-Backed Obligations (Cost--$8,101,174) 8,268,248
US US Treasury Notes 230,000 7.875 11/15/2004 265,901
Government US Treasury STRIPS*** 1,000,000 5.424++ 8/15/2000 789,910
& Agency
Obligations
- --10.8%
Total US Government & Agency Obligations (Cost--$1,017,046) 1,055,811
Face
Amount Issue
Repurchase $1,190,000 Nikko Securities Company, purchased on 1/31/1996, to yield 5.90% to 2/01/1996 1,190,000
Agreement**
- --12.2%
Total Repurchase Agreement (Cost--$1,190,000) 1,190,000
Total Investments (Cost--$10,308,220)--107.5% 10,514,059
Liabilities in Excess of Other Assets--(7.5%) (736,701)
-----------
Net Assets--100.0% $ 9,777,358
===========
<FN>
++Represents the yield-to-maturity on this zero coupon issue.
*Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancing of the underlying mortgage
instruments. As a result, the average life may be substantially
less than the original maturity.
**Repurchase Agreement is fully collateralized by US Government &
Agency Obligations.
***STRIPS--Separate Trading of Registered Interest and Principal of
Securities.
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
<CAPTION>
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
As of January 31, 1996 Portfolio Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C> <C>
Assets: Investments, at value* (Note 1a) $31,447,317 $25,291,525 $ 6,516,287 $10,514,059
Cash -- -- 207 120
Unrealized appreciation on forward
foreign exchange contracts (Note 1b) -- 19,398 -- --
Receivables:
Securities sold 345,964 -- -- 1,025,469
Capital shares sold. 245,913 274,475 11,916 43,864
Interest -- 116,262 99,249 77,850
Investment adviser (Note 2) -- -- 54,132 59,975
Principal paydowns -- -- -- 45,690
Dividends 17,630 14,408 -- --
Deferred organization expenses
(Note 1f) 29,653 69,189 16,995 37,149
Prepaid registration fees and other
assets (Note 1f) 112,774 251,547 91,724 179,143
----------- ----------- ----------- -----------
Total assets 32,199,251 26,036,804 6,790,510 11,983,319
----------- ----------- ----------- -----------
Liabilities: Payables:
Securities purchased 342,272 446,889 155,331 2,015,680
Capital shares redeemed. 32,309 20,624 12,808 108,244
Distributor (Note 2) 25,597 18,276 2,596 2,484
Dividends to shareholders
(Note 1g) -- -- 13,586 21,724
Investment adviser (Note 2) 17,763 16,898 -- --
Accrued expenses and other
liabilities 210,547 109,444 17,616 57,829
----------- ----------- ----------- -----------
Total liabilities 628,488 612,131 201,937 2,205,961
----------- ----------- ----------- -----------
Net Assets: Net assets $31,570,763 $25,424,673 $ 6,588,573 $ 9,777,358
=========== =========== =========== ===========
Net Assets Class A Common Stock, $0.10
Consist of: par value++ $ 1,034 $ 27,965 $ 21,370 $ 52,149
Class B Common Stock, $0.10
par value++++ 181,714 149,776 29,694 29,049
Class C Common Stock, $0.10
par value++++++ 69,185 44,356 10,941 10,403
Class D Common Stock, $0.10
par value++++++++ 21,209 14,006 2,150 1,736
Paid-in capital in excess of par. 29,195,489 23,798,678 6,356,162 9,406,103
Accumulated distributions in
excess of investment income--net -- (112,356) -- --
Undistributed (accumulated)
realized capital gains (losses)
on investments and foreign
currency transactions--net (2,597) (132,463) 31,507 72,079
Accumulated distributions in
excess of realized gain on
investments--net (263,201) (71,570) -- --
Unrealized appreciation on
investments and foreign currency
transactions--net 2,367,930 1,706,281 136,749 205,839
----------- ----------- ----------- -----------
Net assets $31,570,763 $25,424,673 $ 6,588,573 $ 9,777,358
=========== =========== =========== ===========
Net Asset Value: Class A:
Net assets $ 120,673 $ 3,025,048 $ 2,195,379 $ 5,463,061
=========== =========== =========== ===========
Shares outstanding 10,341 279,647 213,698 521,489
=========== =========== =========== ===========
</TABLE>
52
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C>
Net asset value and redemption
price per share $ 11.67 $ 10.82 $ 10.27 $ 10.48
=========== =========== =========== ===========
Class B:
Net assets $20,989,210 $16,116,487 $ 3,048,998 $ 3,042,922
=========== =========== =========== ===========
Shares outstanding 1,817,144 1,497,764 296,940 290,485
=========== =========== =========== ===========
Net asset value and redemption
price per share $ 11.55 $ 10.76 $ 10.27 $ 10.48
=========== =========== =========== ===========
Class C:
Net assets $ 7,990,024 $ 4,770,236 $ 1,123,370 $ 1,089,443
=========== =========== =========== ===========
Shares outstanding 691,852 443,560 109,412 104,027
=========== =========== =========== ===========
Net asset value and redemption
price per share $ 11.55 $ 10.75 $ 10.27 $ 10.47
=========== =========== =========== ===========
Class D:
Net assets $ 2,470,856 $ 1,512,902 $ 220,826 $ 181,932
=========== =========== =========== ===========
Shares outstanding 212,095 140,061 21,505 17,359
=========== =========== =========== ===========
Net asset value and redemption
price per share $ 11.65 $ 10.80 $ 10.27 $ 10.48
=========== =========== =========== ===========
<FN>
*Identified cost $29,079,387 $23,603,790 $ 6,379,538 $10,308,220
=========== =========== =========== ===========
++Authorized shares--Class A 6,250,000 6,250,000 6,250,000 6,250,000
=========== =========== =========== ===========
++++Authorized shares--Class B 6,250,000 6,250,000 6,250,000 6,250,000
=========== =========== =========== ===========
++++++Authorized shares--Class C 6,250,000 6,250,000 6,250,000 6,250,000
=========== =========== =========== ===========
