<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
SECURITIES ACT FILE NO. 33-53887
INVESTMENT COMPANY ACT FILE NO. 811-7177
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE FUND: MARK B. GOLDFUS, ESQ.
MERRILL LYNCH ASSET
BROWN & WOOD LLP
ONE WORLD TRADE CENTER MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NJ 08543-9011
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON MARCH 25, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table; Merrill Lynch Select Pricing SM
System
Item 3. Condensed Financial
Information............. Financial Highlights; Performance Data
Item 4. General Description of Investment Objectives and Policies;
Registrant.............. Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Program;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance..... Not Applicable
Item 6. Capital Stock and Other
Securities.............. Cover Page; Additional Information
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch Select
Being Offered........... Pricing SM System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Fee Table; Merrill Lynch Select Pricing SM
Repurchase.............. System; Purchase of Shares; Shareholder
Services; Redemption of Shares
Item 9. Pending Legal
Proceedings............. Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................. Not Applicable
Item 13. Investment Objectives
and Policies............ Investment Objectives and Policies
Item 14. Management of the Fund.. Management of the Program
Item 15. Control Persons and
Principal Holders of Management of the Program; General
Securities.............. Information--Additional Information
Item 16. Investment Advisory and
Other Services.......... Management of the Program; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices......... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities.............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of Shares;
Being Offered........... Determination of Net Asset Value;
Shareholder Services; General Information--
Computation of Offering Price Per Share
Item 20. Tax Status.............. Dividends, Distributions and Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data........ Performance Data
Item 23. Financial Statements.... Independent Auditors' Reports; Statements
of Assets and Liabilities (audited);
Financial Statements (unaudited)
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
MAY 23, 1997
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 21.
(Cover continues on next page)
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the 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 23, 1997 (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,
simplified employee pension plans and simple retirement accounts (collectively
"IRAs") for which Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") acts as custodian and by CBA(R) accounts and CMA(R) 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
$5.35) 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 None(d) 4.0% during 1.0% for None(d) None(d) 4.0% during 1.0% for None(d)
original purchase the first year, one year the first year, one year
price or decreasing 1.0% decreasing 1.0%
redemption annually thereafter annually thereafter
proceeds, to 0.0% after to 0.0% after
whichever is the fourth year the fourth year
lower).............
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... .05% .05% .05% .05% .14% .14% .14% .14%
Shareholder Ser-
vicing Costs(g).. .46% .54% .58% .45% .45% .55% .57% .44%
Other............ .87% .87% .87% .87% 2.14% 2.14% 2.14% 2.14%
---- --- --- --- ---- ---- ---- ----
Total Other 1.38% 1.46% 1.50% 1.37% 2.73% 2.83% 2.85% 2.72%
Expenses(h)...... ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
Operating Ex- 2.03% 3.11% 3.15% 2.27% 3.23% 4.08% 4.15% 3.47%
penses............. ==== ==== ==== ==== ==== ==== ==== ====
</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 None(d) 4.0% during 1.0% for None(d) None(d) 4.0% during 1.0% for None(d)
original purchase the first year, one year the first year, one year
price or decreasing 1.0% decreasing 1.0%
redemption annually thereafter annually thereafter
proceeds, to 0.0% after to 0.0% after
whichever is the fourth year the fourth year
lower).............
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% .14% .14% .14% .14%
Shareholder Ser-
vicing Costs(g).. .23% .28% .29% .20% .49% .60% .65% .51%
Other............ 2.07% 2.07% 2.07% 2.07% 1.52% 1.52% 1.52% 1.52%
---- ---- ---- ---- ---- ---- ---- ----
Total Other 2.42% 2.47% 2.48% 2.39% 2.15% 2.26% 2.31% 2.17%
Expenses(h)...... ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
Operating Ex- 2.92% 3.72% 3.78% 3.14% 2.90% 4.01% 4.06% 3.17%
penses............. ==== ==== ==== ==== ==== ==== ==== ====
</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 None(d) 4.0% during the first 1.0% for None(d)
original purchase price year, decreasing 1.0% one year
or redemption proceeds, annually thereafter
whichever is lower)..... 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:
Custodial Fees........ .15% .15% .15% .15%
Shareholder Servicing
Costs(g).............. .72% .78% .83% .66%
Other................. 1.56% 1.42% 1.42% 1.42%
---- ---- ---- ----
Total Other 2.43% 2.35% 2.40% 2.23%
Expenses(h)........... ---- ---- ---- ----
Total Portfolio Operat- 3.08% 4.00% 4.05% 3.13%
ing Expenses............ ==== ==== ==== ====
</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 43.
(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 45.
(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 and participants in connection with
certain investment programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 43.
(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 36.
(f) See "Purchase of Shares--Distribution Plans"--page 48.
(g) See "Management of the Program--Transfer Agency Services"--page 38.
(h) The expense information in the table reflects current reimbursement
arrangements. As of January 31, 1997, with the exception of Fundamental
Value Portfolio, the Investment Adviser was waiving management fees and
voluntarily reimbursing the Program for a portion of other expenses
(excluding 12b-1 fees), as shown in the table below. The Fee Table has
been restated to assume the absence of any such waiver of fees and/or
reimbursement of expenses because the Investment Adviser may discontinue
or reduce such waiver of fees and/or reimbursement of expenses at any time
without notice.
<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>
Quality Bond Portfolio.. 3.23% 3.30% 3.30% 3.31% 0.00% 0.78% 0.85% 0.16%
US Government Securities
Portfolio............... 2.92% 2.94% 2.93% 2.93% 0.00% 0.78% 0.85% 0.21%
Global Opportunity Port-
folio................... 0.43% 0.25% 0.25% 0.26% 2.47% 3.76% 3.81% 2.91%
Growth Opportunity Port-
folio................... 0.64% 0.16% 0.17% 0.19% 2.44% 3.84% 3.88% 2.94%
</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 on pages 3-5, (2) a 5% annual
return throughout the periods and (3)
redemption at the end of the period:
Fundamental Value Portfolio
Class A.................................... $72 $113 $156 $276
Class B.................................... $71 $116 $163 $325*
Class C.................................... $42 $ 97 $165 $346
Class D.................................... $74 $120 $168 $299
Quality Bond Portfolio
Class A.................................... $71 $136 $202 $379
Class B.................................... $81 $144 $209 $427
Class C.................................... $52 $126 $212 $433
Class D.................................... $74 $142 $213 $400
U.S. Government Securities Portfolio
Class A.................................... $68 $127 $188 $351
Class B.................................... $77 $134 $192 $397
Class C.................................... $48 $115 $195 $402
Class D.................................... $70 $133 $198 $371
Global Opportunity Portfolio
Class A.................................... $80 $138 $197 $358
Class B.................................... $80 $142 $206 $406*
Class C.................................... $51 $124 $208 $426
Class D.................................... $83 $145 $210 $382
Growth Opportunity Portfolio
Class A.................................... $82 $143 $206 $374
Class B.................................... $80 $142 $205 $405*
Class C.................................... $51 $123 $207 $425
Class D.................................... $82 $144 $208 $378
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 $113 $156 $276
Class B.................................... $31 $ 96 $163 $325*
Class C.................................... $32 $ 97 $165 $346
Class D.................................... $74 $120 $168 $299
Quality Bond Portfolio
Class A.................................... $71 $136 $202 $379
Class B.................................... $41 $124 $209 $427
Class C.................................... $42 $126 $212 $433
Class D.................................... $74 $142 $213 $400
U.S. Government Securities Portfolio
Class A.................................... $68 $127 $188 $351
Class B.................................... $37 $114 $192 $397
Class C.................................... $38 $115 $195 $402
Class D.................................... $70 $133 $198 $371
Global Opportunity Portfolio
Class A.................................... $80 $138 $197 $358
Class B.................................... $40 $122 $206 $406*
Class C.................................... $41 $124 $208 $426
Class D.................................... $83 $145 $210 $382
Growth Opportunity Portfolio
Class A.................................... $82 $143 $206 $374
Class B.................................... $40 $122 $205 $405*
Class C.................................... $41 $123 $207 $425
Class D.................................... $82 $144 $208 $378
</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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) 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 140 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, 1997, the Investment Adviser and FAM had a total of approximately
$244.2 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 ("NYSE") (generally 4:00 P.M., New York time) on each day
during which the NYSE 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 registered investment companies advised by MLAM or its affiliate, FAM.
Funds advised by MLAM or FAM that 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 PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his or her 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
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply. 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
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply. 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 at net asset value to
Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term
"subsidiaries" when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly wholly-
owned and controlled by ML & Co.) and their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The
maximum initial sales charge is 5.25% 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 and participants 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 may 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 1.0% CDSC if they are redeemed within one year of purchase.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
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 may 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 have 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, 1997 are included in the Statement of Additional
Information. 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 Program's audited financial statements.
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE PORTFOLIO*
------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
--------------- ----------------- ---------------- ---------------
FOR THE YEAR ENDED JANUARY 31,
------------------------------------------------------------------------
1997 1996+ 1997 1996+ 1997 1996+ 1997 1996+
------ ------ ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $11.67 $10.00 $ 11.55 $10.00 $ 11.55 $10.00 $11.65 $10.00
------ ------ ------- ------- ------- ------ ------ ------
Investment income
(loss)--net............ (.01) .25 (.15) (.07) (.15) (.09) (.04) .03
Realized and unrealized
gain on investments and
foreign currency
transactions--net...... 2.70 1.76 2.65 1.96 2.66 1.98 2.68 1.96
------ ------ ------- ------- ------- ------ ------ ------
Total from investment
operations............. 2.69 2.01 2.50 1.89 2.51 1.89 2.64 1.99
------ ------ ------- ------- ------- ------ ------ ------
Less distributions:
Realized gain on in-
vestments--net....... (.78) (.20) (.66) (.20) (.67) (.20) (.75) (.20)
In excess of realized
gain on investments--
net.................. -- (.11) -- (.11) -- (.11) -- (.11)
Return of capital--
net.................. -- (.03) -- (.03) -- (.03) -- (.03)
------ ------ ------- ------- ------- ------ ------ ------
Total distributions..... (.78) (.34) (.66) (.34) (.67) (.34) (.75) (.34)
------ ------ ------- ------- ------- ------ ------ ------
Net asset value, end of
period................. $13.58 $11.67 $ 13.39 $ 11.55 $ 13.39 $11.55 $13.54 $11.65
====== ====== ======= ======= ======= ====== ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 23.20% 20.10%# 21.79% 18.89%# 21.82% 18.89%# 22.82% 19.90%#
====== ====== ======= ======= ======= ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. 2.03% 1.54% 3.11% 3.29% 3.15% 3.38% 2.27% 2.45%
====== ====== ======= ======= ======= ====== ====== ======
Expenses................ 2.03% 2.00% 3.11% 3.39% 3.15% 3.46% 2.27% 2.56%
====== ====== ======= ======= ======= ====== ====== ======
Investment income
(loss)--net............ (.07)% 1.99% (1.15)% (.61)% (1.19)% (.75)% (.31)% .24%
====== ====== ======= ======= ======= ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $ 209 $ 121 $34,828 $20,989 $15,022 $7,990 $4,180 $2,471
====== ====== ======= ======= ======= ====== ====== ======
Portfolio turnover...... 80.60% 51.37% 80.60% 51.37% 80.60% 51.37% 80.60% 51.37%
====== ====== ======= ======= ======= ====== ====== ======
Average Commission Rate
Paid++................. $.0539 -- $ .0539 -- $ .0539 -- $.0539 --
====== ====== ======= ======= ======= ====== ====== ======
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ The Program commenced operations on February 1, 1995.
++ For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversion may significantly affect the rate shown.
# Aggregate total investment return.
14
<PAGE>
<TABLE>
<CAPTION>
QUALITY BOND PORTFOLIO*
-----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
FOR THE YEAR ENDED JANUARY 31,
-----------------------------------------------------------------
1997 1996+ 1997 1996+ 1997 1996+ 1997 1996+
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $10.27 $10.00 $10.27 $10.00 $10.27 $10.00 $10.27 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment income--net.. .68 .62 .59 .54 .58 .53 .65 .60
Realized and unrealized
gain (loss) on
investments--net....... (.44) .27 (.44) .27 (.44) .27 (.44) .27
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............. .24 .89 .15 .81 .14 .80 .21 .87
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Investment income--net. (.68) (.62) (.59) (.54) (.58) (.53) (.65) (.60)
In excess of realized
gain on
investments--net...... (.04) -- (.04) -- (.04) -- (.04) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and dis-
tributions............. (.72) (.62) (.63) (.54) (.62) (.53) (.69) (.60)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 9.79 $10.27 $ 9.79 $10.27 $ 9.79 $10.27 $ 9.79 $10.27
====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 2.51% 9.26%# 1.62% 8.35%# 1.55% 8.27%# 2.25% 8.99%#
====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. .00% .00% .78% .79% .85% .87% .16% .19%
====== ====== ====== ====== ====== ====== ====== ======
Expenses................ 3.23% 2.60% 4.08% 3.31% 4.15% 3.44% 3.47% 2.70%
====== ====== ====== ====== ====== ====== ====== ======
Investment income--net.. 6.85% 6.22% 6.00% 5.52% 5.93% 5.46% 6.62% 6.11%
====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $2,254 $2,196 $4,824 $3,049 $1,885 $1,123 $ 452 $ 221
====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover...... 91.10% 86.68% 91.10% 86.68% 91.10% 86.68% 91.10% 86.68%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ The Program commenced operations on February 1, 1995.
# Aggregate total investment return.
15
<PAGE>
<TABLE>
<CAPTION>
US GOVERNMENT SECURITIES PORTFOLIO*
-----------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- -------------- --------------
FOR THE YEAR ENDED JANUARY 31,
-----------------------------------------------------------------
1997 1996+ 1997 1996+ 1997 1996+ 1997 1996+
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $10.48 $10.00 $10.48 $10.00 $10.47 $10.00 $10.48 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment income--net.. .69 .76 .60 .68 .59 .67 .66 .74
Realized and unrealized
gain (loss) on
investments--net....... (.21) .74 (.21) .74 (.21) .73 (.21) .74
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............. .48 1.50 .39 1.42 .38 1.40 .45 1.48
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and dis-
tributions:
Investment income--net. (.69) (.76) (.60) (.68) (.59) (.67) (.66) (.74)
Realized gain on in-
vestments--net........ (.07) (.26) (.07) (.26) (.07) (.26) (.07) (.26)
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and dis-
tributions............. (.76) (1.02) (.67) (.94) (.66) (.93) (.73) (1.00)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period................. $10.20 $10.48 $10.20 $10.48 $10.19 $10.47 $10.20 $10.48
====== ====== ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 4.76% 15.47%# 3.90% 14.53%# 3.83% 14.36%# 4.49% 15.13%#
====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. .00% .00% .78% .81% .85% .86% .21% .22%
====== ====== ====== ====== ====== ====== ====== ======
Expenses................ 2.92% 2.54% 3.72% 3.35% 3.78% 3.41% 3.14% 2.77%
====== ====== ====== ====== ====== ====== ====== ======
Investment income--net.. 6.69% 7.30% 5.85% 6.28% 5.78% 6.21% 6.42% 6.90%
====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $4,486 $5,463 $4,514 $3,043 $1,757 $1,089 $313 $ 182
====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover...... 27.32% 113.05% 27.32% 113.05% 27.32% 113.05% 27.32% 113.05%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ The Program commenced operations on February 1, 1995.
# Aggregate total investment return.
16
<PAGE>
<TABLE>
<CAPTION>
GLOBAL OPPORTUNITY PORTFOLIO*
-----------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
-------------- ----------------- ---------------- ---------------
FOR THE YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1997 1996+ 1997 1996+ 1997 1996+ 1997 1996+
------ ------ ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $10.82 $10.00 $ 10.76 $ 10.00 $ 10.75 $10.00 $ 10.80 $10.00
------ ------ ------- ------- ------- ------ ------- ------
Investment income
(loss)--net............ .15 .34 (.04) .13 (.05) .12 .05 .22
Realized and unrealized
gain on investments and
foreign currency
transactions--net...... 1.21 .77 1.29 .85 1.29 .85 1.29 .85
------ ------ ------- ------- ------- ------ ------- ------
Total from investment
operations............. 1.36 1.11 1.25 .98 1.24 .97 1.34 1.07
------ ------ ------- ------- ------- ------ ------- ------
Less dividends and dis-
tributions:
Investment income--net. -- (.20) -- (.15) -- (.15) -- (.18)
In excess of investment
income on
investments--net...... (.13) (.06) (.03) (.04) (.03) (.04) (.10) (.06)
Realized gain on
investments--net...... (.12) -- (.12) -- (.12) -- (.12) --
In excess of realized
gain on investments--
net................... -- (.03) -- (.03) -- (.03) -- (.03)
------ ------ ------- ------- ------- ------ ------- ------
Total dividends and
distributions.......... (.25) (.29) (.15) (.22) (.15) (.22) (.22) (.27)
------ ------ ------- ------- ------- ------ ------- ------
Net asset value, end of
period................. $11.93 $10.82 $ 11.86 $ 10.76 $ 11.84 $10.75 $ 11.92 $10.80
====== ====== ======= ======= ======= ====== ======= ======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 12.68% 11.15%# 11.67% 9.89%# 11.61% 9.81%# 12.56% 10.80%#
====== ====== ======= ======= ======= ====== ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement.............. 2.47% 2.01% 3.76% 3.50% 3.81% 3.58% 2.91% 2.67%
====== ====== ======= ======= ======= ====== ======= ======
Expenses................ 2.90% 2.32% 4.01% 3.61% 4.06% 3.65% 3.17% 2.77%
====== ====== ======= ======= ======= ====== ======= ======
Investment income
(loss)--net............ 1.83% 2.92% (.39)% 1.20% (.46)% 1.07% .48% 2.00%
====== ====== ======= ======= ======= ====== ======= ======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $ 129 $3,025 $30,469 $16,117 $10,659 $4,770 $ 2,596 $1,513
====== ====== ======= ======= ======= ====== ======= ======
Portfolio turnover...... 125.68% 83.14% 125.68% 83.14% 125.68% 83.14% 125.68% 83.14%
====== ====== ======= ======= ======= ====== ======= ======
Average Commission Rate
Paid++................. $.0170 -- $ .0170 -- $ .0170 -- $ .0170 --
====== ====== ======= ======= ======= ====== ======= ======
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ The Program commenced operations on February 1, 1995.
++ For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversion may significantly affect the rate shown.
# Aggregate total investment return.
17
<PAGE>
<TABLE>
<CAPTION>
GROWTH OPPORTUNITY PORTFOLIO*
--------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
FOR THE PERIOD FEBRUARY 2,
1996+ TO JANUARY 31, 1997
------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, begin-
ning of period........ $ 10.00 $ 10.00 $10.00 $10.00
------- ------- ------- -------
Investment income
(loss)--net........... .03 (.21) (.22) (.11)
Realized and unrealized
gain on investments
and foreign currency
transactions--net..... 1.76 1.89 1.89 1.89
------- ------- ------- -------
Total from investment
operations............ 1.79 1.68 1.67 1.78
------- ------- ------- -------
Net asset value, end of
period................ $ 11.79 $ 11.68 $ 11.67 $ 11.78
======= ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset
value per share....... 17.90%# 16.80%# 16.70%# 17.80%#
======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement............. 2.44%## 3.84%## 3.88%## 2.94%##
======= ======= ======= =======
Expenses............... 3.08%## 4.00%## 4.05%## 3.13%##
======= ======= ======= =======
Investment income
(loss) --net.......... .23%## (1.93)%## (1.98)%## (1.00)%##
======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands)... $ 58 $ 9,816 $ 4,649 $ 819
======= ======= ======= =======
Portfolio turnover..... 51.63% 51.63% 51.63% 51.63%
======= ======= ======= =======
Average Commission Rate
Paid++................ $ .0626 $ .0626 $ .0626 $ .0626
======= ======= ======= =======
</TABLE>
- --------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
++ For fiscal years beginning on or after September 1, 1995, the Portfolio is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversion may significantly affect the rate shown.
