<PAGE> 1
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH ASSET GROWTH FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Asset Growth Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent risk,
through an 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. Under normal conditions, at least 65%, and as
much as all, of the Fund's total assets will be invested in U.S. and foreign
equity securities. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
Investments on an international basis involve certain risks and special
considerations. See "Risk Factors and Special Considerations."
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50 except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1.00. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 21, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C)
---------- ------------------------ ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(d) None None 5.25%(d)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever is
lower)................ None(e) 4.0% during the first 1% for one None(e)
year, decreasing 1.0% year
annually thereafter to
0.0% after the fourth year
Exchange Fee............ None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(f)............... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(g): ---- ----- ---- ----
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
---- ---- ----
Distribution Fees..... None 0.75% 0.75% None
---- ----
(Class B shares convert
to Class D shares
automatically after
approximately eight
years and cease being
subject to distribution
fees)
OTHER EXPENSES:
Custodial Fees.... 0.15% 0.15% 0.15% 0.15%
Shareholder
Servicing
Costs(h)........ 0.16% 0.17% 0.17% 0.16%
Other............. 2.30% 2.30% 2.30% 2.30%
---- ---- ---- ----
Total Other
Expenses...... 2.61% 2.62% 2.62% 2.61%
Reimbursement of
expenses(i)..... (.86) (.87) (.87) (.86)
---- ---- ---- ----
Total Fund Operating
Expenses.......... 2.50% 3.50% 3.50% 2.75%
==== ==== ==== ====
</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 28.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares"--page 30.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 28.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page 25.
(g) See "Purchase of Shares--Distribution Plans"--page 33.
(h) See "Management of the Fund--Transfer Agency Services"--page 26.
(i) Pursuant to state expense limitations imposed on the Fund, for the period
September 2, 1994 (commencement of operations) to September 30, 1994, the
Manager was required to reimburse its entire management fee and voluntarily
reimbursed a portion of other expenses (excluding 12b-1 fees). "Investment
Advisory Fees," "12b-1 Fees" and "Other Expenses," as shown above, are based
upon estimated amounts of expenses of the Fund expected to be incurred
during its fiscal year ending August 31, 1995.
2
<PAGE> 3
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE
PERIOD OF:
----------------------------------------
EXAMPLE. 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class set
forth above; (2) a 5% annual return throughout the
periods; and (3) redemption at the end of the period:
Class A............................................... $ 76 $ 126 $ 179 $321
Class B............................................... $ 75 $ 127 $ 182 $361*
Class C............................................... $ 45 $ 107 $ 182 $377
Class D............................................... $ 79 $ 133 $ 190 $344
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................... $ 76 $ 126 $ 179 $321
Class B............................................... $ 35 $ 107 $ 182 $361*
Class C............................................... $ 35 $ 107 $ 182 $377
Class D............................................... $ 79 $ 133 $ 190 $344
</TABLE>
- ---------------
* Assumes conversion to Class D Shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD") Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing(SM) System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds."
3
<PAGE> 4
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the 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 Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
4
<PAGE> 5
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2),(3)
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(4)
annually to 0.0%
- ------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
will be subject to a 1.0% CDSC for one year. See "Class A" and "Class D"
below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account are
entitled to purchase additional Class A shares in that account. Other
eligible investors include certain retirement plans and participants in
certain investment programs. In addition, Class A shares will be offered
to Merrill Lynch & Co., Inc. and its subsidiaries (the term
"subsidiaries," when used herein with respect to Merrill Lynch & Co.,
Inc. includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by Merrill Lynch & Co., Inc.) and
their directors and employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales
5
<PAGE> 6
charge but if the initial sales charge is waived such purchases
will be subject to a CDSC of 1% if the shares are redeemed within one
year after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to the Class B shares, an
ongoing distribution fee of 0.75% and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares and for certain retirement plans is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B
Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
average net assets and an ongoing distribution fee of 0.75%. Class C
shares are also subject to a CDSC if they are redeemed within one year
of purchase. Although Class C shares are subject to a 1.0% CDSC for
only one year (as compared to four years for Class B), Class C shares
have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of
average net assets. Class D shares are not subject to an ongoing
distribution fee or any CDSC when they are redeemed. Purchase of $1
million or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases will be subject to a
CDSC of 1% if shares are redeemed within one year of purchase. The
schedule of initial sales charges and reductions for the Class D
shares is the same as the schedule for Class A shares. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
6
<PAGE> 7
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under the
investor's particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors 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 towards 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 alternative 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 and Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution
7
<PAGE> 8
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."