++++++++Authorized shares--Class D 6,250,000 6,250,000 6,250,000 6,250,000
=========== =========== =========== ===========
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
For the Year Ended January 31, 1996++ Portfolio Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C> <C>
Investment Income Interest and discount earned* $ 219,482 $ 693,296 $ 288,935 $ 548,298
(Notes 1d & 1e): Dividends** 317,142 237,566 -- --
Other -- 5,000 -- --
----------- ----------- ----------- -----------
Total income 536,624 935,862 288,935 548,298
----------- ----------- ----------- -----------
Expenses: Investment advisory fees (Note 2) 128,082 146,953 23,114 37,948
Account maintenance and distribution
fees--Class B (Note 2) 125,337 90,528 13,769 11,770
Accounting services (Note 2) 50,776 55,145 16,948 56,177
Printing and shareholder reports 57,649 70,193 9,051 22,989
Registration fees (Note 1f) 73,253 57,300 25,748 2,734
Transfer agent fees--Class B (Note 2) 68,705 38,823 7,031 3,452
Account maintenance and distribution
fees--Class C (Note 2) 44,518 24,524 4,600 4,309
Amortization of organization expenses
(Note 1f) 7,414 17,297 12,138 26,207
Custodian fees 17,215 24,507 8,552 8,911
Professional fees 16,360 17,337 4,897 19,027
Transfer agent fees--Class C (Note 2) 26,014 11,554 2,402 1,224
Transfer agent fees--Class A (Note 2) 4,604 21,696 6,219 7,452
Directors' fees and expenses 6,061 10,901 2,199 5,528
Transfer agent fees--Class D (Note 2) 6,833 2,715 387 134
Pricing fees (Note 2) 212 8,557 776 226
Account maintenance fees--Class D
(Note 2) 3,718 2,015 348 245
Other 5,062 5,878 -- 2,169
----------- ----------- ----------- -----------
Total expenses before reimbursement 641,813 605,923 138,179 210,502
Reimbursement of expenses (Note 2) (23,907) (33,240) (119,461) (194,178)
----------- ----------- ----------- -----------
Total expenses after reimbursement 617,906 572,683 18,718 16,324
----------- ----------- ----------- -----------
Investment income (loss)--net (81,282) 363,179 270,217 531,974
----------- ----------- ----------- -----------
Realized & Realized gain (loss) from:
Unrealized Investments--net 563,770 (281,507) 31,507 297,048
Gain (Loss) on Foreign currency transactions
Investments & --net -- 149,044 -- --
Foreign Currency Unrealized appreciation on:
Transactions--Net Investments--net 2,367,930 1,687,735 136,749 205,839
(Notes 1b, 1c, Foreign currency transactions--net -- 18,546 -- --
1e & 3): ----------- ----------- ----------- -----------
Net realized and unrealized gain
on investments and foreign
currency transactions 2,931,700 1,573,818 168,256 502,887
----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 2,850,418 $ 1,936,997 $ 438,473 $ 1,034,861
=========== =========== =========== ===========
<FN>
*Net of withholding tax on interest $ -- $ 1,618 $ -- $ --
=========== =========== =========== ===========
**Net of withholding tax on
dividends $ 1,931 $ 17,536 $ -- $ --
=========== =========== =========== ===========
<FN>
++The Program commenced operations on February 1, 1995.
</TABLE>
54
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended January 31, 1996++
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
Increase (Decrease) in Net Assets: Portfolio Portfolio Portfolio Portfolio
<S> <S> <C> <C> <C> <C>
Operations: Investment income (loss)--net $ (81,282) $ 363,179 $ 270,217 $ 531,974
Realized gain (loss) on investments
and foreign currency transactions
--net 563,770 (132,463) 31,507 297,048
Unrealized appreciation on
investments and foreign currency
transactions--net 2,367,930 1,706,281 136,749 205,839
----------- ----------- ----------- -----------
Net increase in net assets resulting
from operations 2,850,418 1,936,997 438,473 1,034,861
----------- ----------- ----------- -----------
Dividends & Investment income--net:
Distributions to Class A -- (90,788) (128,948) (393,269)
Shareholders Class B -- (193,635) (101,375) (98,505)
(Note 1g): Class C -- (56,404) (31,396) (33,445)
Class D -- (22,352) (8,498) (6,755)
In excess of investment income--net:
Class A -- (28,087) -- --
Class B -- (59,905) -- --
Class C -- (17,449) -- --
Class D -- (6,915) -- --
Realized gain on investments--net:
Class A (1,832) -- -- (133,258)
Class B (326,209) -- -- (64,660)
Class C (125,467) -- -- (23,204)
Class D (38,990) -- -- (3,847)
In excess of realized gain on
investments--net:
Class A (978) (14,537) -- --
Class B (174,333) (41,351) -- --
Class C (67,053) (11,895) -- --
Class D (20,837) (3,787) -- --
Return of capital--net:
Class A (265) -- -- --
Class B (47,208) -- -- --
Class C (18,157) -- -- --
Class D (5,642) -- -- --
----------- ----------- ----------- -----------
Net decrease in net assets
resulting from dividends and
distributions to shareholders (826,971) (547,105) (270,217) (756,943)
----------- ----------- ----------- -----------
Capital Share Net increase in net assets
Transactions derived from capital share
(Note 4): transactions 29,522,316 24,009,781 6,395,317 9,474,440
----------- ----------- ----------- -----------
Net Assets: Total increase in net assets 31,545,763 25,399,673 6,563,573 9,752,358
Beginning of period 25,000 25,000 25,000 25,000
----------- ----------- ----------- -----------
End of period $31,570,763 $25,424,673 $ 6,588,573 $ 9,777,358
=========== =========== =========== ===========
<FN>
++The Program commenced operations on February 1, 1995.
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data
and ratios have been derived
from information provided
in the financial statements.