# Aggregate total investment return.
## Annualized.
18
<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
19
<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
20
<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 "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
21
<PAGE>
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 and,
secondarily, capital appreciation 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
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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
25
<PAGE>
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 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
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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.
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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% 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
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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% 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
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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 receives
compensation for entering into the loan and thereby increases its yield. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, 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. 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% 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 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,
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<PAGE>
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 that 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 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.
35
<PAGE>
The Directors of the Program are:
Arthur Zeikel*--President of the Investment Adviser and its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee; Member of the Investment Advisory Committees of the State of New
York Common Retirement Fund and the Howard Hughes Medical Institute; and
Director of Kimco Realty Corporation.
Walter Mintz--Special Limited Partner of Cumberland Associates (investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investment and consulting).
Stephen B. Swensrud--Chairman 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) for more than 140 registered investment companies and
provide investment advisory services to individuals and institutions. As of
April 30, 1997, the Investment Adviser and its affiliates had a total of
approximately $244.2 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 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>
36
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
BASED ON PAYMENT TO
AVERAGE NET INVESTMENT RATIO OF TOTAL EXPENSES, NET OF
ASSETS OF ADVISER FOR REIMBURSEMENT, TO AVERAGE NET ASSETS
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.................. 284,074 43.7 96,812 2.03% 3.11% 3.15% 2.27%
Quality Bond Portfolio.. 40,461 8.0 20,217 .00 .78 .85 .16
U.S. Government Securi-
ties Portfolio......... 52,827 10.5 4,466 .00 .78 .85 .21
Global Opportunity Port-
folio.................. 255,998 34.1 76,883 2.47 3.76 3.81 2.91
Growth Opportunity Port-
folio.................. 57,884 8.9 24,366 2.44 3.84 3.88 2.94
</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.
The Investment Adviser has also entered into sub-advisory agreements with
respect to Fundamental Value Portfolio, Global Opportunity Portfolio and
Growth Opportunity Portfolio with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), a wholly-owned, indirect subsidiary of ML & Co. and an
affiliate of the Investment Adviser, pursuant to which the Investment Advisor
pays MLAM U.K. a fee for providing investment advisory services to the
Investment Adviser with respect to each Portfolio in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K., but in
no event in excess of the amount that the Investment Adviser actually receives
for providing services to each Portfolio pursuant to each Investment Advisory
Agreement.
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 M. 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.
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.
37
<PAGE>
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 that 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 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 up to $11.00 per Class A and Class D account and up to $14.00
per Class B and Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by it under the
Transfer Agency Agreement. For purposes of the Transfer Agency Agreement, the
term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a wholly-owned subsidiary of ML&Co.
<TABLE>
<CAPTION>
TRANSFER
AGENCY FEE PAID
FOR THE YEAR ENDED
PORTFOLIO JANUARY 31, 1997
--------- ------------------
<S> <C>
Fundamental Value...................................... $242,300
Quality Bond........................................... $ 42,117
U.S. Government Securities............................. $ 25,551
Global Opportunity..................................... $209,106
Growth Opportunity..................................... $ 70,484
</TABLE>
38
<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, SRA-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 PricingSM 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 NYSE (generally, 4:00 P.M., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value as of 15 minutes after the
close of business on the NYSE, 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 NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE such orders shall be deemed received on the next
business day. The 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 $5.35) 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
PricingSM 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 PricingSM System is
set forth under "Merrill Lynch Select PricingSM 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
39
<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, UGMA, UTMA accounts in a CBA(R) account or CMA
SubAccount SM which participates in the Merrill Lynch Asset Builder SM
Service, provided the account 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 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 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 (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D
40
<PAGE>
Distribution Plan). 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 PricingSM 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 if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(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.
41
<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 if the initial sales charge
is waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(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.
42
<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 $1,000,000 or more, such purchase may be
subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Program will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
The following tables set forth information about the number of Class A and
Class D shares sold by each Portfolio for the fiscal year ended January 31,
1997, the aggregate net proceeds from such sales, the gross sales charges and
the amounts of such charges received by the Distributor and Merrill Lynch. No
CDSCs
43
<PAGE>
were paid to the Distributor with respect to redemption within one year of
purchase of Class A or Class D shares purchased subject to front-end sales
charge waivers.
<TABLE>
<CAPTION>
GROSS SALES CHARGES
------------------------------------
NO. OF AGGREGATE PAID TO
CLASS A SHARES NET TOTAL PAID TO MERRILL
PORTFOLIO SOLD PROCEEDS ($) AMOUNT ($) DISTRIBUTOR ($) LYNCH ($)
- --------- -------------- ------------ ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Fundamental Value....... 7,936 102,340 183 9 174
Quality Bond............ 1,729 5,246 0 0 0
U.S. Government Securi-
ties................... 3,546 36,344 0 0 0
Global Opportunity...... 5,866 65,458 98 3 95
Growth Opportunity...... 205,569 2,057,557 0 0 0
<CAPTION>
GROSS SALES CHARGES
------------------------------------
NO. OF AGGREGATE PAID TO
CLASS D SHARES NET TOTAL PAID TO MERRILL
PORTFOLIO SOLD PROCEEDS ($) AMOUNT ($) DISTRIBUTOR ($) LYNCH ($)
- --------- -------------- ------------ ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Fundamental Value....... 95,960 1,214,323 34,665 1,669 32,996
Quality Bond............ 29,757 292,294 4,677 307 4,370
U.S. Government Securi-
ties................... 14,460 147,648 1,829 120 1,709
Global Opportunity...... 93,756 1,043,467 28,819 1,415 27,404
Growth Opportunity...... 78,115 811,625 20,469 1,004 19,465
</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. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Program and certain other MLAM-
advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors."
Class A and Class D shares are offered at net asset value to certain employer
sponsored retirement or savings plans 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
44
<PAGE>
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.
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met.
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
45
<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.
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 after 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.
For the fiscal year ended January 31, 1997, 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......................................... 55,593
Quality Bond.............................................. 7,529
U.S. Government Securities................................ 5,590
Global Opportunity........................................ 51,643
Growth Opportunity........................................ 9,146
</TABLE>
46
<PAGE>
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 $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an IRA or following the death or
disability (as defined in the Code of 1986, as amended) of a shareholder.
Additional information concerning the waiver of the Class B CDSC is set forth
in the Statement of Additional Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
For the fiscal year ended January 31, 1997, the Distributor received CDSCs
from the Portfolios with respect to redemption of Class C shares, all of which
were paid to Merrill Lynch, as follows:
<TABLE>
<CAPTION>
CDSCS RECEIVED
PORTFOLIO BY DISTRIBUTOR ($)
--------- ------------------
<S> <C>
Fundamental Value......................................... 5,793
Quality Bond.............................................. 1,038
U.S. Government Securities................................ 358
Global Opportunity........................................ 4,084
Growth Opportunity........................................ 1,138
</TABLE>
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
47
<PAGE>
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 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
48
<PAGE>
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, 1997, the Portfolios paid the
Distributor the amounts set forth below under the Plans.
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS D
DISTRIBUTION PLAN DISTRIBUTION PLAN DISTRIBUTION PLAN
------------------- ------------------- -------------------
ACCOUNT MAINTENANCE ACCOUNT MAINTENANCE
AND DISTRIBUTION AND DISTRIBUTION ACCOUNT MAINTENANCE
PORTFOLIO FEES FEES FEES
- --------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Fundamental Value....... $283,793 $117,326 $8,573
Quality Bond............ $ 29,716 $ 12,944 $ 819
U.S. Government Securi-
ties................... $ 28,821 $ 11,916 $ 664
Global Opportunity...... $237,750 $ 79,435 $5,122
Growth Opportunity...... $ 52,397 $ 24,977 $1,192
</TABLE>
Payments under the Distribution Plans are based upon a percentage of average
daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues
49
<PAGE>
consist of the account maintenance fees, distribution fees and CDSCs, and the
expenses consist of financial consultant compensation.
The table below sets forth information, with respect to Class B and Class C
shares, concerning direct cash revenues and expenses for the period February 1,
1995 (commencement of operations) to December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT BY WHICH AMOUNT BY WHICH
DIRECT CASH DIRECT CASH
EXPENSES EXCEEDED EXPENSES EXCEEDED
DIRECT CASH % OF CLASS B DIRECT CASH % OF CLASS C
REVENUES AS OF NET ASSETS AT REVENUES AS OF NET ASSETS AT
PORTFOLIO DECEMBER 31, 1996 ($) DECEMBER 31, 1996 DECEMBER 31, 1996 ($) DECEMBER 31, 1996
- --------- --------------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Fundamental Value....... 47,422* .14 86,100* .60
Quality Bond............ 14,254 .30 7,370* .39
U.S. Government Securi-
ties................... 7,638 .18 6,256* .35
Global Opportunity...... 34,604* .12 54,368* .54
Growth Opportunity...... 39,691 .47 13,696* .33
</TABLE>
- --------
* Revenues exceed expenses by this amount.
The table below sets forth information, with respect to Class B and Class C
shares, concerning fully allocated revenues and expenses for the period
February 1, 1995 (commencement of operations) to December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT BY WHICH FULLY AMOUNT BY WHICH FULLY
ALLOCATED ALLOCATED
EXPENSES EXCEEDED EXPENSES EXCEEDED
FULLY ALLOCATED % OF CLASS B FULLY ALLOCATED % OF CLASS C
REVENUES AS OF NET ASSETS AT REVENUES AS OF NET ASSETS AT
PORTFOLIO DECEMBER 31, 1996 ($) DECEMBER 31, 1996 DECEMBER 31, 1996 ($) DECEMBER 31, 1996
- --------- --------------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Fundamental Value....... 950,000 2.9 243,000 1.7
Quality Bond............ 186,000 4.0 46,000 2.4
U.S. Government Securi-
ties................... 134,000 3.1 29,000 1.6
Global Opportunity...... 810,000 2.8 203,000 2.0
Growth Opportunity...... 308,000 3.6 72,000 1.8
</TABLE>
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 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 Conduct Rules 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
50
<PAGE>
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.
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 NYSE), 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.
51
<PAGE>
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 or persons for whose benefit the IRA is maintained; 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 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 may be exercised by sending a notice of exercise along with a check
for the amount to be reinstated to the Transfer Agent within 30 days after the
date the request for redemption was accepted by the Transfer Agent or the
Distributor. Alternatively, the reinstatement privilege may be exercised
through the investor's Merrill Lynch Financial Consultant within 30 days after
the date the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The 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 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
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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. U.S. 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 PricingSM 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.
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.
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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, UGMA, UTMA accounts in a CBA(R) account or CMA
SubAccount SM which participates in the Merrill Lynch Asset Builder SM
Service, provided the account 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 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 current CMA SubAccount SM fees charged by Merrill Lynch,
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.
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,
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<PAGE>
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
of compensation 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) or
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 OTC 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 OTC 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, 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
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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 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
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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, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CLASS A CLASS B CLASS C CLASS D
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Quality Bond.............................. 6.30% 5.81% 5.88% 6.28%
U.S. Government Securities................ 6.67% 6.21% 6.16% 6.44%
</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 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 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
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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 (or, in the case of certain SRA-IRA distributions,
25 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
$160,000) 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 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
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10% (or 25%) and 15% 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 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
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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 NYSE (generally 4:00 p.m., New
York time) on each day during which the NYSE 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 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
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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, 1997, the Program paid MLSPS $3,132 for
the securities price quotations to compute the net asset value of the
portfolios.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When a
Portfolio writes an 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 OTC 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 OTC market, the last bid price. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith 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. 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
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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
- --------- ---------- ---------- --------- ---------
Fundamental Value..................... 6,250,000 6,250,000 6,250,000 6,250,000
<S> <C> <C> <C> <C>
Quality Bond.......................... 6,250,000 6,250,000 6,250,000 6,250,000
U.S. Government Securities............ 26,250,000 26,250,000 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 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.
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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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<PAGE>
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
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
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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
73
<PAGE>
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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<PAGE>
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 ARROW/RIGHT ARROW]
Declining [DOWN ARROW]
Uncertain [UP ARROW/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.
75
<PAGE>
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-4
Weak 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.
LOCThe symbol "LOC" indicates that the rating is based on a letter of
credit issued by a commercial bank.
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78
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
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 LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY 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................................... 19
Investment Objectives and Policies........................................ 21
Fundamental Value Portfolio.............................................. 22
Quality Bond Portfolio................................................... 22
U.S. Government Securities Portfolio..................................... 23
Global Opportunity Portfolio............................................. 24
Growth Opportunity Portfolio............................................. 25
Other Investment Policies and Practices of the Portfolios................. 26
Investments in Equity Securities......................................... 26
Investments in Debt Securities........................................... 27
Investments in Securities Denominated in Foreign Currencies.............. 31
Investments in Money Market Securities................................... 31
When-Issued Securities, Forward Commitments and Delayed Delivery
Transactions............................................................ 31
Standby Commitment Agreements............................................ 32
Repurchase Agreements and Purchase and Sale Contracts.................... 32
Indexed and Inverse Securities........................................... 33
Lending of Portfolio Securities.......................................... 33
Portfolio Strategies Involving Options and Futures....................... 34
Illiquid Securities...................................................... 34
Investment Restrictions.................................................. 35
Management of the Program................................................. 35
Board of Directors....................................................... 35
Management and Advisory Arrangements..................................... 36
Code of Ethics........................................................... 38
Transfer Agency Services................................................. 38
Purchase of Shares........................................................ 39
Continuous Offering...................................................... 39
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 43
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 45
Distribution Plans....................................................... 48
Limitations on the Payment of Deferred Sales Charges..................... 50
Redemption of Shares...................................................... 51
Reinstatement Privilege--Class A and Class D Shares...................... 52
Shareholder Services...................................................... 52
Portfolio Transactions and Brokerage...................................... 55
Performance Data.......................................................... 56
Taxes..................................................................... 57
Federal.................................................................. 57
State.................................................................... 59
Additional Information................................................... 59
Dividends and Distributions.............................................. 59
Determination of Net Asset Value......................................... 60
Organization of the Program.............................................. 62
Shareholder Reports...................................................... 63
Shareholder Inquiries.................................................... 63
Appendix A--Options and Futures Transactions.............................. 64
Appendix B--Ratings of Corporate Debt Securities.......................... 70
</TABLE>
Code # 18471-0597
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Builder Program, Inc.
[ART]
PROSPECTUS
May 23, 1997
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 and simple retirement accounts (collectively
"IRAs") for which Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") acts as custodian and CBASM 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 23, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the 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 23, 1997.
<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 years ended January 31, 1996 and 1997, the portfolio
turnover rates of the Portfolio were 51.37% and 80.60%.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio seeks a high level of current income and,
secondarily, capital appreciation 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 years ended January 31, 1996 and 1997, the portfolio turnover rates
of the Portfolio were 86.68% and 91.10%.
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
years ended January 31, 1996 and 1997, the portfolio turnover rates of the
Portfolio were 113.05% and 27.32%.
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 years ended January 31, 1997 the
portfolio turnover rates of the Portfolio were 83.14% and 125.68%.
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. See
"Portfolio Transactions and Brokerage--Portfolio Turnover." For the fiscal year
ended January 31, 1997 the portfolio turnover rate of the Portfolio was 51.63%.
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 ("NYSE"). 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 may borrow
up to an additional 5% of its total assets for temporary purposes, (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. 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.
d. 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.
7
<PAGE>
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.
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 (64)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
Joe Grills (62)--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;
Member of the Investment Advisory Committee of the Howard Hughes Medical
Institute; Director, Duke Management Company and the LaSalle Street Fund since
1995; Director, Kimco Realty Corporation since January 1997.
Walter Mintz (68)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Robert S. Salomon, Jr. (60)--Director (2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman
and CEO of Salomon Brothers Asset Management 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 from 1975 to 1991.
Melvin R. Seiden (66)--Director(2)--780 Third Avenue, New York, New York
10017. Director of Silbanc Properties, Ltd. (real estate, investments and
consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
8
<PAGE>
Stephen B. Swensrud (63)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Associates (financial consultants).
Terry K. Glenn (56)--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.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
Joseph T. Monagle, Jr. (48)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and FAM since 1990; Vice President of the
Investment Adviser from 1978 to 1990; Senior Vice President of Princeton
Services since 1993.
Kevin M. Rendino (30)--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.
Thomas R. Robinson (53)--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 (62)--Vice President(1)(2)--Vice President of the Investment
Adviser since 1986.
Gregory Mark Maunz (44)--Vice President(1)(2)--Vice President of the
Investment Adviser since 1985 and Portfolio Manager since 1984.
Lawrence R. Fuller (56)--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 (36)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990.
Gerald M. Richard (48)--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.
- --------
(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.
At April 30, 1997, the Directors and officers of the Program as a group (16
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
9
<PAGE>
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, 1997, were allocated to
each Portfolio on the basis of the size of the Portfolio: Fundamental Value
Portfolio, $10,606; Quality Bond Portfolio, $2,174; U.S. Government Securities
Portfolio, $3,030; Global Opportunity Portfolio, $8,594 and Growth Opportunity
Portfolio, $865.
The following table sets forth for the fiscal year ended January 31, 1997,
compensation paid by the Program to the unaffiliated Directors, and for the
calendar year ended December 31, 1996, 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
COMPENSATION BENEFITS ACCRUED AS FROM MLAM/FAM
FROM THE PART OF PROGRAM ADVISED FUNDS
NAME OF DIRECTOR PROGRAM EXPENSES PAID TO DIRECTORS
---------------- ------------ --------------------- ------------------
<S> <C> <C> <C>
Joe Grills(/1/).......... $5,000 None $164,000
Walter Mintz(/1/)........ $5,000 None $164,000
Robert S. Salomon,
Jr.(/1/)................ $5,000 None $187,167
Melvin R. Seiden(/1/).... $5,000 None $164,000
Stephen B. Swensrud(/1/). $4,500 None $154,250
</TABLE>
- --------
(1) In addition to the Program, the Directors serve on the boards of MLAM/FAM
Advised Funds as follows: Joe Grills (18 registered investment companies
consisting of 38 portfolios), Walter Mintz (18 registered investment
companies consisting of 38 portfolios), Robert S. Salomon (18 registered
investment companies consisting of 38 portfolios), Melvin R. Seiden (18
registered investment companies consisting of 38 portfolios), and Stephen
B. Swensrud (20 registered investment companies consisting of 49
portfolios).
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
10
<PAGE>
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.
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 table below sets forth for the fiscal years ended January 31, 1997 and
1996, the total advisory fee paid by each Portfolio to the Investment Adviser:
<TABLE>
<CAPTION>
FEE AMOUNT ($)
-----------------------------
FOR THE FISCAL YEAR ENDED
-----------------------------
PORTFOLIO 1997 1996
--------- ------------ ---------------
<S> <C> <C>
Fundamental Value.............................. 284,074 128,082(/4/)
Quality Bond................................... 40,461(1) 23,114(/5/)
U.S. Government Securities..................... 52,827(1) 37,948(/5/)
Global Opportunity............................. 255,998(2) 146,953(/6/)
Growth Opportunity............................. 57,884(3) (/7/)
</TABLE>
- --------
(1) The Investment Adviser reimbursed the Portfolio for all of the advisory
fee. In addition, the Investment Advisor reimbursed the Quality Bond
Portfolio for $227,819, and U.S. Government Securities Portfolio for
$259,312, respectively, of certain other expenses (excluding 12b-1 fees).
(2) The Investment Adviser reimbursed $87,899 of the advisory fee.
(3) The Investment Adviser reimbursed $17,978 of the advisory fee.
(4) The Investment Adviser reimbursed $23,907 of the advisory fee.
(5) 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).
(6) The Investment Adviser reimbursed $33,240 of certain other expenses
(excluding 12b-1 fees).
(7) The Growth Opportunity Portfolio commenced operations on February 2, 1996.