FINANCIAL HIGHLIGHTS
The unaudited financial information in the table below is for the period
September 2, 1994 (commencement of operations) to September 30, 1994. Unaudited
financial statements for the period September 2, 1994 to September 30, 1994 are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
unaudited financial statements. Financial information is not presented for Class
C or Class D shares, since no shares of those classes are publicly issued as of
the date of this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 2, 1994+ TO
SEPTEMBER 30, 1994
--------------------------
CLASS A CLASS B
--------- --------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 10.00 $ 10.00
--------- --------
Investment income--net.......................................... 0.02 0.01
Realized and unrealized loss on investments--net................ (0.21) (0.21)
--------- --------
Total from investment operations................................ (0.19) (0.20)
--------- --------
Less dividends and distributions:
Investment income--net........................................ 0.00 0.00
Realized gain on investments--net............................. 0.00 0.00
--------- --------
Total dividends and distributions............................... 0.00 0.00
--------- --------
Net asset value, end of period.................................. $ 9.81 9.80
========= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............................. (1.90)% (2.00)%
========= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees........................... 2.48%* 2.50%*
========= ========
Expenses........................................................ 2.48%* 3.50%*
========= ========
Investment income--net.......................................... 2.40%* 1.38%*
========= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................ $ 2,082 $ 12,334
========= ========
Portfolio turnover.............................................. 0.00% 0.00%
========= ========
</TABLE>
- ---------------
* Annualized.
** Amount shown represents aggregate total investment return; total investment
returns exclude the effects of sales loads.
+ Commencement of operations.
8
<PAGE> 9
RISK FACTORS AND SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in U.S. and foreign securities. The
foreign securities in which the Fund may invest are not limited to securities of
issuers in developed countries or economies and may include securities of
issuers in less developed or emerging market economies. 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 Fund 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 Fund's assets denominated in those currencies and the Fund's yield
on such assets. Foreign currency exchange rates are determined by forces of
supply and demand on the foreign exchange markets. These forces are, in turn,
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation, and other factors.
Moreover, individual foreign economies may differ favorably or unfavorably from
the 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. In addition, certain
foreign investments may be subject to foreign withholding taxes. Subject to
certain limitations, investors will be able to deduct such taxes in computing
their taxable income or to use such amounts as credits against their U.S. income
taxes if more than 50% of the Fund's total assets at the close of any taxable
year consists of stock or securities in foreign corporations and certain other
conditions are met. However, certain retirement accounts cannot claim foreign
tax credits on investments in foreign securities held in the Fund. See
"Additional Information--Taxes." Foreign financial markets, while generally
growing in volume, typically have substantially less volume than U.S. markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. Foreign markets also
have different clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S. securities. There
is generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the U.S.
9
<PAGE> 10
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of covered options on portfolio securities and to hedge
its portfolio against movements in the securities markets and exchange rates
between currencies by the use of derivatives, such as options, futures and
options thereon. 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 currencies which are the subject
of the hedge. There can be no assurance that a liquid secondary market for
options and futures contracts will exist at any specific time. Although the
Fund's use of futures and options transactions for hedging should tend to
minimize the risk of loss due to a decline in value of the hedged position, it
will also tend to limit any potential gain to the Fund that might result from an
increase in value of the hedged position and, to the extent that the Manager's
views as to certain market movements is incorrect, the use of hedging could
result in losses greater than if no hedging had been used. See "Investment
Objective and Policies--Portfolio Strategies Involving Options and Futures."
Certain derivative securities in which the Fund may invest, 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
values of such securities will generally be more volatile than the market values
of fixed-rate securities. See "Investment Objective and Policies--Other
Investment Policies and Practices--Derivative Securities."
The Fund has established no rating criteria for the fixed income securities
in which it may invest. Securities rated in the medium to lower rating
categories of nationally recognized statistical rating organizations 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
Fund does not intend to purchase securities that are in default.
The net asset value of the Fund's shares, to the extent the Fund invests in
fixed income securities, will be affected by changes in the general level of
interest rates. When interest rates decline, the value of a portfolio of fixed
income securities can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio of fixed income securities can be expected to decline.
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through an 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
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and economic trends. Total investment return is the aggregate of capital value
changes and income. This objective is a fundamental policy which the Fund may
not change without a vote of a majority of the Fund's outstanding voting
securities. There can be no assurance that the Fund's investment objective will
be achieved. Under normal conditions, at least 65%, and as much as all, of the
Fund's total assets will be invested in equity securities.The Fund may employ a
variety of instruments and techniques to enhance income and to hedge against
market and currency risk, as described under "Portfolio Strategies Involving
Options and Futures" below.