For the Year Ended January 31, 1996++
Increase (Decrease) in Fundamental Value Portfolio++++ Global Opportunity Portfolio++++
Net Asset Value: Class A Class B Class C Class D Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Performance: ------- ------- ------- ------- ------- ------- ------- -------
Investment income
(loss)--net .25 (.07) (.09) .03 .34 .13 .12 .22
Realized and unrealized
gain on investments and
foreign currency trans-
actions--net 1.76 1.96 1.98 1.96 .77 .85 .85 .85
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations 2.01 1.89 1.89 1.99 1.11 .98 .97 1.07
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income
--net -- -- -- -- (.20) (.15) (.15) (.18)
In excess of investment
income on investments
--net -- -- -- -- (.06) (.04) (.04) (.06)
Realized gain on
investments--net (.20) (.20) (.20) (.20) -- -- -- --
In excess of realized
gain on investments--net (.11) (.11) (.11) (.11) (.03) (.03) (.03) (.03)
Return of capital--net (.03) (.03) (.03) (.03) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions (.34) (.34) (.34) (.34) (.29) (.22) (.22) (.27)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period $ 11.67 $ 11.55 $ 11.55 $ 11.65 $ 10.82 $ 10.76 $ 10.75 $ 10.80
======= ======= ======= ======= ======= ======= ======= =======
Total Investment Based on net asset
Return:* value per share. 20.10% 18.89% 18.89% 19.90% 11.15% 9.89% 9.81% 10.80%
======= ======= ======= ======= ======= ======= ======= =======
Ratio to Expenses, net of
Average Net reimbursement 1.54% 3.29% 3.38% 2.45% 2.01% 3.50% 3.58% 2.67%
Assets: ======= ======= ======= ======= ======= ======= ======= =======
Expenses 2.00% 3.39% 3.46% 2.56% 2.32% 3.61% 3.65% 2.77%
======= ======= ======= ======= ======= ======= ======= =======
Investment income
(loss)--net 1.99% (.61%) (.75%) .24% 2.92% 1.20% 1.07% 2.00%
======= ======= ======= ======= ======= ======= ======= =======
Supplemental Net assets end of
Data: period (in thousands) $ 121 $20,989 $ 7,990 $ 2,471 $ 3,025 $16,117 $ 4,770 $ 1,513
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover 51.37% 51.37% 51.37% 51.37% 83.14% 83.14% 83.14% 83.14%
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
The following per share data
and ratios have been derived
from information provided
in the financial statements.
For the Year Ended January 31, 1996++
Increase (Decrease) in Quality Bond Portfolio US Government Securities Portfolio
Net Asset Value: Class A Class B Class C Class D Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Performance: ------- ------- ------- ------- ------- ------- ------- -------
Investment income--net .62 .54 .53 .60 .76 .68 .67 .74
Realized and unrealized
gain on investments--net .27 .27 .27 .27 .74 .74 .73 .74
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations .89 .81 .80 .87 1.50 1.42 1.40 1.48
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net (.62) (.54) (.53) (.60) (.76) (.68) (.67) (.74)
Realized gain on
investments--net -- -- -- -- (.26) (.26) (.26) (.26)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions (.62) (.54) (.53) (.60) (1.02) (.94) (.93) (1.00)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period $ 10.27 $ 10.27 $ 10.27 $ 10.27 $ 10.48 $ 10.48 $ 10.47 $ 10.48
======= ======= ======= ======= ======= ======= ======= =======
Total Investment Based on net asset
Return:* value per share 9.22% 8.35% 8.27% 8.98% 15.42% 14.52% 14.35% 15.09%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
56
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratios to Average Expenses, net of
Net Assets: reimbursement .00% .79% .87% .19% .00% .81% .86% .22%
======= ======= ======= ======= ======= ======= ======= =======
Expenses 2.60% 3.31% 3.44% 2.70% 2.54% 3.35% 3.41% 2.77%
======= ======= ======= ======= ======= ======= ======= =======
Investment income--net 6.22% 5.52% 5.46% 6.11% 7.30% 6.28% 6.21% 6.90%
======= ======= ======= ======= ======= ======= ======= =======
Supplemental Net assets, end of
Data: period (in thousands) $ 2,196 $ 3,049 $ 1,123 $ 221 $ 5,463 $ 3,043 $ 1,089 $ 182
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover 86.68% 86.68% 86.68% 86.68% 113.05% 113.05% 113.05% 113.05%
======= ======= ======= ======= ======= ======= ======= =======
<FN>
*Total investment returns exclude the effect of sales loads.
++The Program commenced operations on February 1, 1995
++++Based on average shares outstanding during the period.
+++Aggregate total return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Asset Builder Program, Inc. (the "Program") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company consisting of
four separate portfolios: Fundamental Value Portfolio, Global
Opportunity Portfolio, Quality Bond Portfolio and US Government
Securities Portfolio (the "Portfolios"). The Program's Portfolios
offer 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
Program.
(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 in the
over-the-counter market 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 their last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair market value
as determined in good faith by or under the direction of the Board
of Directors of the Program.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
(b) Derivative financial instruments--Each Portfolio may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the equity, debt
or currency markets. Losses may arise due to changes in the value of
the contract or if the counterparty does not perform under the
contract.
* Financial futures contracts--The Portfolios may purchase or sell
futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the
Portfolios deposit and maintain as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Portfolios agree 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 Portfolios as unrealized
gains or losses. When the contract is closed, the Portfolios record
a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Portfolios are authorized to purchase and write call
and put options. When the Portfolios write an option, an amount
equal to the premium received by the Portfolios is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Portfolios enter into a closing
transaction), the Portfolios realize a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the
extent the cost of the closing transaction exceeds the premium paid
or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--Fundamental Value and Global
Opportunity Portfolios are authorized to enter into forward foreign
exchange contracts as a hedge against either specific transactions
or portfolio positions. Such contracts are not entered on the
Portfolios' records. However, the effect on operations is recorded
from the date the Portfolios enter into such contracts. Premium or
discount is amortized over the life of the contracts.
* Foreign currency options and futures--Fundamental Value and Global
Opportunity Portfolios may also purchase or sell listed or over-the-
counter foreign currency options, foreign currency futures and
related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-US dollar
denominated securities owned by the Portfolios, sold by the
Portfolios but not yet delivered, or committed or anticipated to be
purchased by the Portfolios.
(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 each Portfolio'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
witholding 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 except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Portfolios are informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment
income of Quality Bond and US Government Securities Portfolios are
declared daily and paid monthly. Dividends from net investment
income of Fundamental Value and Global Opportunity Portfolios are
recorded on the ex-dividend dates. Distributions of capital gains
for all Portfolios are recorded on the ex-dividend dates.
Distributions in excess of investment income and realized
58
<PAGE>
gains are due primarily to differing tax treatments for futures
transactions and post-October losses.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $2,597 and $78,685 on the Fundamental Value Portfolio have been
reclassified from accumulated net realized capital losses and paid-
in capital in excess of par, respectively, to undistributed net
investment income. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Program 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 Program 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 Program's portfolios
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Program.
For such services, each Portfolio pays a monthly fee based on the
average daily value of that Portfolio's net assets at the following
annual rates; 0.65% for Fundamental Value Portfolio, 0.50% for
Quality Bond and US Government Securities Portfolios and 0.75% for
Global Opportunity Portfolio.
The Investment Advisory Agreement obligates MLAM to reimburse the
Program to the extent the Program's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Program's first $30 million
of average daily net assets, 2.0% of the Program's next $70 million
of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made to MLAM during
any fiscal year which will cause such expenses to exceed the pro
rata expense limitation at the time of such payment.