As described in the Prospectus, the Investment Adviser has entered into sub-
advisory agreements with respect to Fundamental Value Portfolio, Global
Opportunity Portfolio and Growth Opportunity Portfolio with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K.
provides investment advisory services to the Investment Adviser with respect
to each Portfolio.
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
11
<PAGE>
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), 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 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 NYSE (generally, 4:00 P.M., New York time), which
12
<PAGE>
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE, on the day the 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 NYSE on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the NYSE, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the 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 $5.35) to confirm a sale of
shares to such customers.
Each Portfolio issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of 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 (except
that Class B shareholders may vote upon any material changes to expenses
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Investment Adviser, or its affiliate, FAM.
Funds advised by the Investment Adviser or FAM that utilize 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, 1997 was $183, of which
$9 and $174 were received by the Distributor and Merrill Lynch, respectively.
The gross sales charge for the sale of Class A shares of the Fundamental Value
Portfolio
13
<PAGE>
for the fiscal year ended January 31, 1996 was $96, of which $5 and $91 were
received by the Distributor and Merrill Lynch, respectively. There was no
gross sales charge for the sale of Class A shares of the U.S. Government
Securities Portfolio for the fiscal year ended January 31, 1997. 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, 1997 was $98, of which $3 and
$95 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.
There was no gross sales charge for the sale of Class A shares of the Quality
Bond Portfolio for the fiscal year ended January 31, 1997. There was no gross
sales charge for the sale of Class A shares of the Growth Opportunity
Portfolio for the fiscal year ended January 31, 1997. The gross sales charge
for the sale of Class D shares of the Fundamental Value Portfolio for the
fiscal year ended January 31, 1997 was $34,665, of which $1,669 and $32,996,
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, 1997 was $4,677, of which $307
and $4,370 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,
1997 was $1,829, of which $120 and $1,709 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, 1997 was $28,819, of which $1,415 and $27,404 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 gross sales
charge for the sale of Class D shares of the Growth Opportunity Portfolio for
the fiscal year ended January 31, 1997 was $20,469, of which $1,004 and
$19,465 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 an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or their own account and
to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account (including a pension, profit-
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the 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
14
<PAGE>
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.
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,
15
<PAGE>
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 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
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.
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.
16
<PAGE>
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 Conduct Rules of 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
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,
1997, with respect to Class B and Class C shares indicating the maximum
allowable payments that can be made under the NASD
17
<PAGE>
maximum sales charge rule and, with respect to Class B shares, the
Distributor's voluntary maximum for the periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JANUARY 31, 1997
---------------------------------------------------------------------------
(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)
-------- --------- ---------- ------- -------------- --------- ------------
CLASS B SHARES, FOR THE
PERIOD FEBRUARY 1, 1995
(COMMENCEMENT OF
OPERATIONS) TO JANUARY
31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted
Fundamental Value Port-
folio.................. $25,471 $1,592 $156 $1,748 $374 $1,374 $261
Quality Bond Portfolio.. $ 4,197 $ 262 $ 26 $ 288 $ 38 $ 250 $ 24
Global Opportunity Port-
folio.................. $21,984 $1,374 $114 $1,488 $310 $1,178 $229
U.S. Government Securi-
ties Portfolio......... $ 3,794 $ 237 $ 24 $ 261 $ 35 $ 226 $ 23
Growth Opportunity Port-
folio.................. $ 7,888 $ 493 $ 25 $ 518 $ 48 $ 470 $ 74
Under Distributor's Vol-
untary Waiver
Fundamental Value Port-
folio.................. $25,471 $1,592 $127 $1,719 $374 $1,345 $261
Quality Bond Portfolio.. $ 4,197 $ 262 $ 21 $ 283 $ 38 $ 245 $ 24
Global Opportunity Port-
folio.................. $21,984 $1,374 $110 $1,484 $310 $1,174 $229
U.S. Government Securi-
ties Portfolio......... $ 3,794 $ 237 $ 19 $ 256 $ 35 $ 221 $ 23
Growth Opportunity Port-
folio.................. $ 7,888 $ 493 $ 39 $ 532 $ 48 $ 484 $ 74
<CAPTION>
CLASS C SHARES, FOR THE
PERIOD FEBRUARY 1, 1995
(COMMENCEMENT OF
OPERATIONS) TO JANUARY
31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted
Fundamental Value Port-
folio.................. $13,954 $ 872 $ 84 $ 956 $130 $ 826 $113
Quality Bond Portfolio.. $ 2,220 $ 139 $ 13 $ 152 $ 13 $ 139 $ 10
Global Opportunity Port-
folio.................. $10,204 $ 638 $ 56 $ 694 $ 83 $ 611 $ 80
U.S. Government Securi-
ties Portfolio......... $ 1,896 $ 119 $ 12 $ 131 $ 12 $ 119 $ 10
Growth Opportunity Port-
folio.................. $ 4,200 $ 262 $ 13 $ 275 $ 20 $ 255 $ 35
</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.
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.
18
<PAGE>
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, UGMA, UTMA accounts in a CBA(R) account or CMA
SubAccount SM which participates in the Merrill Lynch Asset Builder SM
Service, provided the account 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 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 current CMA SubAccount SM fees charged by Merrill Lynch,
consult the Cash Management Account(R) Program description.
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
NYSE 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
19
<PAGE>
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 NYSE), 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 expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended
January 31, 1996 and 1997, the Distributor received CDSCs of $11,993 and
$55,593, with respect to redemptions of Class B shares of Fundamental Value
Portfolio, all of which was paid to Merrill Lynch. For the fiscal years ended
January 31, 1996 and 1997, the Distributor received CDSCs of $2,371 and $5,793,
with respect to redemptions of Class C shares of Fundamental Value Portfolio,
all of which was paid to Merrill Lynch. For the fiscal years ended January 31,
1996 and 1997, the Distributor received CDSCs of $1,288 and $7,529, with
respect to redemptions of Class B shares of Quality Bond Portfolio, all of
which was paid to
20
<PAGE>
Merrill Lynch. For the fiscal years ended January 31, 1996 and 1997, the
Distributor received CDSCs of $224 and $1,038, with respect to redemptions of
Class C shares of Quality Bond Portfolio, all of which was paid to Merrill
Lynch. For the fiscal years ended January 31, 1996 and 1997, the Distributor
received CDSCs of $12,061 and $51,643, with respect to redemptions of Class B
shares of Global Opportunity Portfolio, all of which was paid to Merrill
Lynch. For the fiscal years ended January 31, 1996 and 1997, the Distributor
received CDSCs of $1,357 and $4,084, with respect to redemptions of Class C
shares of Global Opportunity Portfolio, all of which was paid to Merrill
Lynch. For the fiscal years ended January 31, 1996 and 1997, the Distributor
received CDSCs of $2,636 and $5,590, with respect to redemptions of Class B
shares of U.S. Government Securities Portfolio, all of which was paid to
Merrill Lynch. For the fiscal years ended January 31, 1996 and 1997, the
Distributor received CDSCs of $255 and $358, with respect to redemptions of
Class C shares of U.S. Government Securities, all of which was paid to Merrill
Lynch. For the fiscal year ended January 31, 1997, the Distributor received
CDSCs of $9,146, with respect to redemptions of Class B shares of Growth
Opportunity Portfolio, all of which was paid to Merrill Lynch. For the fiscal
year ended January 31, 1997, the Distributor received CDSCs of $1,138, with
respect to redemptions of Class C shares of Growth Opportunity 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
Conduct Rules 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 by the Investment Adviser under the Investment
Advisory Agreement with the Program, and the expenses
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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
OTC market. Transactions in the OTC market generally are principal transactions
with dealers and the costs of such transactions involve dealer spreads. With
respect to the OTC 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 OTC 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 OTC 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 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
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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, 1997 the Fundamental Value Portfolio paid total
brokerage commissions of $141,506, of which $2,085, or 1.5%, was paid to
Merrill Lynch for effecting 1.4% 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,
1997 the Global Opportunity Portfolio paid total brokerage commissions of
$86,689, of which $1,813, or 2.1%, was paid to Merrill Lynch for effecting 2.7%
of the aggregate dollar amount of transactions in which the Portfolio paid
brokerage commissions. For the fiscal year ended January 31, 1997 the Growth
Opportunity Portfolio paid total brokerage commissions of $20,474, of which
$1,578, or 7.7%, was paid to Merrill Lynch for effecting 7.7% of the aggregate
dollar amount of transactions in which the Portfolio paid brokerage
commissions. For the fiscal years ended January 31, 1996 and 1997, the Quality
Bond Portfolio and the U.S. Government Securities Portfolio paid no brokerage
commissions.
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PORTFOLIO TURNOVER
Each Portfolio intends to comply with the various requirements of the
Internal Revenue Code of 1986, as amended (the "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 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 NYSE (generally,
4:00 P.M., New York time) on each day during which the NYSE is open for
trading. The NYSE is not open on New Year's Day, 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 Class B, Class C and Class D
shares of a Portfolio generally will be lower than the per share net asset
value of 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 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 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 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. 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.
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When a Portfolio writes an 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
OTC 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 OTC market, the last bid price. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Program.
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
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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
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 of compensation
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
U.S. 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 PricingSM 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
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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 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 certain 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 certain
money market funds 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
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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 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 MLAM-advised
mutual funds, 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 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 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
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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.
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
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 (or, in the case of certain SRA-IRA distributions,
25 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
$160,000) 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
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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 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 10% (or 25%) and
15% 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 Global Opportunity Portfolio and the Growth Opportunity Portfolio, to a
lesser degree, may invest in high yield bonds, as described in the Prospectus.
The U.S. Government Securities and Global Opportunity Portfolios may also
invest in asset-backed securities, mortgaged-backed securities and derivative
mortgage-backed securities. Furthermore, all of the Portfolios may invest in
instruments the return on which includes nontraditional features such as
indexed principal or interest payments. These instruments may be subject to
special tax rules under which a Portfolio may be required to accrue and
distribute income before amounts due under the obligations are paid.
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.
<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>
One year ended January
31, 1997.............. 16.73% $1,167.30 17.79% $1,177.90
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 18.40% $1,401.90 19.08% $1,418.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 23.20% $1,232.00 21.79% $1,217.90
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, 1997.............. 40.19% $1,401.90 41.81% $1,418.10
QUALITY BOND PORTFOLIO
- ----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. -1.59% $ 984.10 -2.19% $ 978.10
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 3.69% $1,075.20 3.52% $1,071.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 2.51% $1,025.10 1.62% $1,016.20
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, 1997.............. 7.52% $1,075.20 7.17% $1,071.70
</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>
One year ended January
31, 1997.............. 0.57% $1,005.70 0.00% $1,000.00
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 7.76% $1,161.30 7.70% $1,159.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 4.76% $1,047.60 3.90% $1,039.00
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 15.47% $1,154.70 14.53% $1,145.30
<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, 1997.............. 16.13% $1,161.30 15.99% $1,159.90
GLOBAL OPPORTUNITY PORT-
FOLIO
- ------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 6.76% $1,067.60 7.67% $1,076.70
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 8.93% $1,186.66 9.41% $1,197.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 12.68% $1,126.80 11.67% $1,116.70
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, 1997.............. 18.66% $1,186.66 19.71% $1,197.10
GROWTH OPPORTUNITY PORT-
FOLIO
- ------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the fis-
cal year ended January
31, 1997.............. 11.74% $1,174.10 12.84% $1,128.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the fis-
cal year ended January
31, 1997.............. 17.90% $1,179.00 16.80% $1,168.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the fis-
cal year ended January
31, 1997.............. 11.71% $1,117.10 12.80% $1,128.00
</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>
FUNDAMENTAL VALUE PORT-
FOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 20.82% $1,208.20 16.38% $ 1,163.80
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 20.35% $1,448.40 18.12% $ 1,395.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 21.82% $1,218.20 22.82% $ 1,228.20
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, 1997.............. 44.84% $1,448.40 39.53% $ 1,395.30
QUALITY BOND PORTFOLIO
- ----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 0.60% $1,006.00 -1.84% $ 981.60
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 4.86% $1,099.50 3.44% $ 1,069.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 1.55% $1,015.50 2.25% $ 1,022.50
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 8.27% $1,082.70 8.99% $ 1,089.90
<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, 1997.............. 9.95% $1,099.50 6.99% $ 1,069.90
U.S. GOVERNMENT SECURI-
TIES PORTFOLIO
- -----------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 2.85% $1,028.50 0.31% $ 1,003.10
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1997.............. 8.97% $1,187.40 7.47% $ 1,154.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One year ended January
31, 1997.............. 3.83% $1,038.30 4.49% $ 1,044.90
Inception (February 1,
1995) through the fis-
cal year ended January
31, 1996.............. 14.36% $1,143.60 15.13% $ 1,151.30
<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, 1997.............. 18.74% $1,187.40 15.49% $ 1,154.90
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS 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
----------------- ----------------- ----------------- -----------------
GLOBAL OPPORTUNITY PORT-
FOLIO
- ------------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year ended January
31, 1997.............. 10.61% $1,106.10 6.65% $1,066.50
Inception (February 1,
1995) through the
fiscal year
ended January 31,
1997.................. 10.71% $1,225.60 8.71% $1,181.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year ended January
31, 1997.............. 11.61% $1,116.10 12.56% $1,125.60
Inception (February 1,
1995) through the
fiscal 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
fiscal year
ended January 31,
1997.................. 22.56% $1,225.60 18.17% $1,181.70
GROWTH OPPORTUNITY PORT-
FOLIO
- ------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the
fiscal year
ended January 31,
1997.................. 15.75% $1,157.00 11.65% $1,116.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the
fiscal year
ended January 31,
1997.................. 16.70% $1,167.00 17.80% $1,178.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 2,
1996) through the
fiscal year
ended January 31,
1997.................. 15.70% $1,157.00 11.62% $1,116.20
</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.
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
35
<PAGE>
Class D shares; U.S. Government Securities Portfolio Series Common Stock which
consists of 26,250,000 Class A shares, 26,250,000 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, 1997,
is calculated as set forth below:
<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.............. $ 209,226 $34,827,598 $15,021,781 $4,180,092 $ 129,067 $30,468,965 $10,658,359 $2,596,268
========== =========== =========== ========== ========== =========== =========== ==========
Number of Shares
Outstanding............ 15,411 2,600,676 1,121,527 308,620 10,815 2,569,917 900,077 217,736
========== =========== =========== ========== ========== =========== =========== ==========
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 13.58 $ 13.39 $ 13.39 $ 13.54 $ 11.93 $ 11.86 $ 11.84 $ 11.92
Sales Charge(1)......... .75 ** ** .75 .66 ** ** .66
---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
Offering Price.......... $ 14.33 $ 13.39 $ 13.39 $ 14.29 $ 12.59 $ 11.86 $ 11.84 $ 12.58
========== =========== =========== ========== ========== =========== =========== ==========
<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.............. $2,253,978 $ 4,824,038 $ 1,885,012 $ 452,114 $4,485,747 $4,514,545 $ 1,757,414 $ 312,648
========== =========== =========== ========== ========== =========== =========== ==========
Number of Shares
Outstanding............ 230,122 492,756 192,563 46,182 439,890 442,746 172,388 30,648
========== =========== =========== ========== ========== =========== =========== ==========
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 9.79 $ 9.79 $ 9.79 $ 9.79 $ 10.20 $ 10.20 $ 10.19 $ 10.20
Sales Charge(1)......... .41 ** ** .41 .43 ** ** .43
---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
Offering Price.......... $ 10.20 $ 9.79 $ 9.79 $ 10.20 $ 10.63 $ 10.20 $ 10.19 $ 10.63
========== =========== =========== ========== ========== =========== =========== ==========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
GROWTH OPPORTUNITY PORTFOLIO
--------------------------------------
CLASS A CLASS B CLASS C CLASS D
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Net Assets.............................. $57,448 $9,816,397 $4,648,954 $818,999
======= ========== ========== ========
Number of Shares Outstanding............ 4,873 840,723 398,309 69,522
======= ========== ========== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 11.79 $ 11.68 $ 11.67 $ 11.78
Sales Charge(1)......................... .65 ** ** .65
------- ---------- ---------- --------
Offering Price.......................... $ 12.44 $ 11.68 $ 11.67 $ 12.43
======= ========== ========== ========
</TABLE>
- --------
(1) For Class A and Class D shares of each Portfolio as follows: Fundamental
Value, Global Opportunity and Growth 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 LLP, 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. After the end of each year, shareholders will receive Federal
income tax information regarding dividends and capital gains distributions.
37
<PAGE>
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto which the 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 April 30, 1997, 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
PORTFOLIO OF PORTFOLIO
--------- ------------
<S> <C>
Quality Bond................................... 21.0%
U.S. Government Securities..................... 38.6%
</TABLE>
38
<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, Growth Opportunity, Quality Bond and US Government Securities
Portfolios of the Merrill Lynch Asset Builder Program, Inc. as of January 31,
1997, the related statements of operations for the year then ended and changes
in net assets for the two year period then ended and the financial highlights
for the two year period then ended. These financial statements and the
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at January
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fundamental
Value, Global Opportunity, Growth Opportunity, Quality Bond and US Government
Securities Portfolios of the Merrill Lynch Asset Builder Program, Inc. as of
January 31, 1997, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods, in conformity
with generally accepted accounting principles.