The Fund invests in a portfolio of U.S. and foreign equity, debt and money
market securities. The composition of the portfolio among these securities and
markets are varied from time to time by the Fund's manager, Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management (the
"Manager"), in response to changing market and economic trends. This investment
approach provides the Fund 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 Fund 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 Fund 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 Fund 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 Manager
considers, 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 Manager also considers 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.
In selecting securities denominated in foreign currencies, the Manager
considers, 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 Fund of securities denominated in
such currency. Conversely, a decline in the value of the currency will reduce
the total return. The Manager may seek to hedge all or a portion of the Fund's
foreign securities through the use of forward foreign currency contracts,
currency options, futures contracts and options thereon. See "Portfolio
Strategies Involving Options and Futures" below.
While there are no prescribed limits on the geographical allocation of the
Fund's assets, the Manager 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 Manager
anticipates that a portion of the Fund's assets normally will be invested in the
U.S. securities markets and three other major capital markets. Under normal
conditions, the Fund's investments will be denominated in at least three
currencies or multinational currency units. However, the Fund reserves the right
to invest substantially all of its assets in U.S. markets or U.S.
dollar-denominated obligations when market conditions warrant.
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Although up to 100% of the Fund's total assets may be invested in equity
securities, the Manager anticipates that the Fund's portfolio generally will
include both equity and debt securities.
EQUITY SECURITIES
Within the portion of the Fund's portfolio allocated to equity securities,
the Manager seeks to identify the securities of companies and industry sectors
which are expected to provide high total return relative to alternative equity
investments. The Fund generally seeks to invest in securities the Manager
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. The Fund may also 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 Fund 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 Manager seeks 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. For
example, the value of precious metals can be expected to benefit from such
factors as rising inflationary pressures or other economic, political or
financial uncertainty or instability. Real estate values, which are influenced
by a variety of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions favor a
particular real asset as compared to other investment opportunities, the Fund
may emphasize investments related to that asset such as investments in precious
or industrial metal-related securities or real estate-related securities as
described below. The Fund may invest up to 25% of its total assets in any
particular industry sector.
Precious and Industrial Metal-Related Securities. Precious and industrial
metal-related securities are equity securities of companies that explore for,
extract, process or deal in precious or industrial metals, i.e., gold, silver,
platinum, iron, copper and aluminum, and asset-based securities indexed to the
value of such metals. Based on historical experience, during periods of economic
or financial instability the securities of such companies may be subject to
extreme price fluctuations, reflecting the high volatility of precious and
industrial metal prices during such periods. In addition, the instability of
precious and industrial metal prices may result in volatile earnings of precious
and industrial metal-related companies which, in turn, may affect adversely the
financial condition of such companies. Asset-based securities are debt
securities, preferred stock or convertible securities, the principal amount,
redemption terms or conversion terms of which are related to the market price of
some precious or industrial metal such as gold bullion. The Fund will purchase
only asset-based securities which are rated, or are issued by issuers that have
outstanding debt obligations rated, BBB or better
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by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors
Service, Inc. ("Moody's") or commercial paper rated A-1 by S&P or Prime-1 by
Moody's or of issuers that the Manager has determined to be of similar
creditworthiness. Securities rated BBB by S&P or Baa by Moody's, while
considered "investment grade," have certain speculative characteristics. If the
asset-based security is backed by a bank letter of credit or other similar
facility, the Manager may take such backing into account in determining the
creditworthiness of the issuer.
Real Estate-Related Securities. The real estate-related securities which
are emphasized are equity securities of real estate investment trusts, which own
income-producing properties, and mortgage real estate investment trusts which
make various types of mortgage loans often combined with equity features. The
securities of such trusts generally pay above average dividends and may offer
the potential for capital appreciation. Such securities will be subject to the
risks customarily associated with the real estate industry, including declines
in the value of the real estate investments of the trusts. Real estate values
are affected by numerous factors including (i) governmental regulation (such as
zoning and environmental laws) and changes in tax laws; (ii) operating costs;
(iii) the location and the attractiveness of the properties; (iv) changes in
economic conditions (such as fluctuations in interest and inflation rates and
business conditions); and (v) supply and demand for improved real estate. Such
trusts also are dependent on management skill and may not be diversified in
their investments.