For the period February 1, 1995 to January 31, 1996, MLAM had
voluntarily waived management fees and reimbursed each Portfolio for
additional expenses as follows:
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
Portfolio Portfolio Portfolio Portfolio
Management fee $23,907 -- $23,114 $ 37,948
Additional
expenses -- $33,240 $96,347 $156,230
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Program in accordance with Rule 12b-1 under the
Investment Company Act of 1940, each Portfolio 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 Fees
Class B Class C Class D
Fundamental Value Portfolio 0.25% 0.25% 0.25%
Global Opportunity Portfolio 0.25% 0.25% 0.25%
Quality Bond Portfolio 0.25% 0.25% 0.25%
US Government Securities Portfolio 0.25% 0.25% 0.25%
Distribution Fees
Class B Class C
Fundamental Value Portfolio 0.75% 0.75%
Global Opportunity Portfolio 0.75% 0.75%
Quality Bond Portfolio 0.50% 0.55%
US Government Securities Portfolio 0.50% 0.55%
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
Program. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account main-tenance 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 period February 1, 1995 to January 31, 1996, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of each Portfolio's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A Class D Class A Class D
Fundamental Value Portfolio $ 5 $2,345 $ 91 $44,760
Global Opportunity Portfolio $11 $ 959 $199 $18,584
Quality Bond Portfolio -- $ 192 -- $ 2,637
US Government Securities
Portfolio $ 3 $ 203 $ 46 $ 2,871
59
<PAGE>
NOTE TO FINANCIAL STATEMENTS (continued)
For the period February 1, 1995 to January 31, 1996, MLPF&S received
contingent deferred sales charges relating to transactions in Class
B and Class C Shares as follows:
Class B Shares Class C Shares
Fundamental Value Portfolio $11,993 $2,371
Global Opportunity Portfolio $12,061 $1,357
Quality Bond Portfolio $ 1,288 $ 224
US Government Securities Portfolio $ 2,636 $ 255
In addition, MLPF&S received $2,890 and $10,690 in commissions on
the execution of portfolio security transactions for the Fundamental
Value and Global Opportunity Portfolios, respectively, for the
period February 1, 1995 to January 31, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Program's transfer agent.
During the period February 1, 1995 to January 31, 1996, the Global
Opportunity, Quality Bond and US Government Securities Portfolio
paid Merrill Lynch Security Pricing Service, an affiliate of MLPF&S,
$1,194, $349 and $126, respectively, for security price quotations
to compute the net asset value of the Portfolios.
Accounting services are provided to each Portfolio by MLAM at cost.
Certain officers and/or directors of the Program are officers and/or
directors of MLAM, PSI, MLPF&S, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period February 1, 1995 to January 31, 1996 were as follows:
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
Portfolio Portfolio Portfolio Portfolio
Purchases $33,906,783 $26,605,160 $7,476,885 $16,657,523
Sales $ 8,113,989 $12,325,939 $2,275,679 $ 7,219,021
Net realized and unrealized gains (losses) as of January 31, 1996
were as follows:
Realized Unrealized
Fundamental Value Portfolio Gains Gains
Long-term investments $ 563,700 $2,367,930
Short-term investments 70 --
----------- ----------
Total $ 563,770 $2,367,930
=========== ==========
Realized Unrealized
Gains Gains
Global Opportunity Portfolio (Losses) (Losses)
Long-term investments $ (281,678) $1,687,914
Short-term investments 171 (179)
Foreign currency transactions (17,603) (852)
Forward foreign exchange contracts 166,647 19,398
----------- ----------
Total $ (132,463) $1,706,281
=========== ==========
Realized
Gains Unrealized
Quality Bond Portfolio (Losses) Gains
Long-term investments $ 31,562 $ 136,749
Short-term investments (55) --
----------- ----------
Total $ 31,507 $ 136,749
=========== ==========
Realized
Gains Unrealized
US Government Securities Portfolio (Losses) Gains
Long-term investments $ 297,536 $ 205,839
Short-term investments (488) --
----------- ----------
Total $ 297,048 $ 205,839
=========== ==========
As of January 31, 1996, net unrealized appreciation for Federal
income tax purposes was as follows:
US
Fundamental Global Quality Government
Value Opportunity Bond Securities
Portfolio Portfolio Portfolio Portfolio
Gross
unrealized
appreciation $3,588,293 $1,765,219 $134,760 $205,839
Gross
unrealized
depreciation (1,220,363) (79,447) (1,221) --
---------- ---------- -------- --------
Net
unrealized
appreciation $2,367,930 $1,685,772 $133,539 $205,839
========== ========== ======== ========
60
<PAGE>
The aggregate cost of investments at January 31, 1996 for Federal
income tax purposes was $29,079,387 for the Fundamental Value
Portfolio, $23,605,753 for the Global Opportunity Portfolio,
$6,382,748 for the Quality Bond Portfolio, and $10,308,220 for the
US Government Securities Portfolio.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the period February 1, 1995 to January 31, 1996, was $29,522,316
for the Fundamental Value Portfolio, $24,009,781 for the Global
Opportunity Portfolio, $6,395,317 for the Quality Bond Portfolio,
and $9,474,440 for the US Government Securities Portfolio.