Deloitte & Touche llp
Princeton, New Jersey
March 14, 1997
39
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Fundamental Value Portfolio
LATIN Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Oil--International 45,000 Yacimientos Petroliferos Fiscales
S.A. (ADR)* $ 862,750 $ 1,254,375 2.3%
Total Investments in Latin America 862,750 1,254,375 2.3
MIDDLE
EAST
Israel Computer Services 68,500 Scitex Corp. Ltd. 762,904 736,375 1.4
Total Investments in the Middle East 762,904 736,375 1.4
NORTH
AMERICA
United States Airlines 80,000 ++Mesa Air Group, Inc. 696,742 520,000 1.0
Athletic Footwear 17,500 Reebok International Ltd. 507,324 831,250 1.5
Auto--Related 60,900 ++National Auto Credit, Inc. 623,556 662,288 1.2
Automotive 35,000 Ford Motor Co. 1,078,176 1,124,375 2.1
16,500 General Motors Corp. 800,012 973,500 1.8
----------- ----------- ------
1,878,188 2,097,875 3.9
Banking 12,500 Bankers Trust New York Corp. 796,351 1,062,500 2.0
65,000 ++Hibernia Corp. (Class A) 751,258 861,250 1.6
----------- ----------- ------
1,547,609 1,923,750 3.6
Beverage & 20,000 Seagram Company Ltd. (The) 679,112 792,500 1.5
Entertainment
Chemicals 1,500 Great Lakes Chemical Corp. 70,098 64,688 0.1
30,000 ++Millennium Chemicals Inc. 613,498 596,250 1.1
----------- ----------- ------
683,596 660,938 1.2
Entertainment 30,000 ++Harrah's Entertainment, Inc. 556,740 585,000 1.1
Environmental 95,600 ++Allwaste Inc. 526,415 513,850 1.0
Services
Financial Services 8,000 Student Loan Marketing Association 491,605 871,000 1.6
Hardware Products 20,000 Black & Decker Corp. 628,132 670,000 1.2
Health Care 37,500 ++Humana, Inc. 705,910 712,500 1.3
Home Builders 40,000 ++Beazer Homes USA, Inc. 659,255 645,000 1.2
Hospital Management 90,000 ++Transitional Hospitals Corp. 792,131 821,250 1.5
Hotels 12,500 ++ITT Corp. 550,401 714,063 1.3
Information 50,000 ++Apple Computer, Inc. 1,142,450 825,000 1.6
Processing 9,000 International Business Machines Corp. 968,223 1,415,250 2.6
82,700 ++Tandem Computers, Inc. 880,564 1,147,462 2.1
----------- ----------- ------
2,991,237 3,387,712 6.3
Machinery 32,500 ITT Industries Inc. 752,558 820,625 1.5
Medical Services 38,800 ++Pharmaceutical Product Development,
Inc. (a) 581,693 1,105,800 2.0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Metals--Non-Ferrous 40,000 ASARCO Inc. 1,084,257 1,100,000 2.0
12,500 Phelps Dodge Corp. 741,636 873,437 1.6
----------- ----------- ------
1,825,893 1,973,437 3.6
Oil--Domestic 49,900 ++American Exploration Co. 556,170 736,025 1.4
45,000 Occidental Petroleum Corp. 1,006,450 1,147,500 2.1
----------- ----------- ------
1,562,620 1,883,525 3.5
Oil Refiners 70,000 Total Petroleum (North America) Ltd. 783,735 743,750 1.4
Paper & Forest 25,000 International Paper Co. 967,851 1,021,875 1.9
Products 30,000 Louisiana-Pacific Corp. 765,796 622,500 1.1
----------- ----------- ------
1,733,647 1,644,375 3.0
Pharmaceuticals 7,000 Bristol-Myers Squibb Co. 513,760 889,000 1.6
Photography 9,000 Eastman Kodak Co. 638,640 780,750 1.4
Publishing/ 19,800 Dow Jones & Company, Inc. 714,018 784,575 1.5
Newspapers
Real Estate 30,000 Evans Withycombe Residential, Inc. 609,085 630,000 1.2
Investment Trusts
Retail 160,000 ++Charming Shoppes, Inc. 672,371 750,000 1.4
30,000 Dillard Department Stores Inc. 912,709 896,250 1.6
100,100 Hechinger Co. (Class A) 402,680 197,072 0.4
80,000 ++Kmart Corporation 846,317 890,000 1.6
50,000 ++Woolworth Corp. 634,936 1,018,750 1.9
----------- ----------- ------
3,469,013 3,752,072 6.9
Savings & Loans 80,000 Greater New York Savings Bank 794,627 1,130,000 2.1
27,200 ++PFF Bancorp Inc. 306,550 397,800 0.7
----------- ----------- ------
1,101,177 1,527,800 2.8
Semiconductors 20,000 ++Advanced Micro Devices Inc. 237,128 700,000 1.3
76,400 ++Integrated Device Technology, Inc. 879,634 792,650 1.4
30,900 ++National Semiconductor Corp. 545,679 857,475 1.6
15,000 Texas Instruments, Inc. 727,692 1,175,625 2.2
----------- ----------- ------
2,390,133 3,525,750 6.5
Software--Computer 68,600 ++Mentor Graphics Corporation 705,318 703,150 1.3
Steel 41,800 USX-US Steel Group, Inc. 1,248,759 1,321,925 2.4
85,000 ++WHX Corp. 877,229 733,125 1.4
----------- ----------- ------
2,125,988 2,055,050 3.8
Technology 110,000 ++Computervision Corp. 1,008,276 825,000 1.5
69,300 ++Exabyte Corp. 891,920 736,312 1.3
86,000 ++Micronics Computers, Inc. 285,678 198,875 0.4
----------- ----------- ------
2,185,874 1,760,187 3.2
Telecommunications 17,500 GTE Corp. 746,200 822,500 1.5
50,000 ++U S West Media Group 869,720 931,250 1.7
----------- ----------- ------
1,615,920 1,753,750 3.2
Total Investments in North America 37,827,025 42,742,572 78.8
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Fundamental Value Portfolio (concluded)
WESTERN Shares Value Percent of
EUROPE Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Kingdom Conglomerates 80,800 Hanson PLC (ADR)* $ 679,409 $ 606,000 1.1%
Total Investments in Western Europe 679,409 606,000 1.1
SHORT-TERM Face
SECURITIES Amount Issue
US Government Federal Home Loan Bank:
Agency US$ 1,000,000 5.21% due 3/11/1997 994,500 994,500 1.8
Obligations** 1,890,000 5.21% due 3/17/1997 1,877,965 1,877,965 3.5
2,000,000 Federal Home Loan Mortgage Corp.,
5.22% due 3/25/1997 1,984,920 1,984,920 3.7
Federal National Mortgage Association:
1,000,000 5.20% due 2/24/1997 996,678 996,678 1.8
3,200,000 5.19% due 3/07/1997 3,184,315 3,184,315 5.9
Total Investments in Short-Term
Securities 9,038,378 9,038,378 16.7
Total Investments $49,170,466 54,377,700 100.3
===========
Liabilities in Excess of Other Assets (139,003) (0.3)
=========== ======
Net Assets $54,238,697 100.0%
=========== ======
<FN>
*American Depositary Receipts (ADR).
**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.
(a)Applied Bioscience International Inc. was acquired by
Pharmaceutical Product Development, Inc.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Global Opportunity Portfolio
Face Value Percent of
COUNTRY Amount Foreign Government Obligations Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Denmark Dkr 5,000,000 Denmark Government Bonds, 8%
due 3/15/2006 $ 916,833 $ 882,136 2.0%
Finland Fim 2,000,000 Finnish Government Bonds, 7.25%
due 4/18/2006 451,354 442,351 1.0
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
France Frf 1,600,000 French Government OATS, 5.50%
due 4/25/2004 301,488 294,712 0.7
3,000,000 French Treasury Bill (BTAN), 5.50%
due 10/12/2001 584,058 565,063 1.3
----------- ----------- ------
885,546 859,775 2.0
Germany Bundesrepublik Deutschland:
DM 735,000 7.125% due 12/20/2002 513,394 496,805 1.1
850,000 6.50% due 10/14/2005 547,951 548,593 1.3
800,000 Treuhandanstalt, 6.875% due
6/11/2003 532,016 533,366 1.2
----------- ----------- ------
1,593,361 1,578,764 3.6
Italy Lit 1,655,000,000 Buoni Poliennali del Tesoro (Italian
Government Bonds), 8.50% due 1/01/2004 1,171,703 1,108,861 2.5
Spain Pta 80,000,000 Bonos del Estado (Spanish Government
Bonds), 7.90% due 2/28/2002 648,305 624,500 1.4
Sweden Government of Sweden:
Skr 2,000,000 10.25% due 5/05/2000 336,811 317,001 0.7
6,400,000 8% due 8/15/2007 1,004,679 955,422 2.2
----------- ----------- ------
1,341,490 1,272,423 2.9
Total Investments in Foreign
Government Obligations 7,008,592 6,768,810 15.4
US Government Obligations
United States US Treasury Notes:
US$ 500,000 5% due 1/31/1998 495,586 496,795 1.1
500,000 6.25% due 4/30/2001 502,773 500,155 1.2
Total Investments in US Government
Obligations 998,359 996,950 2.3
Total Investments in Foreign &
US Government Obligations 8,006,951 7,765,760 17.7
<CAPTION>
Shares
Industries Held US Stocks
<S> <C> <C> <C> <C> <C> <C>
United States Aerospace & Defense 3,500 AlliedSignal, Inc. 253,009 245,875 0.6
3,000 Northrop Grumman Corp. 197,765 234,375 0.5
3,000 United Technologies Corporation 110,912 209,250 0.5
----------- ----------- ------
561,686 689,500 1.6
Automobile Parts 7,000 ++Lear Corporation 234,500 261,625 0.6
Automobiles 4,200 General Motors Corp. 233,197 247,800 0.6
Banking 7,700 The Bank of New York Company, Inc. 192,063 282,013 0.6
2,400 BankAmerica Corp. 248,481 267,900 0.6
2,500 Citicorp 198,914 290,938 0.7
----------- ----------- ------
639,458 840,851 1.9
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Global Opportunity Portfolio (continued)
Shares Value Percent of
COUNTRY Industries Held US Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Building & 5,500 Oakwood Homes Corporation $ 124,764 $ 112,750 0.3%
(concluded) Construction
Chemicals 3,000 ++FMC Corporation 212,542 210,375 0.5
Computer Sales 1,700 International Business Machines Corp. 186,823 267,325 0.6
Computer Services 3,800 ++cisco Systems, Inc. 169,246 264,575 0.6
Computer Software 5,900 ++BMC Software, Inc. 220,226 255,175 0.6
5,175 ++Oracle Corp. (a) 167,872 200,531 0.4
----------- ----------- ------
388,098 455,706 1.0
Computer Technology 5,200 ++Gulfstream Aerospace Corporation 128,409 120,250 0.3
Computers 7,400 ++Cabletron Systems, Inc. 255,712 257,150 0.6
3,800 ++Compaq Computer Corp. 281,803 330,125 0.7
----------- ----------- ------
537,515 587,275 1.3
Diversified 6,500 Corning, Inc. 169,837 231,563 0.5
Drugs 3,500 ++Centocor, Inc. 127,149 133,438 0.3
Electrical Equipment 1,900 General Electric Company PLC 150,368 195,700 0.5
Energy 14,100 Edison International, Inc. 269,839 301,388 0.7
Engineering & 5,500 Foster Wheeler Corporation 230,178 212,438 0.5
Construction
Finance 5,000 Countrywide Credit Industries, Inc. 151,815 149,375 0.3
Financial Services 4,950 American Express Company 231,481 308,756 0.7
6,600 First Data Corp. 234,476 237,600 0.5
----------- ----------- ------
465,957 546,356 1.2
Foods 6,800 H.J. Heinz Company 223,452 273,700 0.6
Hardware Products 2,200 Black & Decker Corp. 74,735 73,700 0.2
Hospital Management 8,400 ++Health Management Associates, Inc.
(Class A) 189,374 232,050 0.5
Hospital Supplies 4,700 Abbott Laboratories 190,749 255,563 0.6
Insurance 2,050 Aetna Inc. (c) 156,273 161,950 0.4
4,500 Allstate Corp. 193,528 295,875 0.7
5,600 Travelers Group Inc. 294,513 293,300 0.7
3,600 UNUM Corporation 229,970 272,250 0.6
----------- ----------- ------
874,284 1,023,375 2.4
Leisure & Tourism 9,400 Brunswick Corporation 233,238 236,175 0.5
9,300 Carnival Corporation (Class A) 266,884 341,775 0.8
5,221 ++Viacom, Inc. (Class B) 191,700 178,819 0.4
----------- ----------- ------
691,822 756,769 1.7
Machinery 4,000 ++American Standard Companies, Inc. 130,473 162,500 0.4
Manufacturing 5,400 Fisher Scientific International Inc. 170,672 236,925 0.5
Natural Gas 5,000 El Paso Natural Gas Co. 251,413 269,375 0.6
5,600 Enron Corp. 213,414 231,000 0.5
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
3,100 IMC Global, Inc. 120,164 118,188 0.3
----------- ----------- ------
584,991 618,563 1.4
Oil Service 7,700 Dresser Industries, Inc. 162,474 260,838 0.6
2,100 Schlumberger Ltd. 132,364 233,363 0.5
----------- ----------- ------
294,838 494,201 1.1
Paper 2,600 Kimberly-Clark Corp. 199,836 253,500 0.6
Petroleum 4,500 Pennzoil Company 180,578 280,688 0.7
6,400 Unocal Corp. 215,286 269,600 0.6
----------- ----------- ------
395,864 550,288 1.3
Pharmaceuticals 4,600 American Home Products Corporation 270,780 291,525 0.7
3,200 Merck & Co., Inc. 194,992 290,400 0.6
----------- ----------- ------
465,772 581,925 1.3
Railroads 2,500 Burlington Northern Santa Fe 202,835 218,750 0.5
Real Estate 5,400 Prentiss Properties Trust 110,372 145,125 0.3
Investment Trust
Retail--Drug Stores 6,455 Rite Aid Corporation 210,038 258,200 0.6
Retail Trade 4,400 Sears, Roebuck & Co. 191,869 211,200 0.5
Steel 1,000 AK Steel Holding Corp. 38,999 40,250 0.1
Telecommunications 9,200 ++AirTouch Communications, Inc. 263,399 238,050 0.5
3,600 Bell Atlantic Corporation 205,486 242,100 0.6
2,053 TCI Pacific Communications
(Convertible Preferred) 192,635 190,929 0.4
----------- ----------- ------
661,520 671,079 1.5
Tobacco 1,700 Philip Morris Companies, Inc. 163,704 202,087 0.5
Total Investments in US Stocks 11,047,580 13,088,040 29.9
Foreign Stocks
Argentina Banking 17,707 Banco de Galicia y Buenos Aires
S.A. (ADR)* 298,216 431,608 1.0
15,237 Banco Frances del Rio de la Plata
S.A. (ADR)* 294,143 457,110 1.0
----------- ----------- ------
592,359 888,718 2.0
Petroleum 15,200 Yacimientos Petroliferos Fiscales
S.A. (ADR)* 315,268 423,700 1.0
Total Stocks in Argentina 907,627 1,312,418 3.0
Brazil Beverages 640,000 Companhia Cervejaria Brahma S.A.
PN (Preferred) 355,180 389,326 0.9
Oil--Related 2,500,000 Petroleo Brasileiro S.A. (Petrobras)
(Preferred) 296,363 480,631 1.1
Telecommunications 4,600 Telecomunicacoes Brasileiras S.A.--
Telebras PN (ADR)* 243,225 401,350 0.9
Total Stocks in Brazil 894,768 1,271,307 2.9
Canada Automotive Parts 7,300 Magna International, Inc. (Class A) 335,467 406,062 0.9
Conglomerates 15,800 Canadian Pacific, Ltd. 267,558 428,575 1.0
Entertainment 6,000 ++Imax Corporation 189,475 183,000 0.4
Fertilizers 5,300 Potash Corp. of Saskatchewan, Inc. 358,645 445,862 1.0
Total Stocks in Canada 1,151,145 1,463,499 3.3
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Global Opportunity Portfolio (continued)
Shares Value Percent of
COUNTRY Industries Held Foreign Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Finland Paper & Forest 18,500 ++UPM-Kymmene Corp. (b) $ 377,041 $ 361,957 0.8%
Products
Telecommunications & 7,000 Nokia Corp. AB (ADR)* 255,343 468,125 1.1
Equipment
Transportation 9,000 Finnlines OY 167,834 224,949 0.5
Total Stocks in Finland 800,218 1,055,031 2.4
France Insurance 10,600 Scor S.A. 409,263 381,447 0.9
Semi-Conductor 7,500 ++SGS-Thompson Microelectronics N.V.
Capital Equipment (NY Registered) 274,852 530,625 1.2
Steel 25,900 Usinor-Sacilor S.A. 408,710 368,127 0.8
Tires 7,200 Compagnie Generale des Establissement
Michelin S.A. (Class B) 328,953 412,861 1.0
Total Stocks in France 1,421,778 1,693,060 3.9
Germany Apparel 2,100 ++Puma AG 68,994 65,248 0.2
Chemicals 600 ++Henkel KGaA 26,670 29,520 0.1
5,400 ++Henkel KGaA (Preferred) 229,478 274,252 0.6
----------- ----------- ------
256,148 303,772 0.7
Electronics 7,950 Siemens AG 401,514 389,929 0.9
Machinery & 950 Mannesmann AG 312,291 367,660 0.8
Equipment
Total Stocks in Germany 1,038,947 1,126,609 2.6
Hong Kong Banking 20,000 HSBC Holdings PLC 312,430 463,315 1.1
Telecommunications 19,000 Hong Kong Telecommunications Ltd.
(ADR)* 352,215 327,750 0.7
Total Stocks in Hong Kong 664,645 791,065 1.8
Indonesia Telecommunications 11,000 P.T. Indonesian Satellite Corp. (ADR)* 367,699 309,375 0.7
Total Stocks In Indonesia 367,699 309,375 0.7
Italy Machinery 71,000 Danieli & Co. 266,366 300,220 0.7
Telecommunications 88,600 Societa Finanziara Telefonica S.p.A.
(STET) 253,451 437,310 1.0
Total Stocks in Italy 519,817 737,530 1.7
Japan Building & 34,000 Maeda Corp. 357,334 240,132 0.6
Construction 40,000 Okumura Corp. 367,731 216,172 0.5
----------- ----------- ------
725,065 456,304 1.1
Capital Goods 44,000 Mitsubishi Heavy Industries, Ltd. 337,710 316,931 0.7
Consumer--Electronics 6,000 Rohm Company Ltd. 331,262 393,564 0.9
Electrical Equipment 64,000 Mitsubishi Electric Corp. 448,473 364,884 0.8
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Electronics 17,000 Canon Inc. 306,699 360,479 0.8
20,000 Matsushita Electric Industrial Co.,
Ltd. 319,779 301,980 0.7
----------- ----------- ------
626,478 662,459 1.5
Financial Services 22,000 Nomura Securities Co., Ltd. 425,585 281,353 0.7
Insurance 40,000 Tokio Marine & Fire Insurance Co., Ltd. 442,529 363,036 0.8
Pharmaceuticals 19,000 Eisai Co., Ltd. 353,439 366,832 0.8
Textiles 60,000 Toray Industries Inc. 385,098 341,584 0.8
Tires & Rubber 21,000 Bridgestone Corp. 364,639 360,396 0.8
Warehouse & Storage 36,000 Mitsui-Soko Co., Ltd. 307,384 198,416 0.5
Total Stocks in Japan 4,747,662 4,105,759 9.4
Mexico Beverages 8,000 Panamerican Beverages, Inc. (Class A) 327,109 419,000 1.0
Conglomerates 12,800 Grupo Carso, S.A. de C.V. (ADR)* 203,726 155,200 0.3
Multi-Industry 178 Grupo Financiero Inbursa, S.A. de
C.V. (ADR)* 3,584 3,115 0.0
Paper & Forest 15,300 Kimberly-Clark de Mexico, S.A. de C.V 272,751 317,085 0.7
Producers
Telecommunications 12,800 ++Global Telecommunications Solutions,
Inc. (ADR)* 60,800 73,600 0.2
Total Stocks in Mexico 867,970 968,000 2.2
Netherlands Banking 5,400 ABN AMRO Holding N.V. 302,413 355,441 0.8
Total Stocks in the Netherlands 302,413 355,441 0.8
Norway Transportation 42,089 Color Line ASA 164,462 223,602 0.5
Services
Total Stocks in Norway 164,462 223,602 0.5
Philippines Beverages 82,000 San Miguel Corp. (Class B) 272,811 330,243 0.7
Total Stocks in the Philippines 272,811 330,243 0.7
South Korea Engineering & 4,900 ++Hyundai Engineering & Construction 63,847 23,275 0.0
Construction Co., Ltd. (GDR)**(d)
Total Stocks in South Korea 63,847 23,275 0.0
Spain Petroleum 9,400 Repsol S.A. (ADR)* 308,300 372,475 0.9
Total Stocks in Spain 308,300 372,475 0.9
Sweden Banking 16,200 Sparbanken Sverige AB (Class A) 207,538 257,292 0.6
Investment 26,300 Bure Investment AB 243,251 385,013 0.9
Management
Total Stocks in Sweden 450,789 642,305 1.5
Switzerland Electrical Equipment 285 BBC Brown Boveri & Cie (Bearer) 304,247 364,512 0.8
Pharmaceuticals 6,000 ++Novartis AG (ADR)* (e) 285,354 341,250 0.8
Total Stocks in Switzerland 589,601 705,762 1.6
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Global Opportunity Portfolio (concluded)
Shares Value Percent of
COUNTRY Industries Held Foreign Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Kingdom Banking 29,000 National Westminster Bank PLC $ 309,851 $ 358,535 0.8%
Beverages 46,300 Grand Metropolitan PLC 324,693 344,639 0.8
Chemicals 7,100 Imperial Chemical Industries PLC 91,648 85,845 0.2
7,500 Imperial Chemical Industries PLC (ADR)* 389,042 368,437 0.8
----------- ----------- ------
480,690 454,282 1.0
Electrical Equipment 58,800 General Electric Co. PLC (Ordinary) 316,394 367,485 0.9
Pharmaceuticals 24,500 Glaxo Wellcome PLC 340,903 392,416 0.9
Retail 37,000 Boots Company PLC 356,406 392,813 0.9
Steel 134,000 British Steel PLC 358,843 321,029 0.7
Telecommunications 94,000 Vodafone Group PLC 329,936 406,714 0.9
Total Stocks in the United Kingdom 2,817,716 3,037,913 6.9
Total Investments in Foreign Stocks 18,352,215 20,524,669 46.8
Total Investments in US & Foreign
Stocks 29,399,795 33,612,709 76.7
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
<S> <C> <C> <C> <C> <C> <C>
Commercial US$1,516,000 General Electric Capital Corp.,
Paper*** 5.58% due 2/03/1997 1,515,530 1,515,530 3.4
Total Investments in Short-Term
Securities 1,515,530 1,515,530 3.4
Total Investments $38,922,276 42,893,999 97.8
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts++++ 656,544 1.5
Other Assets Less Liabilities 302,116 0.7
----------- ------
Net Assets $43,852,659 100.0%
=========== ======
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the
Portfolio.