DEBT SECURITIES
The debt securities in which the Fund may invest include securities issued
or guaranteed by the U.S. Government and its agencies or instrumentalities, by
foreign governments (including foreign states, provinces and municipalities) and
agencies or instrumentalities thereof and debt obligations issued by U.S. and
foreign corporations. Such securities may include mortgage-backed securities
issued or guaranteed by governmental entities or by private issuers. In
addition, the Fund may invest in debt securities issued or guaranteed 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 International Bank for Reconstruction and Development
(the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (e.g., obligations
of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the
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yield and price of the securities. Accelerated prepayments adversely impact
yields for pass-through securities purchased at a premium (i.e., a price in
excess of principal amount) and may involve additional risk of loss of principal
because the premium may not have been fully amortized at the time the obligation
is repaid. The opposite is true for pass-through securities purchased at a
discount. The Fund may purchase mortgage-related securities at a premium or at a
discount.
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 Fund will
invest in foreign government securities of issuers considered stable by the
Manager. The Manager 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.
The Fund generally invests the portion, if any, of its assets allocated to
debt obligations in the securities of governmental issuers and in corporate debt
securities, including convertible debt securities, rated BBB or better by S&P or
Baa or better by Moody's or which, in the Manager's judgment, possess similar
credit characteristics ("investment grade bonds"). Debt securities ranked in
these rating categories, while considered "investment grade," have more
speculative characteristics and are more likely to be downgraded than securities
rated in the three highest rating categories. See the Statement of Additional
Information for more information regarding ratings of debt securities. The
Manager considers the ratings assigned by S&P and Moody's as one of several
factors in its independent credit analysis of issuers. If a debt security in the
Fund's portfolio is downgraded below investment grade, the Manager will consider
factors such as price, credit risk, market conditions and interest rates and
will sell such security only if, in the Manager's judgment, it is advantageous
to do so.
The Fund is authorized to invest a portion of its assets in fixed income
securities rated below investment grade by a nationally recognized rating agency
or in unrated securities which, in the Manager's judgment, possess similar
credit characteristics ("high yield, high risk bonds"). The Fund's Board of
Directors has adopted a policy that the Fund will not invest more than 35% of
its assets in obligations rated below Baa or BBB by Moody's or S&P,
respectively. Investment in high yield, high risk bonds (which are sometimes
referred to as "junk" bonds) involves substantial risk. Investments in high
yield, high risk bonds will be made only when, in the judgment of the Manager,
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 Ba or lower by Moody's are considered by those
rating agencies to have varying degrees of speculative characteristics.
Consequently, although high yield, high risk 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 Fund will not invest in debt securities in the
lowest rating categories (CC or lower for S&P or Ca or lower for Moody's) unless
the Manager 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 the Statement of Additional Information
for additional information regarding high yield, high risk bonds.
High yield, high risk 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, high risk bonds frequently are junior
obligations of their issuers, so that in the event of
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the issuer's bankruptcy, claims of the holders of high yield, high risk bonds
will be satisfied only after satisfaction of the claims of senior
securityholders. While the high yield, high risk bonds in which the Fund 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 Fund purchases a particular security,
in which case the Fund may experience losses and incur costs.
High yield, high risk 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, high risk bonds than on higher rated fixed
income securities. Like higher rated fixed income securities, high yield, high
risk 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, high risk bond market which may be less liquid than the market for
higher rated fixed income securities even under normal economic conditions.
Also, there may be significant disparities in the prices quoted for high yield,
high risk 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 Fund receives for its high
yield, high risk bonds to be reduced, or the Fund may experience difficulty in
liquidating a portion of its portfolio. Under such conditions, judgment may play
a greater role in valuing certain of the Fund's portfolio securities than in the
case of securities trading in a more liquid market.
The average maturity of the Fund's portfolio of debt securities will vary
based on the Manager's assessment of pertinent economic 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.
MONEY MARKET SECURITIES
Money market securities in which the Fund may invest consist of short-term
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities; commercial paper, including variable amount master demand
notes, rated at least "A" by S&P or "Prime" by Moody's; and repurchase
agreements, purchase and sale contracts, and money market instruments issued by
commercial banks, domestic savings banks, and savings and loan associations with
total assets of at least one billion dollars. 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).