Transactions in capital shares for each class were as follows:
Fundamental Value Portfolio
Class A Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 211,092 $ 2,121,694
Shares issued to shareholders in
reinvestment of distributions 226 2,614
----------- -----------
Total issued 211,318 2,124,308
Shares redeemed (201,602) (2,349,514)
----------- -----------
Net increase (decrease) 9,716 $ (225,206)
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Fundamental Value Portfolio
Class B Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 1,898,235 $20,687,636
Shares issued to shareholders in
reinvestment of distributions 46,363 530,851
----------- -----------
Total issued 1,944,598 21,218,487
Shares redeemed (128,079) (1,426,547)
----------- -----------
Net increase 1,816,519 $19,791,940
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Fundamental Value Portfolio
Class C Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 722,871 $ 7,998,489
Shares issued to shareholders in
reinvestment of distributions 17,800 203,810
----------- -----------
Total issued 740,671 8,202,299
Shares redeemed (49,444) (560,243)
----------- -----------
Net increase 691,227 $ 7,642,056
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Fundamental Value Portfolio
Class D Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 217,786 $ 2,387,449
Shares issued to shareholders in
reinvestment of distributions 5,449 62,881
----------- -----------
Total issued 223,235 2,450,330
Shares redeemed (11,765) (136,804)
----------- -----------
Net increase 211,470 $ 2,313,526
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Global Opportunity Portfolio
Class A Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 835,209 $ 8,372,011
Shares issued to shareholders
in reinvestment of dividends
and distributions 12,609 133,409
----------- -----------
Total issued 847,818 8,505,420
Shares redeemed (568,796) (6,107,760)
----------- -----------
Net increase 279,022 $ 2,397,660
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Global Opportunity Portfolio
Class B Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 1,579,063 $16,389,513
Shares issued to shareholders
in reinvestment of dividends
and distributions 27,153 286,188
----------- -----------
Total issued 1,606,216 16,675,701
Automatic conversion of shares (12,547) (136,198)
Shares redeemed (96,530) (1,007,511)
----------- -----------
Net increase 1,497,139 $15,531,992
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Global Opportunity Portfolio
Class C Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 460,425 $ 4,809,137
Shares issued to shareholders
in reinvestment of dividends
and distributions 7,790 82,108
----------- -----------
Total issued 468,215 4,891,245
Shares redeemed (25,280) (268,389)
----------- -----------
Net increase 442,935 $ 4,622,856
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Global Opportunity Portfolio
Class D Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 129,359 $ 1,346,418
Automatic conversion of shares sold 12,498 136,198
Shares issued to shareholders
in reinvestment of dividends
and distributions. 3,015 31,872
----------- -----------
Total issued 144,872 1,514,488
Shares redeemed (5,436) (57,215)
----------- -----------
Net increase 139,436 $ 1,457,273
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Quality Bond Portfolio
Class A Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 200,766 $ 2,007,639
Shares issued to shareholders in
reinvestment of dividends 12,321 123,667
----------- -----------
Total issued 213,087 2,131,306
Shares redeemed. (14) (145)
----------- -----------
Net increase 213,073 $ 2,131,161
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Quality Bond Portfolio
Class B Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 310,972 $ 3,112,230
Shares issued to shareholders in
reinvestment of dividends 8,720 87,735
----------- -----------
Total issued. 319,692 3,199,965
Shares redeemed (23,377) (234,918)
----------- -----------
Net increase 296,315 $ 2,965,047
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Quality Bond Portfolio
Class C Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 119,801 $ 1,200,962
Shares issued to shareholders in
reinvestment of dividends 2,715 27,344
----------- -----------
Total issued 122,516 1,228,306
Shares redeemed (13,729) (138,226)
----------- -----------
Net increase 108,787 $ 1,090,080
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
Quality Bond Portfolio
Class D Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold. 22,296 $ 223,184
Shares issued to shareholders in
reinvestment of dividends 764 7,677
----------- -----------
Total issued 23,060 230,861
Shares redeemed (2,180) (21,832)
----------- -----------
Net increase 20,880 $ 209,029
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
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<PAGE>
US Government Securities Portfolio
Class A Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 512,777 $ 5,133,291
Shares issued to shareholders
in reinvestment of dividends
and distributions 46,368 481,964
----------- -----------
Total issued 559,145 5,615,255
Shares redeemed (38,281) (400,291)
----------- -----------
Net increase 520,864 $ 5,214,964
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
US Government Securities Portfolio
Class B Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 316,580 $ 3,300,722
Shares issued to shareholders
in reinvestment of dividends
and distributions 8,754 79,114
----------- -----------
Total issued 325,334 3,379,836
Shares redeemed (35,474) (369,739)
----------- -----------
Net increase 289,860 $ 3,010,097
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
US Government Securities Portfolio
Class C Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold 106,091 $ 1,106,574
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,930 26,407
----------- -----------
Total issued 109,021 1,132,981
Shares redeemed (5,619) (57,961)
----------- -----------
Net increase 103,402 $ 1,075,020
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
US Government Securities Portfolio
Class D Shares for the Period
February 1, 1995++ to Dollar
January 31, 1996 Shares Amount
Shares sold. 23,396 $ 243,530
Shares issued to shareholders
in reinvestment of dividends
and distributions 517 4,969
----------- -----------
Total issued. 23,913 248,499
Shares redeemed (7,179) (74,140)
----------- -----------
Net increase 16,734 $ 174,359
=========== ===========
[FN]
++Prior to February 1, 1995 (commencement of operations), the
Portfolio issued 625 shares to MLAM for $6,250.
5. Commitments:
At January 31, 1996, the Global Opportunity Portfolio had foreign
exchange contracts, in addition to the contracts listed on the
Schedule of Investments, under which it had agreed to purchase a
foreign currency with an approximate value of $152,000.
6. Subsequent Event:
On February 2, 1996, the Growth Opportunity Portfolio commenced
operations as an additional portfolio of the Program.
63
<PAGE>
APPENDIX A
DESCRIPTION OF THE SELF-DIRECTED PLANS
This Appendix describes in summary form the various types of self-directed
retirement plans for which Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") acts as custodian (the "Self-Directed Plans"). This
description does not purport to be complete, and it should be read in
conjunction with the materials concerning the Self-Directed Plans, including
copies of the Plans and the forms necessary to establish a plan, which are
available from Merrill Lynch. Investors should read such materials carefully
before establishing a Self-Directed Plan and should consult with their attorney
or tax adviser to determine if any of the Self-Directed Plans are suited to
their needs and circumstances. The laws applicable to the Self-Directed Plans,
including the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code") are
complex and include a variety of transitional rules which may be applicable to
some investors. These laws should be reviewed by investors' attorneys to
determine their applicability. Investors are further advised that the
discussion of taxation contained in this Appendix relates solely to federal tax
laws but generally does not address the numerous transitional rules and that
the tax treatment of the Self-Directed Plans under applicable state law may
vary.
Shares of the Merrill Lynch Asset Builder Program, Inc. are available for
purchase solely by participants in an IRA (individual retirement account), an
IRRA (individual retirement rollover account) or SEP (simplified employee
pension plan) and, accordingly, the description set forth below will describe
only such arrangements.
ESTABLISHMENT OF A SELF-DIRECTED PLAN ACCOUNT
Self-Directed Plan accounts may be established by qualified individuals and
businesses through Merrill Lynch.
Generally, Self-Directed Plans afford participants the opportunity to take a
tax deduction, up to the maximum amount permitted under the Code for the
particular Self-Directed Plan, for amounts contributed to the Plan. Each Self-
Directed Plan is "self-directed"; that is, each participant is responsible for
making investment decisions concerning the funds contributed to his Self-
Directed Plan.
Merrill Lynch charges an annual custodial fee for each account established
pursuant to the Self-Directed Plans. These fees, which are contained in the
Self-Directed Plan documents, vary according to the type of account. Brokerage
fees will be assessed separately for each transaction to which they apply.