(a)Name changed from Oracle Systems Corp.
(b)Name changed as a result of the merger of Kymmene Corporation and
Repola Ltd.
(c)Name changed from Aetna Life & Casualty Co.
(d)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(e)Name changed from Sandoz AG.
++Non-income producing security.
++++Forward foreign exchange contracts as of January 31, 1997 were
as follows:
<CAPTION>
Foreign Expiration Unrealized
Currency Sold Date Appreciation
<S> <C> <C> <C>
Chf 450,000 February 1997 $ 10,933
DM 14,720,469 February 1997 201,822
Frf 10,575,000 February 1997 65,505
Pound 1,600,000 February 1997 144,461
Sterling
Pta 86,432,000 February 1997 28,355
YEN 508,000,000 February 1997 205,468
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$19,262,633) $656,544
========
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Growth Opportunity Portfolio
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Advertising 3,400 Interpublic Group of Companies, Inc. $ 153,631 $ 167,875 1.1%
Banking & Financial 13,000 H.F. Ahmanson & Company 421,546 487,500 3.2
3,000 State Street Boston Corp. 164,596 219,375 1.4
3,000 US Bancorp 129,706 136,500 0.9
1,200 Wells Fargo & Co. 312,573 365,700 2.4
----------- ----------- ------
1,028,421 1,209,075 7.9
Beverages 9,000 The Coca-Cola Company 424,084 520,875 3.4
Communication Equipment 2,000 ++cisco Systems, Inc. 147,250 139,250 0.9
3,000 ++FORE Systems, Inc. 89,250 87,375 0.6
8,000 Lucent Technologies, Inc. 420,273 434,000 2.8
5,000 Telefonaktiebolaget LM Ericsson (ADR)* 168,585 168,125 1.1
----------- ----------- ------
825,358 828,750 5.4
Computers 3,575 ++Compaq Computer Corp. 249,445 310,578 2.0
7,500 Hewlett-Packard Co. 408,847 394,688 2.6
----------- ----------- ------
658,292 705,266 4.6
Cosmetics 7,000 Gillette Company (The) 459,160 570,500 3.7
100 International Flavors & Fragrances Inc. 4,970 4,438 0.0
----------- ----------- ------
464,130 574,938 3.7
Electrical Equipment 100 Emerson Electric Company 8,482 9,875 0.1
4,000 General Electric Co. 338,764 412,000 2.7
2,000 Honeywell, Inc. 144,477 144,250 0.9
----------- ----------- ------
491,723 566,125 3.7
Electronics 2,500 Intel Corp. 321,227 405,313 2.6
Energy 7,000 El Paso Natural Gas Co. 328,755 377,125 2.5
8,000 Enron Corp. 344,341 330,000 2.2
----------- ----------- ------
673,096 707,125 4.7
Entertainment 6,400 ++Viacom, Inc. (Class A) 241,568 217,600 1.4
2,000 Walt Disney Co. 121,933 146,500 1.0
----------- ----------- ------
363,501 364,100 2.4
Financial Services 13,500 Federal National Mortgage Association 451,454 533,250 3.5
3,000 The Travelers Group, Inc. 107,348 157,125 1.0
----------- ----------- ------
558,802 690,375 4.5
Food 1,500 ConAgra, Inc. 70,590 75,750 0.5
5,000 Nabisco Holdings Corporation (Class A) 184,143 191,250 1.3
2,000 Sara Lee Corp. 64,076 79,000 0.5
100 Wrigley (Wm.) Jr. Co. 5,920 5,813 0.0
----------- ----------- ------
324,729 351,813 2.3
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Growth Opportunity Portfolio (concluded)
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Food Merchandising 4,000 Albertson's, Inc. $ 159,212 $ 140,000 0.9%
4,000 ++Meyer (Fred), Inc. 138,367 138,500 0.9
----------- ----------- ------
297,579 278,500 1.8
Hotels 1,000 Marriott International, Inc. 46,921 53,125 0.3
Household Products 500 Colgate-Palmolive Co. 37,260 48,375 0.3
2,500 Kimberly-Clark Corp. 191,350 243,750 1.6
2,000 Procter & Gamble Company 172,295 231,000 1.5
----------- ----------- ------
400,905 523,125 3.4
Information Processing 1,000 Electronic Data Systems Corp. (b) 54,463 46,000 0.3
10,000 First Data Corp. 374,336 360,000 2.3
----------- ----------- ------
428,799 406,000 2.6
Insurance 4,500 Aetna Inc. (c) 353,425 355,500 2.3
3,500 American International Group, Inc. 352,758 423,937 2.8
9,000 Travelers/Aetna Property Casualty Corp. 253,471 328,500 2.1
----------- ----------- ------
959,654 1,107,937 7.2
Leisure 3,500 Polygram N.V. (NY Registered Shares) 205,850 154,875 1.0
Medical Technology 3,000 ++Boston Scientific Corp. 189,613 204,750 1.3
6,000 Johnson & Johnson 286,361 345,750 2.3
----------- ----------- ------
475,974 550,500 3.6
Oil & Services 4,800 ++Diamond Offshore Drilling, Inc. 340,411 317,400 2.1
4,000 Schlumberger, Ltd. 416,591 444,500 2.9
----------- ----------- ------
757,002 761,900 5.0
Pharmaceuticals 4,000 ++Amgen, Inc. 238,125 225,500 1.5
1,500 Bristol-Myers Squibb Co. 144,171 190,500 1.2
5,500 Merck & Co., Inc. 363,473 499,125 3.3
7,000 Pfizer, Inc. 531,265 650,125 4.2
----------- ----------- ------
1,277,034 1,565,250 10.2
Photography 1,200 Eastman Kodak Co. 89,634 104,100 0.7
Pollution Control 500 WMX Technologies, Inc. 14,160 18,312 0.1
Restaurants 3,000 McDonald's Corp. 142,703 136,500 0.9
Retail--Specialty 6,800 Rite Aid Corp. 236,425 272,000 1.8
750 ++Staples, Inc. 13,000 15,375 0.1
----------- ----------- ------
249,425 287,375 1.9
Retail Stores 5,000 Wal-Mart Stores, Inc. 120,805 118,750 0.8
Software--Computer 5,875 Computer Associates International, Inc. 297,390 266,578 1.7
5,000 ++Microsoft Corp. 360,850 509,375 3.3
1,000 ++Oracle Corp. (a) 35,973 38,750 0.3
----------- ----------- ------
694,213 814,703 5.3
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Toys 8,000 Hasbro, Inc. 307,534 316,000 2.1
Travel & Lodging 1,000 Carnival Corporation (Class A) 26,786 36,750 0.2
Total Investments in Common Stocks 12,781,972 14,325,332 93.4
Face
Amount Short-Term Securities
US Government $ 524,000 Federal Home Loan Mortgage Corp., 523,840 523,840 3.4
Agency Obligations** 5.48% due 2/03/1997
Total Investments in Short-Term
Securities 523,840 523,840 3.4
Total Investments $13,305,812 14,849,172 96.8
===========
Other Assets Less Liabilities 492,626 3.2
----------- ------
Net Assets $15,341,798 100.0%
=========== ======
<FN>
*American Depositary Receipts (ADR).
**Certain US Government Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at the time
of purchase by the Portfolio.
(a)Name changed from Oracle Systems Corp.
(b)Name changed from General Motors Corp. (Class E).
(c)Name changed from Aetna Life & Casualty Co.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Quality Bond Portfolio
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Bonds & Notes Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C>
Asset-Backed AAA Aaa $150,000 Banc One Credit Card Master Trust, Series B, 7.55%
Securities--1.6% due 12/15/1999 $ 152,748 $ 151,922
Banking--21.3% AA- Aa3 150,000 Banc One Milwaukee, 6.625% due 4/15/2003 156,155 148,515
BBB+ A3 115,000 ++Bangkok Metropolitan Bank Public Co. Ltd., 7.25%
due 9/15/2005 113,956 112,618
A- A2 250,000 Bank of New York Company Inc. (The), 7.875% due
11/15/2002 276,675 262,300
BBB+ A1 100,000 Bank of New York Company Inc. (The), 7.97% due
12/31/2026 99,653 100,282
A+ A1 250,000 BankAmerica Corp., 6.65% due 5/01/2001 249,863 249,820
BBB- Baa3 200,000 Capital One Bank, 6.83% due 5/17/1999 202,324 201,410
A A2 253,000 First Chicago Corp., 9% due 6/15/1999 268,428 265,812
AA- Aa3 250,000 Norwest Corporation, 6.75% due 5/12/2000 249,628 252,573
BBB+ A2 200,000 Wells Fargo & Company, 8.375% due 5/15/2002 213,120 212,548
BBB A1 200,000 Wells Fargo Capital I, 7.96% due 12/15/2026 196,634 198,976
---------- ----------
2,026,436 2,004,854
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Quality Bond Portfolio (concluded)
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Bonds & Notes Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C>
Financial A A2 $ 200,000 Bear Stearns Co., 6.75% due 8/15/2000 $ 198,730 $ 200,778
Services--12.2% A A2 200,000 Beneficial Corporation, 7.75% due 11/08/2002 209,676 208,900
A A2 150,000 Dean Witter, Discover & Co., 6.30% due 1/15/2006 149,340 141,585
AA- A2 150,000 Pacific Mutual Life Insurance, Inc., 7.90%
due 12/30/2023 147,533 151,214
A- A2 150,000 Smith Barney Holdings, Inc., 6.875% due 6/15/2005 148,485 146,924
A A1 100,000 Travelers Capital II, 7.75% due 12/01/2036 100,170 96,142
A+ A1 200,000 The Travelers Group, Inc., 7.875% due 5/15/2025 205,616 204,932
---------- ----------
1,159,550 1,150,475
Financial A- A3 200,000 General Motors Acceptance Corp.,
Services-- 6.70% due 4/18/1997 203,006 200,448
Captive--2.1%
Financial A+ A1 200,000 American General Finance Corp., 7.70% due
Services-- 11/15/1997 203,396 202,436
Consumer--5.1% AA- Aa3 200,000 Associates Corp. of North America, 5.25%
due 9/01/1998 193,918 197,164
A+ Aa3 75,000 CIT Group Holdings, Inc., 7% due 9/30/1997 75,607 75,571
---------- ----------
472,921 475,171
Industrial-- AA- A1 100,000 Anheuser-Busch Co., Inc., 8.75% due 12/01/1999 107,905 105,974
Consumer Goods-- A+ A1 100,000 Bass America, Inc., 8.125% due 3/31/2002 105,928 105,896
5.6% A- A2 100,000 Sears, Roebuck & Co., 9.25% due 4/15/1998 106,444 103,601
AA A2 200,000 Wal-Mart Stores, Inc., 8.50% due 9/15/2024 207,350 210,804
---------- ----------
527,627 526,275
Industrial-- AA Aa2 175,000 BP America Inc., 9.375% due 11/01/2000 200,263 191,784
Energy--2.0%
Industrial-- A A2 150,000 Carnival Cruise Lines, Inc., 7.70% due 7/15/2004 156,745 155,160
Other--7.4% A+ A1 200,000 Ford Motor Credit Company, 7% due 9/25/2001 199,204 202,914
A- A3 90,000 IBP, Inc., 6.125% due 2/01/2006 82,690 84,357
BBB+ A3 250,000 Lockheed Martin Corp., 6.55% due 5/15/1999 249,880 250,972
---------- ----------
688,519 693,403
Industrial-- A A2 249,037 ++Disney Enterprises Inc., 6.85% due 1/10/2007** 248,870 247,294
Services--2.6%
Supranational-- AAA Aaa 200,000 Asian Development Bank, 6.125% due 3/09/2004 198,300 195,906
2.1%
US Government US Treasury Notes:
Obligations--9.3% AAA Aaa 150,000 7.125% due 10/15/1998 158,086 152,976
AAA Aaa 200,000 7.50% due 11/15/2001 210,406 209,938
AAA Aaa 200,000 5.875% due 2/15/2004 194,031 194,124
AAA Aaa 300,000 7.25% due 8/15/2004 321,937 314,343
---------- ----------
884,460 871,381
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Utilities-- AA- Aa2 200,000 Duke Power Co., 8% due 11/01/1999 208,016 207,798
Electric--8.4% AA- A1 250,000 Northern States Power Company, 7.125% due 7/01/2025 254,800 243,665
A- A3 180,000 Public Service Electric & Gas Co., 7.125%
due 11/01/1997 181,514 181,193
A A2 150,000 Virginia Electric & Power Co., 8.625% due 10/01/2024 166,200 158,094
---------- ----------
810,530 790,750
Utilities-- A+ A2 300,000 Alltel Corp., 6.75% due 9/15/2005 295,380 295,152
Communications--
3.1%
Yankees BBB+ Baa1 200,000 Crown Cork & Seal Company, Inc., 6.75% due 12/15/2003 198,926 197,820
Corporate--7.4% A A3 250,000 Mass Transit Railway Corp., 7.25% due 10/01/2005 260,325 250,577
A+ A2 100,000 Pohang Iron & Steel Company, Ltd., 7.375%
due 5/15/2005 101,816 100,805
BBB A3 150,000 State Development Bank of China, 7.375%
due 2/01/2007 149,601 149,601
---------- ----------
710,668 698,803
Yankees A+ A2 150,000 Province of Quebec, 7.125% due 2/09/2024 150,195 141,441
Sovereign--1.5%
Total Investments in Bonds & Notes--91.7% 8,729,473 8,635,059
SHORT-TERM
SECURITIES Issue
US Government & 758,000 Federal Home Loan Mortgage Corp., 5.48% 758,000 758,000
Agency due 2/03/1997
Obligations*--8.1%
Total Investments in Short-Term Securities--8.1% 758,000 758,000
Total Investments--99.8% $9,487,473 9,393,059
==========
Other Assets Less Liabilities--0.2% 22,083
----------
Net Assets--100.0% $9,415,142
==========
<FN>
*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.
**Subject to principal paydowns.
++The security may be offered and sold to "qualified institutional
investors" under Rule 144A of the Securities Act of 1933.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
53
<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> <C> <C> <C> <C> <C>
US Government & Federal Home Loan Mortgage Corporation $1,326,777 11.50 % 6/01/2019 $ 1,492,624
Agency Mortgage- Federal Home Loan Mortgage Corporation--
Backed Obligations*-- Gold Program 1,869,683 7.50 8/01/2025-10/01/2025 1,873,180
80.1% Federal Home Loan Mortgage Corporation--
Gold Program 1,000,000 7.00 1/01/2020 980,620
Federal Home Loan Mortgage Corporation--
Gold Program 2,770,686 6.50 2/01/2011-5/01/2011 2,725,909
Government National Mortgage Association 1,790,949 7.50 12/15/2022-10/01/2025 1,799,656
Total US Government & Agency Mortgage-Backed Obligations (Cost--$8,854,797) 8,871,989
US Government US Treasury Notes 700,000 6.00 8/15/1999 699,559
Obligations--13.6% US Treasury STRIPS**** 1,000,000 5.476++ 8/15/2000 806,120
Total US Government Obligations (Cost--$1,511,443) 1,505,679
SHORT-TERM
SECURITIES
US Government Federal National Mortgage Association, 1,000,000 5.25 2/13/1997 998,542
Agency Discount Note
Obligations***--9.0%
Face Amount Issue
Repurchase $481,000 Nikkos Securities Company, purchased on 1/31/1997 to
Agreements**--4.4% yield 5.51% to 2/03/1997 481,000
Total Investments in Short-Term Securities (Cost--$1,479,542) 1,479,542
Total Investments (Cost--$11,845,782)--107.1% 11,857,210
Liabilities in Excess of Other Assets--(7.1%) (786,856)
-----------
Net Assets--100.0% $11,070,354
===========
<FN>
*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 Agreements are fully collateralized by US Government &
Agency Obligations.
***Certain US Government Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of
purchase by the Portfolio.
****STRIPS--Separate Trading of Registered Interest and Principal of
Securities.
++Represents the yield-to-maturity on this zero coupon issue at the
time of purchase by the Portfolio.
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
-------------------------------------
55
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
Fundamental Global Growth Quality US Government
Value Opportunity Opportunity Bond Securities
As of January 31, 1997 Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Assets: Investments, at value*
(Note 1a) $54,377,700 $42,893,999 $14,849,172 $ 9,393,059 $11,857,210
Foreign cash (Note 1c) -- 612 -- -- --
Cash 5,013 107 9,484 1,089 777
Unrealized appreciation on
forward foreign exchange
contracts (Note 1b) -- 656,544 -- -- --
Receivables:
Securities sold 128,566 284,558 319,295 153,158 --
Interest -- 183,512 -- 157,437 89,243
Capital shares sold 141,339 160,850 149,379 6,276 3,217
Investment adviser (Note 2) -- -- -- 63,210 70,037
Dividends 24,747 42,378 13,826 -- --
Principal paydowns -- -- -- -- 13,309
Deferred organization expenses
(Note 1f) 22,240 51,891 64,510 12,735 27,849
Prepaid registration fees and
other assets (Note 1f) 99,094 46,558 12,346 61,682 45,987
----------- ----------- ----------- ----------- -----------
Total assets 54,798,699 44,321,009 15,418,012 9,848,646 12,107,629
----------- ----------- ----------- ----------- -----------
Liabilities: Payables:
Securities purchased 290,284 237,250 -- 361,750 973,896
Capital shares redeemed 72,665 53,130 14,951 26,389 12,379
Distributor (Note 2) 42,296 34,540 11,583 4,556 4,195
Investment adviser (Note 2) 29,300 27,192 7,874 -- --
Dividends to shareholders
(Note 1g) -- -- -- 16,399 18,474
Forward foreign exchange
contracts (Note 1b) -- 1,190 -- -- --
Accrued expenses and other
liabilities 125,457 115,048 41,806 24,410 28,331
----------- ----------- ----------- ----------- -----------
Total liabilities 560,002 468,350 76,214 433,504 1,037,275
----------- ----------- ----------- ----------- -----------
Net Assets: Net assets $54,238,697 $43,852,659 $15,341,798 $ 9,415,142 $11,070,354
=========== =========== =========== =========== ===========
Net Assets Class A Common Stock, $0.10
Consist of: par value++ $ 1,541 $ 1,081 $ 487 $ 23,012 $ 43,989
Class B Common Stock, $0.10
par value++++ 260,068 256,992 84,072 49,276 44,275
Class C Common Stock, $0.10
par value++++++ 112,153 90,008 39,831 19,256 17,239
Class D Common Stock, $0.10
par value++++++++ 30,862 21,774 6,952 4,618 3,065
Paid-in capital in excess
of par 45,653,660 38,384,675 13,442,355 9,467,890 10,947,717
Accumulated investment
loss--net (478,635) (10,827) (154,034) -- --
Undistributed (accumulated)
realized capital gains
(losses) on investments and
foreign currency
transactions--net(Note 7) 3,451,814 491,980 378,775 (19,779) 2,641
Accumulated distributions
in excess of realized
capital gains on investments
--net (Note 1g) -- -- -- (34,717) --
Unrealized appreciation
(depreciation) on investments
and foreign currency
transactions--net 5,207,234 4,616,976 1,543,360 (94,414) 11,428
----------- ----------- ----------- ----------- -----------
Net assets $54,238,697 $43,852,659 $15,341,798 $ 9,415,142 $11,070,354
=========== =========== =========== =========== ===========
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value: Class A:
Net assets $ 209,226 $ 129,067 $ 57,448 $ 2,253,978 $ 4,485,747
=========== =========== =========== =========== ===========
Shares outstanding 15,411 10,815 4,873 230,122 439,890
=========== =========== =========== =========== ===========
Net asset value and
redemption price per share $ 13.58 $ 11.93 $ 11.79 $ 9.79 $ 10.20
=========== =========== =========== =========== ===========
Class B:
Net assets $34,827,598 $30,468,965 $ 9,816,397 $ 4,824,038 $ 4,514,545
=========== =========== =========== =========== ===========
Shares outstanding 2,600,676 2,569,917 840,723 492,756 442,746
=========== =========== =========== =========== ===========
Net asset value and
redemption price per share $ 13.39 $ 11.86 $ 11.68 $ 9.79 $ 10.20
=========== =========== =========== =========== ===========
Class C:
Net assets $15,021,781 $10,658,359 $ 4,648,954 $ 1,885,012 $ 1,757,414
=========== =========== =========== =========== ===========
Shares outstanding 1,121,527 900,077 398,309 192,563 172,388
=========== =========== =========== =========== ===========
Net asset value and
redemption price per share $ 13.39 $ 11.84 $ 11.67 $ 9.79 $ 10.19
=========== =========== =========== =========== ===========
Class D:
Net assets $ 4,180,092 $ 2,596,268 $ 818,999 $ 452,114 $ 312,648
=========== =========== =========== =========== ===========
Shares outstanding 308,620 217,736 69,522 46,182 30,648
=========== =========== =========== =========== ===========
Net asset value and
redemption price per share $ 13.54 $ 11.92 $ 11.78 $ 9.79 $ 10.20
=========== =========== =========== =========== ===========
<FN>
*Identified cost $49,170,466 $38,922,276 $13,305,812 $ 9,487,473 $11,845,782
=========== =========== =========== =========== ===========
++Authorized shares--Class A 6,250,000 6,250,000 6,250,000 6,250,000 26,250,000
=========== =========== =========== =========== ===========
++++Authorized shares--Class B 6,250,000 6,250,000 6,250,000 6,250,000 26,250,000
=========== =========== =========== =========== ===========
++++++Authorized shares--Class C 6,250,000 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 6,250,000
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Fundamental Global Growth Quality US Government
For the Year Ended Value Opportunity Opportunity Bond Securities
January 31, 1997 Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
Investment Income Interest and discount earned* $ 245,212 $ 627,518 $ 70,071 $ 549,506 $ 703,108
(Notes 1d & 1e): Dividends** 614,117 528,065 105,824 -- --
Other -- -- -- 492 --
----------- ----------- ----------- ----------- -----------
Total income 859,329 1,155,583 175,895 549,998 703,108
----------- ----------- ----------- ----------- -----------
Expenses: Registration fees (Note 1f) 87,658 267,666 61,496 105,639 169,918
Investment advisory fees
(Note 2) 284,074 255,998 57,884 40,461 52,827
Account maintenance and
distribution fees--Class B
(Note 2) 283,793 237,750 52,397 29,716 28,821
Transfer agent fees--Class B
(Note 2) 157,251 145,212 41,517 21,851 10,648
Printing and shareholder
reports 117,813 99,268 19,846 21,580 13,409
Account maintenance and
distribution fees--Class C
(Note 2) 117,326 79,435 24,977 12,944 11,916
Accounting services (Note 2) 96,812 76,883 24,366 20,217 4,466
Transfer agent fees--Class C
(Note 2) 68,439 51,576 20,825 9,301 4,356
Professional fees 50,859 40,525 3,683 12,005 15,372
Custodian fees 21,670 46,515 13,524 11,297 12,179
Amortization of organization
expenses (Note 1f) 7,413 17,297 16,127 4,260 9,300
Transfer agent fees--Class D
(Note 2) 15,856 10,464 3,156 1,422 530
Transfer agent fees--Class A
(Note 2) 754 1,854 4,986 9,543 10,017
Directors' fees and expenses 10,606 8,594 865 2,174 3,030
Account maintenance fees--
Class D (Note 2) 8,573 5,122 1,192 819 664
Pricing fees (Note 2) 273 5,492 120 2,701 1,555
Other 8,794 6,225 946 5,829 4,532
----------- ----------- ----------- ----------- -----------
Total expenses before
reimbursement 1,337,964 1,355,876 347,907 311,759 353,540
Reimbursement of expenses
(Note 2) -- (87,899) (17,978) (268,280) (312,139)
----------- ----------- ----------- ----------- -----------
Total expenses after
reimbursement 1,337,964 1,267,977 329,929 43,479 41,401
----------- ----------- ----------- ----------- -----------
Investment income (loss)--net (478,635) (112,394) (154,034) 506,519 661,707
----------- ----------- ----------- ----------- -----------
Realized & Realized gain (loss) from:
Unrealized Investments--net 6,235,956 1,275,133 378,775 (51,285) 243
Gain (Loss) on Foreign currency
Investments & transactions--net -- 178,163 -- -- --
Foreign Currency Change in unrealized
Transactions--Net appreciation (depreciation)
(Notes 1b, 1c, on:
1e & 3): Investments--net 2,839,304 2,283,988 1,543,360 (231,164) (194,411)
Foreign currency
transactions--net -- 626,707 -- -- --
----------- ----------- ----------- ----------- -----------
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 9,075,260 4,363,991 1,922,135 (282,449) (194,168)
----------- ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $ 8,596,625 $ 4,251,597 $ 1,768,101 $ 224,070 $ 467,539
=========== =========== =========== =========== ===========
<FN>
*Net of foreign withholding
tax on interest -- $ 5,366 -- -- --
=========== =========== =========== =========== ===========
**Net of foreign
withholding tax on
dividends $ 15,579 $ 30,457 $ 828 -- --
=========== =========== =========== =========== ===========
++The Portfolio commenced operations on February 2, 1996.
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Fundamental Global Opportunity
Value Portfolio Portfolio
For the Year Ended For the Year Ended
January 31, January 31,
Increase (Decrease) in Net Assets: 1997 1996++ 1997 1996++
<S> <C> <C> <C> <C> <C>
Operations: Investment income (loss)--net $ (478,635) $ (81,282) $ (112,394) $ 363,179
Realized gain (loss) on investments
and foreign currency transactions--net 6,235,956 563,770 1,453,296 (132,463)
Change in unrealized appreciation on
investments and foreign currency
transactions--net 2,839,304 2,367,930 2,910,695 1,706,281
----------- ----------- ----------- -----------
Net increase in net assets resulting
from operations 8,596,625 2,850,418 4,251,597 1,936,997
----------- ----------- ----------- -----------
Dividends & Investment income--net:
Distributions to Class A -- -- -- (90,788)
Shareholders Class B -- -- -- (193,635)
(Note 1g): Class C -- -- -- (56,404)
Class D -- -- -- (22,352)
In excess of investment income--net:
Class A -- -- (1,274) (28,087)
Class B -- -- (65,176) (59,905)
Class C -- -- (25,328) (17,449)
Class D -- -- (21,506) (6,915)
Realized gain on investments--net:
Class A (11,190) (1,832) (1,213) --
Class B (1,597,213) (326,209) (298,844) --
Class C (693,946) (125,467) (104,853) --
Class D (215,995) (38,990) (25,165) --
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 (2,518,344) (826,971) (543,359) (547,105)
----------- ----------- ----------- -----------
Capital Share Net increase in net assets derived from
Transactions capital share transactions 16,589,653 29,522,316 14,719,748 24,009,781
(Note 4): ----------- ----------- ----------- -----------
Net Assets: Total increase in net assets 22,667,934 31,545,763 18,427,986 25,399,673
Beginning of year 31,570,763 25,000 25,424,673 25,000
----------- ----------- ----------- -----------
End of year $54,238,697 $31,570,763 $43,852,659 $25,424,673
=========== =========== =========== ===========
<FN>
++The Program commenced operations on February 1, 1995.
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
Growth Quality US Government
Opportunity Bond Securities
Portfolio Portfolio Portfolio
For the For the For the
Period Feb. 2, Year Ended Year Ended
Increase (Decrease) in 1996++++ to January 31, January 31,
Net Assets: Jan. 31, 1997 1997 1996++ 1997 1996++
<S> <C> <C> <C> <C> <C> <C>
Operations: Investment income (loss)--net $ (154,034) $ 506,519 $ 270,217 $ 661,707 $ 531,974
Realized gain (loss) on
investments--net 378,775 (51,285) 31,507 243 297,048
Change in unrealized
appreciation (depreciation)
on investments--net 1,543,360 (231,164) 136,749 (194,411) 205,839
----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations 1,768,101 224,070 438,473 467,539 1,034,861
----------- ----------- ----------- ----------- -----------
Dividends & Investment income--net:
Distributions to Class A -- (150,009) (128,948) (329,353) (393,269)
Shareholders Class B -- (238,507) (101,375) (222,614) (98,505)
(Note 1g): Class C -- (96,264) (31,396) (85,215) (33,445)
Class D -- (21,739) (8,498) (16,900) (6,755)
Realized gain on investments
--net:
Class A -- -- -- (32,773) (133,258)
Class B -- -- -- (29,573) (64,660)
Class C -- -- -- (12,740) (23,204)
Class D -- -- -- (2,220) (3,847)
In excess of realized gain
on investments--net:
Class A -- (8,426) -- -- --
Class B -- (17,644) -- -- --
Class C -- (7,230) -- -- --
Class D -- (1,417) -- -- --
----------- ----------- ----------- ----------- -----------
Net decrease in net assets
resulting from dividends
and distributions to
shareholders -- (541,236) (270,217) (731,388) (756,943)
----------- ----------- ----------- ----------- -----------
Capital Share Net increase in net assets
Transactions derived from capital share
(Note 4): transactions 13,569,697 3,143,735 6,395,317 1,556,845 9,474,440
----------- ----------- ----------- ----------- -----------
Net Assets: Total increase in net assets 15,337,798 2,826,569 6,563,573 1,292,996 9,752,358
Beginning of period 4,000 6,588,573 25,000 9,777,358 25,000
----------- ----------- ----------- ----------- -----------
End of period $15,341,798 $ 9,415,142 $ 6,588,573 $11,070,354 $ 9,777,358
=========== =========== =========== =========== ===========
<FN>
++The Program commenced operations on February 1, 1995.
++++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Fundamental Value Portfolio++
Class A Class B
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.67 $ 10.00 $ 11.55 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net (.01) .25 (.15) (.07)
Realized and unrealized gain on
investments --net 2.70 1.76 2.65 1.96
------- ------- ------- -------
Total from investment operations 2.69 2.01 2.50 1.89
------- ------- ------- -------
Less distributions:
Realized gain on investments--net (.78) (.20) (.66) (.20)
In excess of realized gain on
investments--net -- (.11) -- (.11)
Return of capital--net -- (.03) -- (.03)
------- ------- ------- -------
Total distributions (.78) (.34) (.66) (.34)
------- ------- ------- -------
Net asset value, end of year $ 13.58 $ 11.67 $ 13.39 $ 11.55
======= ======= ======= =======
Total Investment Based on net asset value per share 23.20% 20.10%+++ 21.79% 18.89%+++
Return:* ======= ======= ======= =======
Ratio to Expenses, net of reimbursement 2.03% 1.54% 3.11% 3.29%
Average Net ======= ======= ======= =======
Assets: Expenses 2.03% 2.00% 3.11% 3.39%
======= ======= ======= =======
Investment income (loss)--net (.07%) 1.99% (1.15%) (.61%)
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 209 $ 121 $34,828 $20,989
Data: ======= ======= ======= =======
Portfolio turnover 80.60% 51.37% 80.60% 51.37%
======= ======= ======= =======
Average commission rate paid+++++ $ .0539 -- $ .0539 --
======= ======= ======= =======
<CAPTION>
Fundamental Value Portfolio++
Class C Class D
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.55 $ 10.00 $ 11.65 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net (.15) (.09) (.04) .03
Realized and unrealized gain on
investments--net 2.66 1.98 2.68 1.96
------- ------- ------- -------
Total from investment operations 2.51 1.89 2.64 1.99
------- ------- ------- -------
Less distributions:
Realized gain on investments--net (.67) (.20) (.75) (.20)
In excess of realized gain on
investments--net -- (.11) -- (.11)
Return of capital--net -- (.03) -- (.03)
------- ------- ------- -------
Total distributions (.67) (.34) (.75) (.34)
------- ------- ------- -------
Net asset value, end of year $ 13.39 $ 11.55 $ 13.54 $ 11.65
======= ======= ======= =======
Total Investment Based on net asset value per share 21.82% 18.89%+++ 22.82% 19.90%+++
Return:* ======= ======= ======= =======
Ratio to Expenses, net of reimbursement 3.15% 3.38% 2.27% 2.45%
Average Net ======= ======= ======= =======
Assets: Expenses 3.15% 3.46% 2.27% 2.56%
======= ======= ======= =======
Investment income (loss)--net (1.19%) (.75%) (.31%) .24%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $15,022 $ 7,990 $ 4,180 $ 2,471
Data: ======= ======= ======= =======
Portfolio turnover 80.60% 51.37% 80.60% 51.37%
======= ======= ======= =======
Average commission rate paid+++++ $ .0539 -- $ .0539 --
======= ======= ======= =======
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
++++The Program commenced operations on February 1, 1995.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Program is required to disclose its average commission rate per
share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
Global Opportunity Portfolio++
Class A Class B
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.82 $ 10.00 $ 10.76 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net .15 .34 (.04) .13
Realized and unrealized gain on
investments--net 1.21 .77 1.29 .85
------- ------- ------- -------
Total from investment operations 1.36 1.11 1.25 .98
------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.20) -- (.15)
In excess of investment income on
investments--net (.13) (.06) (.03) (.04)
Realized gain on investments--net (.12) -- (.12) --
In excess of realized gain on
investments--net -- (.03) -- (.03)
------- ------- ------- -------
Total dividends and distributions (.25) (.29) (.15) (.22)
------- ------- ------- -------
Net asset value, end of year $ 11.93 $ 10.82 $ 11.86 $ 10.76
======= ======= ======= =======
Total Investment Based on net asset value per share 12.68% 11.15%+++ 11.67% 9.89%+++
Return:** ======= ======= ======= =======
Ratio to Expenses, net of reimbursement 2.47% 2.01% 3.76% 3.50%
Average Net ======= ======= ======= =======
Assets: Expenses 2.90% 2.32% 4.01% 3.61%
======= ======= ======= =======
Investment income--net 1.83% 2.92% (.39%) 1.20%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 129 $ 3,025 $30,469 $16,117
Data: ======= ======= ======= =======
Portfolio turnover 125.68% 83.14% 125.68% 83.14%
======= ======= ======= =======
Average commission rate paid+++++ $ .0170 -- $ .0170 --
======= ======= ======= =======
<CAPTION>
Global Opportunity Portfolio++
Class C Class D
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.75 $ 10.00 $ 10.80 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net (.05) .12 .05 .22
Realized and unrealized gain on
investments--net 1.29 .85 1.29 .85
------- ------- ------- -------
Total from investment operations 1.24 .97 1.34 1.07
------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.15) -- (.18)
In excess of investment income on
investments--net (.03) (.04) (.10) (.06)
Realized gain on investments--net (.12) -- (.12) --
In excess of realized gain on
investments--net -- (.03) -- (.03)
------- ------- ------- -------
Total dividends and distributions (.15) (.22) (.22) (.27)
------- ------- ------- -------
Net asset value, end of year $ 11.84 $ 10.75 $ 11.92 $ 10.80
======= ======= ======= =======
Total Investment Based on net asset value per share 11.61% 9.81%+++ 12.56% 10.80%+++
Return:** ======= ======= ======= =======
Ratio to Expenses, net of reimbursement 3.81% 3.58% 2.91% 2.67%
Average Net ======= ======= ======= =======
Assets: Expenses 4.06% 3.65% 3.17% 2.77%
======= ======= ======= =======
Investment income--net (.46%) 1.07% .48% 2.00%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $10,659 $ 4,770 $ 2,596 $ 1,513
Data: ======= ======= ======= =======
Portfolio turnover 125.68% 83.14% 125.68% 83.14%
======= ======= ======= =======
Average commission rate paid+++++ $ .0170 -- $ .0170 --
======= ======= ======= =======
<CAPTION>
The following per share data and ratios
have been derived from information Growth Opportunity Portfolio++
provided in the financial statements.
For the Period February 2, 1996++++++ to January 31, 1997
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net .03 (.21) (.22) (.11)
Realized and unrealized gain on
investments--net 1.76 1.89 1.89 1.89
---------- ---------- ---------- ----------
Total from investment operations 1.79 1.68 1.67 1.78
---------- ---------- ---------- ----------
Net asset value, end of period $ 11.79 $ 11.68 $ 11.67 $ 11.78
========== ========== ========== ==========
Total Investment Based on net asset value per share 17.90%+++ 16.80%+++ 16.70%+++ 17.80%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 2.44%* 3.84%* 3.88%* 2.94%*
Net Assets: ========== ========== ========== ==========
Expenses 3.08%* 4.00%* 4.05%* 3.13%*
========== ========== ========== ==========
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Investment income (loss)--net .23%* (1.93%)* (1.98%)* (1.00%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 58 $ 9,816 $ 4,649 $ 819
Data: ========== ========== ========== ==========
Portfolio turnover 51.63% 51.63% 51.63% 51.63%
========== ========== ========== ==========
Average commission rate paid+++++ $ .0626 $ .0626 $ .0626 $ .0626
========== ========== ========== ==========
<CAPTION>
Quality Bond Portfolio
Class A Class B
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.27 $ 10.00 $ 10.27 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .68 .62 .59 .54
Realized and unrealized gain (loss) on
investments--net (.44) .27 (.44) .27
------- ------- ------- -------
Total from investment operations .24 .89 .15 .81
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.68) (.62) (.59) (.54)
In excess of realized gain on
investments--net (.04) -- (.04) --
------- ------- ------- -------
Total dividends and distributions (.72) (.62) (.63) (.54)
------- ------- ------- -------
Net asset value, end of year $ 9.79 $ 10.27 $ 9.79 $ 10.27
======= ======= ======= =======
Total Investment Based on net asset value per share 2.51% 9.26%+++ 1.62% 8.35%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .00% .00% .78% .79%
Net Assets: ======= ======= ======= =======
Expenses 3.23% 2.60% 4.08% 3.31%
======= ======= ======= =======
Investment income--net 6.85% 6.22% 6.00% 5.52%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 2,254 $ 2,196 $ 4,824 $ 3,049
Data: ======= ======= ======= =======
Portfolio turnover 91.10% 86.68% 91.10% 86.68%
======= ======= ======= =======
<CAPTION>
Quality Bond Portfolio
Class C Class D
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++++ 1997 1996++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.27 $ 10.00 $ 10.27 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .58 .53 .65 .60
Realized and unrealized gain (loss) on
investments--net (.44) .27 (.44) .27
------- ------- ------- -------
Total from investment operations .14 .80 .21 .87
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.58) (.53) (.65) (.60)
In excess of realized gain on
investments--net (.04) -- (.04) --
------- ------- ------- -------
Total dividends and distributions (.62) (.53) (.69) (.60)
------- ------- ------- -------
Net asset value, end of year $ 9.79 $ 10.27 $ 9.79 $ 10.27
======= ======= ======= =======
Total Investment Based on net asset value per share 1.55% 8.27%+++ 2.25% 8.99%+++
Return:** ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .85% .87% .16% .19%
Net Assets: ======= ======= ======= =======
Expenses 4.15% 3.44% 3.47% 2.70%
======= ======= ======= =======
Investment income--net 5.93% 5.46% 6.62% 6.11%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 1,885 $ 1,123 $ 452 $ 221
Data: ======= ======= ======= =======
Portfolio turnover 91.10% 86.68% 91.10% 86.68%
======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the period.