PERMISSIBLE SELF-DIRECTED PLAN INVESTMENTS
The type of investments that may be made depends on the type of Self-Directed
Plan established.
Participants and employers that maintain IRAs, IRRAs or SEPs may invest in
securities through Merrill Lynch or its affiliates, including stocks traded
"over-the-counter" or on a recognized exchange, government or corporate debt
obligations, certain mutual funds, certain limited partnership interests in
real estate, and bank money instruments. Participants and employers may also
invest in annuity contracts issued by a life insurance company (including
Merrill Lynch Life Insurance Company and Merrill Lynch Life Insurance Company
of New York). Those participants and employers desiring a diversified portfolio
but not wishing to actively manage the portfolio may elect to invest all or a
portion of their account in certain mutual funds
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<PAGE>
advised by Merrill Lynch Asset Management, L.P. (the "Investment Adviser") or
its affiliate. Participants and employers may vary their investment portfolio
as often as they wish.
Cash balances arise in a Self-Directed Plan account from contributions to the
Plan, the sale of securities held in the account and the receipt of dividends,
interest and principal repayments on securities held in the account. Cash
balances for which no other investment directions are given will, in accordance
with the option previously selected by the participant or employer, be invested
in full shares of the Portfolios or in certain money market funds advised by
the Investment Adviser or its affiliate, or maintained uninvested in the Self-
Directed Plan account. If such amounts are not invested, no return will be
earned. All cash balances will be invested or maintained in accordance with the
option selected by the participant or employer, pending instructions as to
further investment.
There can be no assurance, that the yield on an investment in the Portfolios
or a money market fund will be or will remain greater than that available on
any interest-bearing account. In addition, a money market fund is not a bank,
and shares of a money market fund are not equivalent to a bank account. As with
any investment in securities, the value of an investment in the Portfolios will
fluctuate. Amounts deposited in an interest-bearing bank account will be
insured as to principal in an amount of up to $100,000 per account by the
Federal Deposit Insurance Corporation. Cash balances maintained in a Self-
Directed Plan account will be insured, up to $100,000, by the Securities
Investor Protection Corporation.
CONTRIBUTIONS AND DISTRIBUTIONS
The amount which may be contributed to a Self-Directed Plan in any one year
is subject to certain limitations under the Code; however, assets already in a
Self-Directed Plan account may be invested without regard to such limitations
on contributions. With the exception of pretax contributions made by
participants in their IRAs or employer contributions to a SEP, a Self-Directed
Plan participant may deduct from his annual gross income, up to the maximum
permitted under the Code, amounts contributed to his Self-Directed Plan. These
amounts, plus any additional income earned on such contributions, will
ordinarily not be taxed until distributed to the participant.
Generally, under the Code, distributions may be made at any time but, as
discussed below, distributions made prior to the date on which the participant
reaches age 59 1/2 may be subject to a penalty and may be subject to mandatory
federal income tax withholding at a 20 percent rate (as described below).
Distributions will be taxed as ordinary income at the rate applicable to the
participant in the year in which distributed.
Excess Contributions. Under Section 4973 of the Code, contributions to an
IRA, IRRA or SEP in excess of those allowed by law are subject to a six percent
excise tax if not withdrawn, together with additional income attributable to
such excess contributions, prior to the date the participant files his income
tax return for the year in which the excess contribution was made. If an excess
amount is contributed in one year and is not eliminated in later years, the
excess amount will be subject to a cumulative six percent excise tax each year
until it is eliminated. Elimination of the excess may be accomplished either by
reducing the contribution (and deduction) for a succeeding year, or by
withdrawal of the excess amount plus the income attributable to it. Such income
will be considered a premature distribution subject to the ten percent penalty
tax on premature distributions under Section 72(f) of the Code discussed below,
and will additionally be taxable as ordinary income at the applicable rate for
the year in which it is distributed.
Timing of Retirement Benefits. Generally, a participant, upon reaching age 59
1/2, may make such distributions from his Self-Directed Plan account as he
chooses without tax penalties. Generally, the Code
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<PAGE>
requires that amounts in all Self-Directed Plans must commence being
distributed to a participant on or before April 1 of the calendar year
following the calendar year in which he reaches age 70 1/2, even if the
employee has not retired.
Such distributions may be made in a lump sum or in installments over the life
of the participant, or the joint lives of the participant and a designated
beneficiary, or over a period not to exceed the life expectancy (determined,
generally, by IRS life expectancy tables) of the participant or the joint life
expectancy of the participant and designated beneficiary. If the employee dies
before his entire interest has been distributed, the remaining portion of his
interest must be distributed at least as rapidly as the method of distribution
in effect prior to his death. Special rules apply under the Code to spousal
beneficiaries.
If the minimum payout required from a Self-Directed Plan for a particular
year is not made, a 50% excise tax will be imposed on the amount representing
the difference between the minimum payout required from the Self-Directed Plan
and the amount actually distributed under Section 4974 of the Code.
Treatment of Lump Sum Distributions and Annuities. The recipient of a "lump
sum distribution" (generally a distribution or payment within one taxable year
to the recipient of the balance to the credit of the employee on account of the
employee's death, attainment of age 59 1/2, disability or separation from
service (except in the case of a self-employed individual)) from a qualified
retirement plan may compute his tax liability using the five-year income
averaging tax computation, subject to certain requirements. However, no lump
sum income averaging methods apply to distributions from IRAs, IRRAs or SEPs.
Excise Tax on Large Distributions. To limit the total tax-deferred benefits
any individual can receive annually, Section 4980A of the Code imposes a 15
percent excise tax on certain "excess distributions" from qualified retirement
plans. All distributions from "qualified retirement plans" including IRAs,
IRRAs or SEPs made within one year are aggregated for this purpose. Total
benefits paid in a year exceeding the greater of $112,500, indexed for
inflation ($155,000 for 1996), or $150,000 (unindexed) are subject to the tax
to the extent of the excess. For lump sum distributions eligible to be taxed
under the five-year averaging provisions, the penalty will be applied
separately with respect to the lump sum distribution and other retirement
distributions. The penalty will be applied on the portion of the lump sum
distribution which exceeds five times the otherwise applicable limit for the
year.
Unless an election is made by a spouse, distributions made to beneficiaries
after the death of an individual are disregarded for purposes of applying this
tax; instead, an additional estate tax may be payable. The penalty tax on
excess distributions is reduced by an excise tax on early withdrawals.
Benefits accrued before August 1, 1986 may have been grandfathered and may
not be subject to the excise tax.
Premature Distributions. 1. Excise Tax: Distributions from an IRA, IRRA or
SEP prior to the time the participant reaches age 59 1/2 generally are subject
to penalty unless the participant has died or has become disabled (within the
meaning of Code Section 72(m)(7)). The penalty for early distributions is an
excise tax equivalent to ten percent of the amount so distributed, in addition
to the applicable ordinary income tax payable on such amount for the year in
which it is distributed. The tax will be waived for any distribution that is
part of a scheduled series of substantially level payments under an annuity for
the life or life expectancy of the taxpayer or the joint lives of the taxpayer
and his designated beneficiary. Distributions can also be made, without
penalty, to cover deductible medical expenses, for certain payments in a
divorce settlement, or
66
<PAGE>
to an employee who is age 55 or older, has separated from service, and has
satisfied the requirements of the employer's plan for early retirement (if the
plan permits such payments). In certain cases, the penalty will not be waived
if the distribution is from an IRA or retirement annuity. The penalty is also
not waived for distributions from a qualified retirement plan, if the employee
is a more than five percent owner or has been a more than five percent owner at
any time during the five plan years preceding the plan year ending in the tax
year in which the amount is received. A five percent owner is a person who, in
the case of a corporate employer, actually or constructively owns more than
five percent of the outstanding stock of the employer or stock possessing more
than five percent of the total combined voting power of all stock of the
employer, or who, in the case of a non-corporate employer, owns more than five
percent of the capital or profits interest in the employer. A rollover will
avoid imposition of the excise tax. However, for distributions prior to 1993,
the Code restricts the rollover of partial distributions to distributions
received on account of an employee's separation from service, death or
disability.
2. Mandatory Income Tax Withholding. Generally, any portion of an "eligible
rollover distribution" made from a qualified retirement plan after December 31,
1992 qualifies for tax-free rollover into an eligible retirement plan under
Section 402(c) of the Code. Under Section 402(c), as amended, all distributions
from a qualified retirement plan (including in-service distributions) are
eligible rollover distributions, except for certain periodic payments, required
amounts distributed to a participant who is over age 70 1/2 as described above,
and amounts otherwise not includible in gross income. Rollovers may be made by
the participant in one of two ways: first, by direct transfers from the
qualified retirement plan to an IRA (including an individual retirement annuity
other than endowment contract), a qualified defined contribution plan or an
annuity under Section 403(a) of the Code (a "direct rollover") or, in the case
of the RSA plan to another 403(b) plan, a tax sheltered annuity; or second, by
rolling over an eligible rollover distribution within 60 days of receipt to any
of the arrangements described above. In the event a direct rollover is not
chosen by the participant, a mandatory 20 percent of the distribution is
withheld to satisfy any federal tax liability that may be assessed. The
mandatory 20 percent withholding tax is not assessed against any distributions
that may not be rolled over (including, but not limited to, distributions to
beneficiaries other than a surviving spouse, or a present or former spouse
under a qualified domestic relations order).
Participants should consult with their attorneys or tax advisers in order to
determine the application of the new rollover and mandatory withholding
requirements to their own circumstances.
The foregoing rules are of general applicability to the Self-Directed Plans.
The following section discusses specific considerations applicable to the
different types of Self-Directed Plans.
TYPES OF SELF-DIRECTED PLANS
Individual Retirement Accounts. As a result of changes made by the Tax Reform
Act of 1986, the allowable deductions for contributions to IRAs are restricted
for certain taxpayers who are (or their spouses are) active participants in
employer-sponsored retirement plans and whose adjusted gross income exceeds
certain levels. An individual will be considered an active participant in a
defined contribution plan if any employer contribution or forfeiture is added
to his account for the year. In the case of a defined benefit plan, an
individual will be considered an active participant if he is not excluded under
the eligibility rules for the year. The determination of whether an individual
is an active participant is made without regard to whether the individual's
rights under a plan are vested. If an unmarried taxpayer, or either spouse in
the case of married taxpayers, is an "active participant" in an employer-
sponsored retirement plan, deductible contributions are permitted subject to a
pro rata phase-out rule where adjusted gross income (before the IRA
67
<PAGE>
deduction) is over $40,000 on a joint return or $25,000 for an unmarried
individual. The allowable deduction is completely eliminated for such taxpayers
when adjusted gross income (before the IRA deduction) reaches $50,000 on a
joint return or $35,000 for an unmarried person. For this purpose, an employer-
sponsored retirement plan means a pension, profit-sharing or stock bonus plan
qualified under Code section 401(a) (including a Keogh plan or 401(k) plan), an
annuity plan qualified under Section 403(a), a SEP, a tax-sheltered Code
section 403(b) annuity and retirement plans covering federal, state or local
government employees. A minimum deductible contribution of $200 is provided for
any taxpayer whose adjusted gross income is not above the phase-out range even
if the phase-out rules would provide for a lower deduction.
Subject to the above limitations, any individual with compensation may
establish an IRA. Generally, the maximum yearly tax deduction that may be taken
for an IRA contribution is the lesser of $2,000 or 100% of the individual's
compensation. If a husband and wife are both employed, they may take a
deduction of up to $4,000 on a joint return. If only one spouse is employed, a
separate IRA, called a "spousal IRA", may be established for the benefit of the
non-working spouse or a spouse that elects to be treated as having no
compensation for the year. The deduction for a spousal IRA may only be taken if
a joint return is filed, and the maximum contribution and aggregate deduction
for the two IRAs for any year is $2,250. Allocations may be made between the
two accounts in any manner so long as no more than $2,000 is contributed to
either of the accounts. No deduction for IRA contributions may be made for or
after the tax year in which a participant reaches age 70 1/2. In addition, no
deduction will be allowed for amounts paid to an "inherited IRA" (i.e., an IRA
acquired on account of the death of another individual other than by the
surviving spouse of the original owner).
Active participants in employer-sponsored plans who are not eligible to make
deductible contributions to IRAs (or whose deductions are limited) may make
nondeductible contributions to a separate account. The nondeductible
contribution is subject to the same dollar limitations (the lesser of $2,000 or
100% of compensation) as deductible contributions described above. Income in
the separate account will accumulate tax-free until distributed; however, only
the account earnings will be included in taxable income upon distribution.