++++The Program commenced operations on February 1, 1995.
++++++Commencement of Operations.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Program is required to disclose its average commission rate per
share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
US Government Securities Portfolio
Class A Class B
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++ 1997 1996++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.48 $ 10.00 $ 10.48 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .69 .76 .60 .68
Realized and unrealized gain (loss) on
investments--net (.21) .74 (.21) .74
------- ------- ------- -------
Total from investment operations .48 1.50 .39 1.42
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.69) (.76) (.60) (.68)
Realized gain on investments--net (.07) (.26) (.07) (.26)
------- ------- ------- -------
Total dividends and distributions (.76) (1.02) (.67) (.94)
------- ------- ------- -------
Net asset value, end of year $ 10.20 $ 10.48 $ 10.20 $ 10.48
======= ======= ======= =======
Total Investment Based on net asset value per share 4.76% 15.47%+++ 3.90% 14.53%+++
Return:* ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .00% .00% .78% .81%
Net Assets: ======= ======= ======= =======
Expenses 2.92% 2.54% 3.72% 3.35%
======= ======= ======= =======
Investment income--net 6.69% 7.30% 5.85% 6.28%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 4,486 $ 5,463 $ 4,514 $ 3,043
Data: ======= ======= ======= =======
Portfolio turnover 27.32% 113.05% 27.32% 113.05%
======= ======= ======= =======
<CAPTION>
US Government Securities Portfolio
Class C Class D
The following per share data and ratios have
been derived from information provided in For the For the
the financial statements. Year Ended Year Ended
January 31, January 31,
Increase (Decrease) in Net Asset Value: 1997 1996++ 1997 1996++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.47 $ 10.00 $ 10.48 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .59 .67 .66 .74
Realized and unrealized gain (loss) on
investments--net (.21) .73 (.21) .74
------- ------- ------- -------
Total from investment operations .38 1.40 .45 1.48
------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.59) (.67) (.66) (.74)
Realized gain on investments--net (.07) (.26) (.07) (.26)
------- ------- ------- -------
Total dividends and distributions (.66) (.93) (.73) (1.00)
------- ------- ------- -------
Net asset value, end of year $ 10.19 $ 10.47 $ 10.20 $ 10.48
======= ======= ======= =======
Total Investment Based on net asset value per share 3.83% 14.36%+++ 4.49% 15.13%+++
Return:* ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement .85% .86% .21% .22%
Net Assets: ======= ======= ======= =======
Expenses 3.78% 3.41% 3.14% 2.77%
======= ======= ======= =======
Investment income--net 5.78% 6.21% 6.42% 6.90%
======= ======= ======= =======
Supplemental Net assets, end of year (in thousands) $ 1,757 $ 1,089 $ 313 $ 182
Data: ======= ======= ======= =======
Portfolio turnover 27.32% 113.05% 27.32% 113.05%
======= ======= ======= =======
<FN>
*Total investment returns exclude the effect of sales loads.
++The Program commenced operations on February 1, 1995.
+++Aggregate total investment 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 five separate
portfolios: Fundamental Value Portfolio, Global Opportunity Portfolio, Growth
Opportunity Portfolio, Quality Bond Portfolio and US Government Securities
Portfolio (the "Portfolios"), except for Growth Opportunity Portfolio which is
classified as a non-diversified portfolio. 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
64
<PAGE>
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.
(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, Global Opportunity and
Growth 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, Global Opportunity
and Growth 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
65
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
provision is required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest, dividends and capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Portfolios have determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and distributions--Dividends 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, Global
Opportunity and Growth 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 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 adjusted to reflect permanent differences
between financial and tax reporting for foreign currency transactions.
Accordingly, current year's permanent book/tax differences of $327,207 in the
Global Opportunity Portfolio have been reclassified between undistributed net
realized capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The 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 and Growth
Opportunity Portfolios, 0.50% for Quality Bond and US Government Securities
Portfolios and 0.75% for Global Opportunity Portfolio.
For the year ended January 31, 1997, MLAM had voluntarily waived management fees
and reimbursed each Portfolio for additional expenses as follows:
Management Additional
Fee Expenses
Global Opportunity Portfolio $87,899 --
Growth Opportunity Portfolio $17,978 --
Quality Bond Portfolio $40,461 $227,819
US Government Securities Portfolio $52,827 $259,312
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%
Growth 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%
Growth 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
maintenance services to Class B, Class C and Class D shareholders. The ongoing
66
<PAGE>
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended January 31, 1997, 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 $ 9 $1,669 $174 $32,996
Global Opportunity Portfolio $ 3 $1,415 $ 95 $27,404
Growth Opportunity Portfolio++ -- $1,004 -- $19,465
Quality Bond Portfolio -- $ 307 -- $ 4,370
US Government Securities
Portfolio -- $ 120 -- $ 1,709
[FN]
++The Portfolio commenced operations February 2, 1996.
For the year ended January 31, 1997, 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 $55,593 $5,793
Global Opportunity Portfolio $51,643 $4,084
Growth Opportunity Portfolio++ $ 9,146 $1,138
Quality Bond Portfolio $ 7,529 $1,038
US Government Securities Portfolio $ 5,590 $ 358
[FN]
++The Portfolio commenced operations February 2, 1996.
In addition, MLPF&S received $2,085, $1,813, and $1,578 in commissions on the
execution of portfolio security transactions for the Fundamental Value, Global
Opportunity and Growth Opportunity Portfolios, respectively, for the year ended
January 31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Program's transfer agent.
During the year ended January 31, 1997, Global Opportunity, Quality Bond and US
Government Securities Portfolios paid Merrill Lynch Security Pricing Service, an
affiliate of MLPF&S, $1,011, $1,504 and $617, 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, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended January 31, 1997 were as follows:
Purchases Sales
Fundamental Value Portfolio $38,665,447 $31,125,811
Global Opportunity Portfolio $59,985,463 $38,015,146
Growth Opportunity Portfolio++ $16,328,886 $ 3,925,675
Quality Bond Portfolio $ 9,999,706 $ 6,451,130
US Government Securities Portfolio $ 3,932,154 $ 2,666,033
[FN]
++The Portfolio commenced operations February 2, 1996.
Net realized and unrealized gains (losses) as of January 31, 1997 were as
follows:
Realized
Gains Unrealized
Fundamental Value Portfolio (Losses) Gains
Long-term investments $6,235,957 $5,207,234
Short-term investments (1) --
---------- ----------
Total $6,235,956 $5,207,234
========== ==========
Realized Unrealized
Gains Gains
Global Opportunity Portfolio (Losses) (Losses)
Long-term investments $1,275,221 $3,971,723
Short-term investments (88) --
Foreign currency transactions 74,238 (11,291)
Forward foreign exchange contracts 103,925 656,544
---------- ----------
Total $1,453,296 $4,616,976
========== ==========
Realized Unrealized
Growth Opportunity Portfolio++ Gains Gains
Long-term investments $ 378,775 $1,543,360
---------- ----------
Total $ 378,775 $1,543,360
========== ==========
[FN]
++The Portfolio commenced operations February 2, 1996.
Realized Unrealized
Quality Bond Portfolio Losses Losses
Long-term investments $ (51,285) $ (94,414)
---------- ----------
Total $ (51,285) $ (94,414)
========== ==========
Realized Unrealized
US Government Securities Portfolio Gains Gains
Long-term investments $ 243 $ 11,428
---------- ----------
Total $ 243 $ 11,428
========== ==========
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
As of January 31, 1997, net unrealized appreciation (depreciation)
for Federal income tax purposes was as follows:
Gross Gross Net Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation)
Fundamental Value
Portfolio $6,905,391 $ (1,728,060) $5,177,331
Global Opportunity
Portfolio $5,406,207 $ (1,460,003) $3,946,204
Growth Opportunity
Portfolio++ $1,774,721 $ (236,291) $1,538,430
Quality Bond Portfolio $ 24,907 $ (119,321) $ (94,414)
US Government Securities
Portfolio $ 86,362 $ (74,934) $ 11,428
[FN]
++The Portfolio commenced operations on February 2, 1996.
The aggregate cost of investments at January 31, 1997 for Federal income tax
purposes was $49,200,369 for the Fundamental Value Portfolio, $38,947,795 for
the Global Opportunity Portfolio, $13,310,742 for the Growth Opportunity
Portfolio, $9,487,473 for the Quality Bond Portfolio, and $11,845,782 for the US
Government Securities Portfolio.
4. Capital Share Transactions: Net increase in net assets derived from capital
share transactions for the year ended January 31, 1997 and the period February
1, 1995 to January 31, 1996, respectively, were as follows:
For the For the Period
Year Ended Feb. 1, 1995++ to
Jan. 31, 1997 Jan. 31, 1996
Fundamental Value Portfolio $16,589,653 $29,522,316
Global Opportunity Portfolio $14,719,748 $24,009,781
Growth Opportunity Portfolio++++ $13,569,697 --
Quality Bond Portfolio $ 3,143,735 $ 6,395,317
US Government Securities Portfolio $ 1,556,845 $ 9,474,440
[FN]
++Commencement of operations of the Program.
++++The Portfolio commenced operations on February 2, 1996.
Transactions in capital shares for each class were as follows:
Fundamental Value Portfolio
Class A Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 7,936 $ 102,340
Shares issued to shareholders in
reinvestment of distributions 493 6,544
------------ ------------
Total issued 8,429 108,884
Shares redeemed (3,359) (43,444)
------------ ------------
Net increase 5,070 $ 65,440
============ ============
Fundamental Value Portfolio
Class A Shares for the Period Dollar
February 1, 1995++ to 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)
============ ============
++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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 1,015,710 $ 12,783,442
Shares issued to shareholders in
reinvestment of distributions 73,472 962,487
------------ ------------
Total issued 1,089,182 13,745,929
Automatic conversion of shares (25,869) (323,827)
Shares redeemed (279,781) (3,545,224)
------------ ------------
Net increase 783,532 $ 9,876,878
============ ============
Fundamental Value Portfolio
Class B Shares for the Period Dollar
February 1, 1995++ to 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
============ ============
++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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 568,727 $ 7,170,424
Shares issued to shareholders in
reinvestment of distributions 31,790 416,450
------------ ------------
Total issued 600,517 7,586,874
Shares redeemed (170,842) (2,169,492)
------------ ------------
Net increase 429,675 $ 5,417,382
============ ============
68
<PAGE>
Fundamental Value Portfolio
Class C Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 95,960 $ 1,214,323
Automatic conversion of shares 25,591 323,827
Shares issued to shareholders in
reinvestment of distributions 10,204 135,000
------------ ------------
Total issued 131,755 1,673,150
Shares redeemed (35,230) (443,197)
------------ ------------
Net increase 96,525 $ 1,229,953
============ ============
Fundamental Value Portfolio
Class D Shares for the Period Dollar
February 1, 1995++ to July 31, 1995 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 5,866 $ 65,458
Shares issued to shareholders in
reinvestment of dividends and
distributions 209 2,379
------------ ------------
Total issued 6,075 67,837
Shares redeemed (274,907) (2,981,256)
------------ ------------
Net decrease (268,832) $ (2,913,419)
============ ============
Global Opportunity Portfolio
Class A Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 1,345,701 $ 14,794,340
Shares issued to shareholders in
reinvestment of dividends and
distributions 30,558 347,756
------------ ------------
Total issued 1,376,259 15,142,096
Automatic conversion of shares (5,557) (61,320)
Shares redeemed (298,549) (3,316,163)
------------ ------------
Net increase 1,072,153 $ 11,764,613
============ ============
Global Opportunity Portfolio
Class B Shares for the Period Dollar
February 1, 1995++ to 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.
Global Opportunity Portfolio
Class C Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 569,220 $ 6,253,388
Shares issued to shareholders in
reinvestment of dividends and
distributions 10,679 121,315
------------ ------------
Total issued 579,899 6,374,703
Shares redeemed (123,382) (1,369,969)
------------ ------------
Net increase 456,517 $ 5,004,734
============ ============
69
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Global Opportunity Portfolio
Class C Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 93,756 $ 1,043,467
Automatic conversion of shares 5,516 61,320
Shares issued to shareholders in
reinvestment of dividends and
distributions 3,910 44,693
------------ ------------
Total issued 103,182 1,149,480
Shares redeemed (25,507) (285,660)
------------ ------------
Net increase 77,675 $ 863,820
============ ============
Global Opportunity Portfolio
Class D Shares for the Period Dollar
February 1, 1995++ to January 31, 1996 Shares Amount
Shares sold 129,359 $ 1,346,418
Automatic conversion of shares 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.
Growth Opportunity Portfolio
Class A Shares for the Period Dollar
February 2, 1996++ to January 31, 1997 Shares Amount
Shares sold 205,569 $ 2,057,557
Shares redeemed (200,796) (2,041,351)
------------ ------------
Net increase 4,773 $ 16,206
============ ============
[FN]
++Prior to February 2, 1996 (commencement of operations), the
Portfolio issued 100 shares to MLAM for $1,000.
Growth Opportunity Portfolio
Class B Shares for the Period Dollar
February 2, 1996++ to January 31, 1997 Shares Amount
Shares sold 886,181 $ 9,203,628
Automatic conversion of shares (947) (10,034)
Shares redeemed (44,611) (477,407)
------------ ------------
Net increase 840,623 $ 8,716,187
============ ============
[FN]
++Prior to February 2, 1996 (commencement of operations), the
Portfolio issued 100 shares to MLAM for $1,000.
Growth Opportunity Portfolio
Class C Shares for the Period Dollar
February 2, 1996++ to January 31, 1997 Shares Amount
Shares sold 429,086 $ 4,441,657
Shares redeemed (30,877) (324,727)
------------ ------------
Net increase 398,209 $ 4,116,930
============ ============
[FN]
++Prior to February 2, 1996 (commencement of operations), the
Portfolio issued 100 shares to MLAM for $1,000.
Growth Opportunity Portfolio
Class D Shares for the Period Dollar
February 2, 1996++ to January 31, 1997 Shares Amount
Shares sold 78,115 $ 811,625
Automatic conversion of shares 944 10,034
------------ ------------
Total issued 79,059 821,659
Shares redeemed (9,637) (101,285)
------------ ------------
Net increase 69,422 $ 720,374
============ ============
[FN]
++Prior to February 2, 1996 (commencement of operations), the
Portfolio issued 100 shares to MLAM for $1,000.
Quality Bond Portfolio
Class A Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 1,729 $ 5,246
Shares issued to shareholders in
reinvestment of dividends and
distributions 14,993 159,085
------------ ------------
Total issued 16,722 164,331
Shares redeemed. (298) (2,925)
------------ ------------
Net increase 16,424 $ 161,406
============ ============
Quality Bond Portfolio
Class A Shares for the Period Dollar
February 1, 1995++ to 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.
70
<PAGE>
Quality Bond Portfolio
Class B Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 234,175 $ 2,302,903
Shares issued to shareholders in
reinvestment of dividends and
distributions 23,284 228,615
------------ ------------
Total issued. 257,459 2,531,518
Shares redeemed (61,643) (608,507)
------------ ------------
Net increase 195,816 $ 1,923,011
============ ============
Quality Bond Portfolio
Class B Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 124,149 $ 1,218,787
Shares issued to shareholders in
reinvestment of dividends and
distributions 9,844 96,601
------------ ------------
Total issued 133,993 1,315,388
Shares redeemed (50,842) (498,626)
------------ ------------
Net increase 83,151 $ 816,762
============ ============
Quality Bond Portfolio
Class C Shares for the Period Dollar
February 1, 1995++ to 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
Year Ended Dollar
January 31, 1997 Shares Amount
Shares sold. 29,757 $ 292,294
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,068 20,304
------------ ------------
Total issued 31,825 312,598
Shares redeemed (7,148) (70,042)
------------ ------------
Net increase 24,677 $ 242,556
============ ============
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.
US Government Securities Portfolio
Class A Shares for the
Year Ended Dollar
January 31, 1997 Shares Amount
Shares sold 3,546 $ 36,344
Shares issued to shareholders in
reinvestment of dividends and
distributions 32,786 334,190
------------ ------------
Total issued 36,332 370,534
Shares redeemed (117,931) (1,201,716)
------------ ------------
Net decrease (81,599) $ (831,182)
============ ============
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.
71
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
US Government Securities Portfolio
Class B Shares for the Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 186,113 $ 1,900,921
Shares issued to shareholders in
reinvestment of dividends and
distributions 18,945 193,085
------------ ------------
Total issued 205,058 2,094,006
Automatic conversion of shares (3,692) (37,683)
Shares redeemed (49,105) (500,968)
------------ ------------
Net increase 152,261 $ 1,555,355
============ ============
US Government Securities Portfolio
Class B Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold 92,431 $ 942,477
Shares issued to shareholders in
reinvestment of dividends and
distributions 8,932 91,008
------------ ------------
Total issued 101,363 1,033,485
Shares redeemed (33,002) (336,458)
------------ ------------
Net increase 68,361 $ 697,027
============ ============
US Government Securities Portfolio
Class C Shares for the Period Dollar
February 1, 1995++ to 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 Year Dollar
Ended January 31, 1997 Shares Amount
Shares sold. 14,460 $ 147,648
Automatic conversion of shares 3,691 37,683
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,438 14,664
------------ ------------
Total issued. 19,589 199,995
Shares redeemed (6,300) (64,350)
------------ ------------
Net increase 13,289 $ 135,645
============ ============
US Government Securities Portfolio
Class D Shares for the Period Dollar
February 1, 1995++ to 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, 1997, the Global Opportunity Portfolio had entered
into foreign exchange contracts, in addition to the contracts listed
in the Schedule of Investments, under which it had agreed to sell a
foreign currency with an approximate value of $34,000.
6. Loaned Securities:
At January 31, 1997, the Quality Bond Portfolio held US Treasury
Notes having aggregate value of approximately $206,000, as
collateral for portfolio securities loaned having market value of
approximately $194,000.
7. Capital Loss Carryforward:
At January 31, 1997, the Quality Bond Portfolio had a net capital
loss carryforward of approximately $48,000, all of which expires in
2005. This amount will be available to offset like amounts of any
future taxable gains.
72
<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) SEP (simplified employee pension
plan) or SRA (simple retirement account) 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 benefit
from the deferral of income taxes on 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, SEPs or SRAs 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
73
<PAGE>
wishing to actively manage the portfolio may elect to invest all or a portion
of their account in certain mutual funds 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. 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 have securities coverage, 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. Self-Directed Plan participants may have a portion of their
compensation contributed, up to the maximum permitted under the Code, 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. 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, SEP or SRA in excess of those allowed by law are subject to a six
percent excise tax if not withdrawn, together with the 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 withdrawn by such date, 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 allowable contributions (and deductions) in succeeding year(s), or by
withdrawal of the excess amount. Distributions of excess contributions and
income attributable to excess contributions may be considered a premature
distribution subject to the ten (or twenty five) percent penalty tax on
premature distributions under Section 72(f) of the Code discussed below, and
may be taxable as ordinary income at the applicable rate for the year in which
it is distributed.
74
<PAGE>
Timing of Retirement Benefits. Generally, a participant, upon reaching age 59
1/2, may make distributions from his Self-Directed Plan account as he chooses
without tax penalties. However, the Code 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 single 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.
Excise Tax on Large Distributions. 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, SEPs or the SRAs made within one year are aggregated for this purpose.
Total benefits paid in a year exceeding the greater of $112,500, indexed for
inflation ($160,000 for 1997), or $150,000 (unindexed) are subject to the tax
to the extent of the excess.