The Self-Directed IRA program allows for the establishment of IRRAs, which
are "rollover IRAs". Prior to 1993, a rollover IRA could have only been
established with a distribution received from a qualified employer-sponsored
pension plan that was of an amount equal to at least 50% of the balance to the
credit of the employee in the plan; after December 31, 1992, this 50%
requirement no longer applies. This distribution would ordinarily be subject to
income tax; however, tax may be deferred to the extent that all or part of the
rollover amount, less any voluntary contributions made to the employer-
sponsored plans, is put into an IRA within 60 days of receiving the
distribution. With respect to a distribution of less than the entire balance to
the credit of the employee in the plan prior to 1993 (a "partial rollover"),
the distribution was eligible for rollover treatment only if the distribution
was made on account of the employee's death, separation from service or
disability and was not one of a series of periodic payments and the employee
elected, in a manner to be prescribed by regulations, to have rollover
treatment apply to such distribution. However, as described above, effective
for rollovers made after December 31, 1992, the limitations described with
respect to partial rollovers have been eliminated, and new mandatory federal
income tax withholding requirements have been imposed for any rollover that is
not a direct rollover. The amounts in a rollover IRA are taxed only upon
distribution, as with other IRAs. However, tax-free rollover treatment will be
denied for amounts received from an "inherited IRA".
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<PAGE>
Simplified Employee Pension Plans. A SEP is essentially a collection of IRA
accounts established by employers for their employees, and any employer,
whether it is a sole proprietorship, a partnership or a corporation, may set up
a SEP. To qualify as a SEP, certain requirements must be met; in particular,
the plan must cover all current employees age 21 years or older who have worked
for the business in three of the last five calendar years and have received at
least $300 in compensation from the employer. Up to $30,000 or 15% of the
employee's compensation up to $150,000 (effective for plan years beginning
after December 31, 1993), subject to inflation adjustments may be paid by the
employer to the employee's SEP. The same percentage of compensation (determined
under a written formula) must be contributed on behalf of each employee. Such
contributions are deductible by the employer and excluded from the employee's
income. The tax-free elective deferral of an employee's income for a taxable
year cannot exceed $7,000, as adjusted for inflation (currently, $9,500 in
1996). This cap limits all tax-free elective deferrals by an employee under all
cash and deferred arrangements, SEPs and tax sheltered annuities.
Because the SEP is also an IRA, the employee may, if otherwise eligible under
the rules applicable to IRAs discussed above, make up to a $2,000 contribution
to the SEP or make rollover contributions (see "Individual Retirement Accounts"
above). Amounts contributed to a participant's SEP account vest immediately. If
the participant should cease to be employed by the business maintaining the
SEP, the participant retains full rights to and investment power over the
account. In such case, the account should be changed to a regular IRA so that
the participant may make additional permissible contributions.
Tax-deductible employer contributions may continue to be made to a SEP
participant's account even after he has reached age 70 1/2.
Each of the foregoing Self-Directed Plans is designed to meet differing needs
and has varying financial and tax consequences. An investor should thoroughly
review all of the materials available from Merrill Lynch concerning the Self-
Directed Plans and consult with his attorney or tax adviser in determining
whether any of these Plans is suited to his needs and circumstances.
Top-Heavy Plan Requirements. The Code imposes special rules with respect to
qualified plans that are considered to be "top-heavy" plans (individual
retirement plans are not subject to the Code's rules relating to "top-heavy"
plans). A defined contribution plan (for purposes of these rules, a SEP is
deemed to be a defined contribution plan) is considered to be "top-heavy" where
the account balances of "key employees" exceed 60% of the account balances of
all employees. "Key employees" include all employees who, at any time during
the plan year or the four preceding plan years (1) are officers having annual
compensation of more than $45,000, as adjusted for inflation, (2) are one of
the ten employees with annual compensation of more than $30,000 that actually
or constructively own the largest interests in the employer, (3) are "five-
percent owners", or (4) own more than a one percent interest in the employer
and have annual compensation in excess of $150,000. The account balance of an
individual that has not received compensation as an employee during the five
preceding plan years is not taken into account.
When a plan favoring key employees is determined to be "top-heavy", its
continued qualification under the Code depends on its compliance with certain
requirements, which (1) limit the amount of a participant's compensation that
may be taken into account, (2) provide stringent vesting schedules, (3) provide
minimum contributions or benefits for non-key employees, and (4) reduce the
aggregate limit on benefits and contributions for certain key employees who
participate in both a defined benefit plan and a defined contribution plan.
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71
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Fundamental Value Portfolio............................................... 2
Quality Bond Portfolio.................................................... 2
U.S. Government Securities Portfolio...................................... 2
Global Opportunity Portfolio.............................................. 3
Growth Opportunity Portfolio.............................................. 4
Other Investment Policies and Practices of the Portfolios................. 4
Management of the Program.................................................. 9
Directors and Officers.................................................... 9
Compensation of Directors................................................. 10
Management and Advisory Arrangements...................................... 11
Purchase of Shares......................................................... 13
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 14
Reduced Initial Sales Charges............................................. 16
Distribution Plans ....................................................... 17
Limitations on the Payment of Deferred Sales Charges ..................... 17
Redemption of Shares....................................................... 20
Deferred Sales Charges--Class B and Class C Shares........................ 20
Portfolio Transactions and Brokerage....................................... 21
Portfolio Turnover........................................................ 23
Determination of Net Asset Value........................................... 24
Shareholder Services....................................................... 25
Investment Account........................................................ 25
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 25
Systematic Redemption and Automatic Investment Plans...................... 25
Exchange Privilege........................................................ 26
Dividends, Distributions and Taxes......................................... 28
Dividends and Distributions............................................... 28
Federal Tax............................................................... 28
State Tax................................................................. 30
Performance Data........................................................... 31
General Information........................................................ 35
Description of Shares..................................................... 35
Computation of Offering Price Per Share................................... 35
Independent Auditors...................................................... 36
Custodian................................................................. 36
Transfer Agent............................................................ 36
Legal Counsel............................................................. 36
Reports to Shareholders................................................... 36
Additional Information.................................................... 37
Growth Opportunity Portfolio
Independent Auditor's Report.............................................. 38
Statement of Assets and Liabilities....................................... 39
Fundamental Value Portfolio
Global Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
Independent Auditor's Report.............................................. 40
Financial Statements....................................................... 41
Appendix A--Description of the Self-Directed Plans......................... 64
</TABLE>
Code # 18472-0596
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Builder Program, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
May 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Interlocking gears and Back cover of Prospectus and
Merrill Lynch logo including back cover of Statement of
stylized market bull Additional Information