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, SEP
or SRA prior to the time the participant reaches age 59 1/2 generally are
subject to penalty. The penalty for early distributions is an excise tax
equivalent to ten percent (twenty-five percent for certain SRA distributions)
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 excise tax
will be waived for any distribution on account of death or disability (within
the meaning of Code Section 72(m)(7) or a distribution that is part of a
scheduled series of substantially level payments under an IRS-approved method
for the life or life expectancy of the taxpayer or the joint lives or life
expectancies of the taxpayer and his designated beneficiary. Distributions can
also be made, without penalty, to cover deductible medical expenses, or pay
health insurance premiums if a taxpayer has received unemployment compensation
for 12 consecutive weeks.
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
75
<PAGE>
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
"modified" adjusted gross income (generally, before the IRA 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 modified adjusted
gross income 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 simple retirement account, 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 under age 70 1/2 with
compensation may establish and make annual contributions to 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 file a joint return, they may make total deductible IRA contributions of
up to $4,000 or 100% of their combined compensation, whichever is less, each
year to their IRAs (although not more than $2,000 may be contributed to either
IRA).
Active participants in employer-sponsored plans who are not eligible to make
deductible contributions to IRAs (or whose deductions are limited) may make
nondeductible IRA contributions. 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 attributable to nondeductible
contributions will accumulate tax-free until distributed; however,
nondeductible contributions themselves are not taxes upon distribution.
The Self-Directed IRA program allows for the establishment of IRRAs, which
are "rollover IRAs". Rollover contributions of all or part of a distribution
from an employer's "qualified" retirement plan (including pension, profit-
sharing, thrift, 401(k), stock bonus or section 403(b) annuity plan) may be
made to an IRRA. Almost any qualified plan distribution is rollover eligible.
The only exceptions are: nondeductible employee contributions returned in the
distribution, substantially equal payments over a period 10 years or longer in
duration or measured by your life or life expectancy (or the life or life
expectancy of you and your designated beneficiary); and "minimum required
distributions" (made after age 70 1/2 or retirement). The plan administrator of
the qualified plan must give participants receiving an eligible rollover
distribution an opportunity to direct that the distribution be transferred
directly to a rollover IRA or another employer retirement plan that will accept
the rollover. If a participant fails to elect a "direct rollover", there is a
mandatory 20% federal income tax withholding on the distribution. Surviving
spouses of a deceased plan participant may roll over distributions from a
qualified plan that are received as a beneficiary under the plan, provided the
distribution is eligible for rollover treatment. Nonspouse beneficiaries cannot
roll over plan distributions.
Simplified Employee Pension Plans. Any employer, whether it is a sole
proprietorship, a partnership or a corporation, may set up a SEP and make
annual contributions to SEP-IRAs maintained for plan participants. 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
76
<PAGE>
years and have received at least $400 in compensation from the employer. Up to
the lesser of $30,000 or 15% of the employee's compensation up to $160,000
(effective for plan years beginning after December 31, 1996), 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. Plans established on or
before December 31, 1996 may also permit participants to defer a portion of
their compensation (up to $9,500 in 1997) and have such deferrals contributed
to their SEP accounts. 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 a SEP is also an IRA, the employee may, if otherwise eligible under
the rules applicable to IRAs discussed above, contribute up to a $2,000 of
compensation to a SEP or make rollover contributions to a SEP (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.
Tax-deductible employer contributions may continue to be made to a SEP
participant's account even after he has reached age 70 1/2.
Simple Retirement Account (SIMPLE) Plans. Employers with 100 or fewer
employees that do not maintain another qualified retirement plan (or a 403(a)
or (b) plan, a SEP or a governmental plan) may set up a SIMPLE plan and make
contributions to Simple Retirement Accounts (SRA-IRAs) maintained for plan
participants. To qualify, a SIMPLE plan must permit all employees who received
$5,000 in compensation in any two preceding years and are reasonably expected
to receive $5,000 in compensation in the current plan year must be eligible to
participate. Participants can defer up to $6,000 (in 1997, as indexed for
inflation) of their annual compensation on a pretax basis, and employers must
make contributions based on a matching or "nonelective" formula. Under the
matching formula, employers must match participant's salary-deferral
contributions dollar for dollar up to 3% of compensation (although the employer
may elect a lower percentage, not lower than 1%, in two out of five years).
Under the nonelective formula, employers must contribute 2% of eligible
compensation for all eligible employees, whether or not they elect to make
salary-deferral contributions for the plan year.
Unlike a SEP, an SRA cannot receive regular or rollover IRA contributions
(see "Individual Retirement Account" and "Simplified Employee Pension Plans"
above). Furthermore, distributions from an SRA may only be rolled over to
another SRA, unless two years have passed since the account holder first became
a participant in any SIMPLE plan maintained by his employer (or is otherwise
not subject to the 25% penalty tax for premature distributions from an SRA).
Amounts contributed to a participant's SRA vest immediately. If a participant
should cease to be employed by the business maintaining the SIMPLE plan, the
participant retains full rights to and investment power over the account.
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.
77
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78
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79
<PAGE>
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.................................................. 8
Directors and Officers.................................................... 8
Compensation of Directors................................................. 9
Management and Advisory Arrangements...................................... 10
Purchase of Shares......................................................... 12
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 13
Reduced Initial Sales Charges............................................. 15
Distribution Plans ....................................................... 16
Limitations on the Payment of Deferred Sales Charges ..................... 17
Redemption of Shares....................................................... 19
Deferred Sales Charges--Class B and Class C Shares........................ 20
Portfolio Transactions and Brokerage....................................... 21
Portfolio Turnover........................................................ 24
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...................... 26
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................................... 36
Independent Auditors...................................................... 37
Custodian................................................................. 37
Transfer Agent............................................................ 37
Legal Counsel............................................................. 37
Reports to Shareholders................................................... 37
Additional Information.................................................... 38
Independent Auditors' Report............................................... 39
Financial Statements....................................................... 40
Appendix A--Description of the Self-Directed Plans......................... 73
</TABLE>
Code # 18472-0597
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Builder Program, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
May 23, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Contained in Part A:
Financial Highlights for each of the Portfolios for the fiscal year
ended January 31, 1997 and for the period February 1, 1995
(commencement of operations) to January 31, 1996.
Contained in Part B:
Financial Statements:
Schedules of Investments as of January 31, 1997.
Fundamental Value Portfolio
Global Opportunity Portfolio
Growth Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
Statements of Assets and Liabilities as of January 31, 1997.
Fundamental Value Portfolio
Global Opportunity Portfolio
Growth Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
Statements of Operations for the year ended January 31, 1997.
Fundamental Value Portfolio
Global Opportunity Portfolio
Growth Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
Statements of Changes in Net Assets for the year ended January 31,
1997.
Fundamental Value Portfolio
Global Opportunity Portfolio
Growth Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
Financial Highlights for the year ended January 31, 1997.
Fundamental Value Portfolio
Global Opportunity Portfolio
Growth Opportunity Portfolio
Quality Bond Portfolio
U.S. Government Securities Portfolio
C-1
<PAGE>
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1(a) --Articles of Incorporation of Registrant.(a)
(b) --Articles of Amendment of Articles of Incorporation of Registrant filed
on November 9, 1994.(a)
(c) --Articles of Amendment of Articles of Incorporation, filed on December
19, 1994.(d)
(d) --Articles of Amendment of Articles of Incorporation of Registrant filed
on July 20, 1995.(e)
(e) --Articles Supplementary to Articles of Incorporation of Registrant filed
on July 20, 1995.(e)
(f) --Articles of Amendment to Articles of Incorporation of Registrant filed
on May 21, 1996.(f)
2 --By-Laws of Registrant.(b)
3 --None.
4(a) --Portions of the Articles of Incorporation and By-Laws of Registrant
defining the rights of holders of shares of common stock of
Registrant.(c)
(b) --Form of specimen certificate for shares of Class A common stock of
Registrant.(a)
(c) --Form of specimen certificate for shares of Class B common stock of
Registrant.(a)
(d) --Form of specimen certificate for shares of Class C common stock of
Registrant.(a)
(e) --Form of specimen certificate for shares of Class D common stock of
Registrant.(a)
5(a) --Form of Management Agreement between Registrant and Merrill Lynch Asset
Management, L.P.(a)
(c) --Form of Sub-Advisory Agreement between Merrill Lynch Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited.
6(a) --Form of Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
7 --None.
8 --Form of Custody Agreement between Registrant and The Bank of New
York.(a)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between Registrant and Merrill Lynch Financial Data
Services, Inc.(d)
(b) --Agreement between Merrill Lynch & Co., Inc. and Registrant relating to
Registrant's use of Merrill Lynch name.(a)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P.(a)
14 --None.
15(a) --Form of Class B Shares Distribution Plan of Registrant and Class B
Shares Distribution Plan Sub-Agreement.(a)
(b) --Form of Class C Shares Distribution Plan of Registrant and Class C
Shares Distribution Plan Sub-Agreement.(a)
(c) --Form of Class D Shares Distribution Plan of Registrant and Class D
Shares Distribution Plan Sub-Agreement.(a)
16 --Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22.(d)
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
17(a) --Financial Data Schedules for Fundamental Value Portfolio.
(b) --Financial Data Schedules for Quality Bond Portfolio.
(c) --Financial Data Schedules for U.S. Government Securities Portfolio.
(d) --Financial Data Schedules for Global Opportunity Portfolio.
(e) --Financial Data Schedules for Growth Opportunity Portfolio.
</TABLE>
- --------
(a) Filed on December 16, 1994, as an Exhibit to Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A (File No. 33-53887)
under the Securities Act.
(b) Filed on May 27, 1994, as an Exhibit to the Registrants' Registration
Statement on Form N-1A (File No. 33-53887) under the Securities Act.
(c) Reference is made to Article IV, Article V (Sections 2, 3, 4, 5 and 6),
Article VI, Article VII and Article IX, of the Registrant's Articles of
Incorporation, as amended, filed as Exhibits 1(a), 1(b) and 1(c) to the
Registration Statement, and to Article II, Article III (Sections 1, 3, 5,
6 and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws, filed as Exhibit 2 to the Registration
Statement.
(d) Filed on May 30, 1995, as an Exhibit to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No. 33-53887) under
the Securities Act.
(e) Filed on August 9, 1995, as an Exhibit to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (File No. 33-53887) under
the Securities Act.
(f) Filed on May 29, 1996, as an Exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A (File No. 33-53877) under
the Securities Act.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS APRIL 30, 1997
-------------- --------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share:
Fundamental Value Portfolio.................................... 180
Quality Bond Portfolio......................................... 19
U.S. Government Securities Portfolio........................... 8
Global Opportunity Portfolio................................... 121
Growth Opportunity Portfolio................................... 98
Class B Shares of Common Stock, par value $0.10 per share:
Fundamental Value Portfolio.................................... 11,696
Quality Bond Portfolio......................................... 1,972
U.S. Government Securities Portfolio........................... 1,236
Global Opportunity Portfolio................................... 11,201
Growth Opportunity Portfolio................................... 5,713
Class C Shares of Common Stock, par value $0.10 per share:
Fundamental Value Portfolio.................................... 7,073
Quality Bond Portfolio......................................... 1,082
U.S. Government Securities Portfolio........................... 642
Global Opportunity Portfolio................................... 5,916
Growth Opportunity Portfolio................................... 3,756
Class D Shares of Common Stock, par value $0.10 per share:
Fundamental Value Portfolio.................................... 1,111
Quality Bond Portfolio......................................... 171
U.S. Government Securities Portfolio........................... 105
Global Opportunity Portfolio................................... 909
Growth Opportunity Portfolio................................... 463
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
C-3
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940 may be concerned, Article VI of the
Registrant's By-Laws provides that the person seeking indemnification shall
provide to the Registrant a written affirmation of his good faith belief that
the standard of conduct necessary for indemnification by the Registrant has
been met and a written undertaking to repay any such advance if it should
ultimately be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (a) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his undertaking; (b) the Registrant
is insured against losses arising by reason of the advance; and (c) a majority
of a quorum of the Registrant's disinterested non-party Directors, or an
independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser") acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources
C-4
<PAGE>
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch Utility Income Fund, Inc., and Merrill Lynch Variable Series Funds, Inc.;
and the following closed-end registered investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment Adviser,
acts as the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Puerto Rico Tax-Exempt Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Investment Adviser, FAM, Princeton
Services, Inc. ("Princeton Services") and Princeton Administrators, L.P. is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281. The address of
Merrill Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
C-5
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since December 1, 1994, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially
all of the investment companies described in the first two paragraphs of this
Item 28, and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- --------------------- ---------------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of FAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989
to 1995
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-6
<PAGE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as a sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc. Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-90011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since December 1, 1995, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert and Richard are officers of one or
more of the registered investment companies listed in the first two paragraphs
of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION,VOCATION OR EMPLOYMENT
---- ------------- ---------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD; Executive
Vice President of ML & Co.
Alan J. Albert.......... Senior Managing Director Vice President of the Manager
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group.
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of MLFD
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</TABLE>
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as principal underwriter for the
following closed-end funds: Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Breen, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ---------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
C-8
<PAGE>
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 22ND
DAY OF MAY, 1997.
Merrill Lynch Asset Builder Program,
Inc.
(Registrant)
/s/ Arthur Zeikel
By __________________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel President (Principal May 22, 1997
- ------------------------------------------- Executive Officer) and
(Arthur Zeikel) Director
Joe Grills* Director
- -------------------------------------------
(Joe Grills)
Walter Mintz* Director
- -------------------------------------------
(Walter Mintz)
Melvin R. Seiden* Director
- -------------------------------------------
(Melvin R. Seiden)
Robert S. Salomon, Jr.* Director
- -------------------------------------------
(Robert S. Salomon, Jr.)
Stephen B. Swensrud* Director
- -------------------------------------------
(Stephen B. Swensrud)
Gerald M. Richard* Treasurer (Principal
- ------------------------------------------- Financial and
(Gerald M. Richard) Accounting Officer)
</TABLE>
/s/ Arthur Zeikel May 22, 1997
*By _________________________________
(Arthur Zeikel, Attorney-in-fact)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
5(c) --Form of Sub-Advisory Agreement between Merril Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K.
Limited.
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
17(a) --Financial Data Schedules for Fundamental Value Portfolio.
(b) --Financial Data Schedules for Quality Bond Portfolio.
(c) --Financial Data Schedules for U.S. Government Securities
Portfolio.
(d) --Financial Data Schedules for Global Opportunity Portfolio.
(e) --Financial Data Schedules for Growth Opportunity Portfolio.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Interlocking gears and Back cover of Prospectus and
Merrill Lynch logo back cover of Statement of
including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH ASSET BUILDER PGM, INC- FUNDAMENTAL VALUE PORT.- CLASS A
CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<INVESTMENTS-AT-COST> 49170466
<INVESTMENTS-AT-VALUE> 54377700
<RECEIVABLES> 294652
<ASSETS-OTHER> 126347
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 54798699
<PAYABLE-FOR-SECURITIES> 290284
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 269718
<TOTAL-LIABILITIES> 560002
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46058284
<SHARES-COMMON-STOCK> 15411
<SHARES-COMMON-PRIOR> 10341
<ACCUMULATED-NII-CURRENT> (478635)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3451814
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5207234
<NET-ASSETS> 209226
<DIVIDEND-INCOME> 614117
<INTEREST-INCOME> 245212
<OTHER-INCOME> 0
<EXPENSES-NET> (1337964)
<NET-INVESTMENT-INCOME> (478635)
<REALIZED-GAINS-CURRENT> 6235956
<APPREC-INCREASE-CURRENT> 2839304
<NET-CHANGE-FROM-OPS> 8596625
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (11190)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7936
<NUMBER-OF-SHARES-REDEEMED> (3359)
<SHARES-REINVESTED> 493
<NET-CHANGE-IN-ASSETS> 22667934
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2597)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 263201
<GROSS-ADVISORY-FEES> 284074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1337964
<AVERAGE-NET-ASSETS> 162648
<PER-SHARE-NAV-BEGIN> 11.67
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> 2.70
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.58
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH ASSET BUILDER PGM, INC- FUNDAMENTAL VALUE PORT.- CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<INVESTMENTS-AT-COST> 49170466
<INVESTMENTS-AT-VALUE> 54377700
<RECEIVABLES> 294652
<ASSETS-OTHER> 126347
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 54798699
<PAYABLE-FOR-SECURITIES> 290284
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 269718
<TOTAL-LIABILITIES> 560002
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46058284
<SHARES-COMMON-STOCK> 2600676
<SHARES-COMMON-PRIOR> 1817144
<ACCUMULATED-NII-CURRENT> (478635)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3451814
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5207234
<NET-ASSETS> 34827598
<DIVIDEND-INCOME> 614117
<INTEREST-INCOME> 245212
<OTHER-INCOME> 0
<EXPENSES-NET> (1337964)
<NET-INVESTMENT-INCOME> (478635)
<REALIZED-GAINS-CURRENT> 6235956
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - US GOVT SEC PORT - CLASS D
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GLOBAL OPPOR. PORT - CLASS A
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GLOBAL OPPOR. PORT - CLASS B
<S> <C>
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GLOBAL OPPOR. PORT - CLASS C
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GLOBAL OPPOR. PORT - CLASS D
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GROWTH OPPOR. PORT - CLASS A
<S> <C>
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GROWTH OPPOR. PORT - CLASS B
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GROWTH OPPOR. PORT - CLASS C
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<NAME> MERRILL LYNCH ASSET BUILDER PROGRAM, INC - GROWTH OPPOR. PORT - CLASS D
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<PERIOD-START> FEB-01-1996
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<PAGE>
EXHIBIT 99.5C
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the ___ day of May, 1997, by and between MERRILL LYNCH
ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter referred to
as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation
organized under the laws of England and Wales (hereinafter referred to as "MLAM
U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH __________________ PORTFOLIO (the "Portfolio") is
one of the five separate portfolios of MERRILL LYNCH ASSET BUILDER PROGRAM, INC.
(the "Program") which is a Maryland corporation engaged in business as a non-
diversified, open-end investment company registered under the Investment Company
Act of 1940, as amended (hereinafter referred to as the "Investment Company
Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
<PAGE>
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated _______ __, 199_, pursuant to which MLAM provides management
and investment and advisory services to the Portfolio; and
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Portfolio's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Non Private
Customer as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no
2
<PAGE>
authority to act for or represent the Portfolio in any way or otherwise be
deemed an agent of the Portfolio.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Portfolio; shall furnish continuously an investment program for
the Portfolio and shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Portfolio shall be held in the various securities in which the Portfolio
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Program, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Portfolio's investment objective, investment policies and investment
restrictions as the same are set forth in the currently effective prospectus and
statement of additional information relating to the shares of the Portfolio
under the Securities Act of 1933, as amended (the "Prospectus" and "Statement of
Additional Information", respectively). MLAM U.K. shall make recommendations
and effect transactions with respect to foreign currency matters, including
foreign exchange contracts, foreign currency options, foreign currency futures
and related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also
3
<PAGE>
make recommendations or take action as to the manner in which voting rights,
rights to consent to corporate action and any other rights pertaining to the
portfolio securities of the Portfolio shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Portfolio, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Portfolio or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Program and all Directors of the Program who are affiliated persons of MLAM
U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Portfolio pursuant to the
Management Agreement.
4
<PAGE>
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory services rendered with respect to the Portfolio,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Portfolio are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that directors, officers,
employees and shareholders of the Program are or may become interested in MLAM
U.K. and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Program, and
that MLAM U.K. and directors, officers, employees, partners and shareholders of
5
<PAGE>
its affiliates may become interested in the Portfolio as shareholders or
otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
6
<PAGE>
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until the date of termination of the Management
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Directors of the Program or by the vote of a majority of the
outstanding voting securities of the Portfolio and (ii) a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by MLAM or by vote of a majority of the outstanding voting securities
of the Portfolio, or by MLAM U.K., on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Program or by the vote of a
majority of outstanding voting securities of the Portfolio and (ii) a majority
of those
7
<PAGE>
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By
----------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By
----------------------------------------
Title:
9
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Builder Program, Inc.:
We consent to the use in Post-Effective Amendment No. 6 to Registration
Statement No. 33-53887 of our report dated March 14, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
May 23, 1997