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of covered options on portfolio securities and to hedge
its portfolio against adverse movements in the equity, debt and currency
markets. The Fund has authority to write (i.e., sell) covered put and call
options on its portfolio securities, purchase put and call options on securities
and engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio strategies
is described below. Although certain risks are involved in options and futures
transactions (as discussed below and in "Risk Factors in Options and Futures
Transactions" further below), the Manager believes that, because the Fund will
(i) write only covered options on portfolio securities and
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(ii) engage in other options and futures transactions only for hedging purposes,
the options and futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of options and
futures transactions. While the Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of its shares, the net asset value
of the Fund's shares will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will only engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity, debt and currency markets
occur. Reference is made to the Statement of Additional Information for further
information concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt 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 Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be 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 Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities (including
stock index options discussed below) if as a result of such purchase, the
aggregate cost of
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all outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on exercise
or assignment, the parties to the contract pay or receive an amount of cash
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index, e.g., the S&P 500 Index, or on a
narrow index representing an industry or market segment, e.g., the AMEX Oil &
Gas Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts in
connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant advance, it may
purchase futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a futures contract or the purchase of a
call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its 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
the Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
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The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options"). In
general, exchange-traded contracts are third-party contracts (i.e., performance
of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not 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 the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund 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 Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund 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 a call
option in this illustration, the Fund gives up the opportunity to profit without
limit from increases in the relative value of the yen to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of
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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 Fund but not yet delivered, the proceeds thereof in its denominated
currency. The Fund may not incur potential net liabilities of more than 20% of
its total assets from foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund 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 Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
These restrictions are in addition to other restrictions on the Fund's hedging
activities mentioned herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund'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 Fund will engage in OTC options, including
over-the-counter stock index options, over-the-counter foreign currency options
and options on foreign currency futures, only with member banks of the Federal
Reserve System and primary dealers in U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 10% of the total assets
of the Fund, taken at market value, together with all other assets of the Fund
which are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option is
"in-the-money." This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Directors of the Fund without the approval of the
Fund's shareholders. However, the Fund will not change or modify this policy
prior to the change or modification by the Securities and Exchange Commission
staff of its position.
19
<PAGE> 20
Risk Factors in Options and Futures Transactions. Utilization of
derivatives, such as options and futures, to hedge the portfolio involves the
risk of imperfect correlation in movements in the price of options and futures
and movements in the price of the securities or currencies which are the subject
of the hedge. If the price of the options or futures moves more or less than the
price of the hedged securities or currencies, the Fund 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 Manager's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund 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 Fund may
purchase or sell fewer stock index options or futures contracts if the
volatility of the price of the hedged securities is historically less than that
of the stock index options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the stock index
option or futures contract approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of over-the-counter
transactions, the Manager believes the Fund 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 Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which the Fund intends 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 Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
The Fund presently does not intend to invest in other types of derivative
transactions; however, in response to changes in market conditions or if other
types of derivative instruments are developed in the future which the Manager
believes are appropriate for the Fund, the Fund will notify investors of its
intention to invest in these instruments.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. However, the Fund's investments will be limited
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Additional
Information--Taxes." To qualify, among other requirements, the Fund will limit
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 Fund's total assets will be
invested in the securities of a single issuer and (ii) with respect to 50% of
the
20
<PAGE> 21
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 Fund
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 Fund assumes large
positions in the securities of a small number of issuers, the Fund's yield 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.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. See "Risk Factors and Special Considerations" above. Where
possible, the Fund 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 are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. Securities
firms may receive brokerage commissions on certain portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon exercise of options. The Fund has no
obligation to deal with any broker in the execution of transactions in portfolio
securities. Under the Investment Company Act, persons affiliated with the Fund,
including Merrill Lynch, are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Securities and Exchange
Commission. Affiliated persons of the Fund, and affiliated persons of such
affiliated persons, may serve as its broker in transactions conducted on an
exchange and in over-the-counter transactions conducted on an agency basis. In
addition, consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., the Fund may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of the
Fund will be sold by Merrill Lynch. Costs associated with transactions in
foreign securities are generally higher than with transactions in U.S.
securities, although the Fund will endeavor to achieve the best net results in
effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Purchasing a security on a
when-issued or delayed basis can involve a risk that the market price at the
time of delivery may be lower than the agreed upon purchase price, in which case
there could be an unrealized loss at the time of delivery. Although the Fund has
not established any limit on the percentage of its assets that may be committed
in connection with such transactions, the Fund will 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 amount of its
commitment in connection with such purchase transactions.
Derivative Securities. The Fund may invest in a variety of instruments
which may be characterized as "Derivative Securities." The Fund may invest in
derivative securities whose potential investment return is based on the change
in particular measurements of value or rate (an "index"). As an illustration,
the Fund may invest in a security that pays interest and returns principal based
on the change in an index of interest
21
<PAGE> 22
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
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund 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 Fund
invests in such types of securities, it will be subject to the risks associated
with changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal.
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 values of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund 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 Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund 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 Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and 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 10% of its
assets taken at the time of acquisition of such commitment or security. The Fund
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 the value of the security, if issued, 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, the Fund
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
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund'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. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary
22
<PAGE> 23
dealer in U.S. Government securities or an affiliate thereof. Under such
agreements, the other party agrees, upon entering into the contract with the
Fund, 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 it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations. Such agreements usually cover short periods, often 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, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but constitute only collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
of possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of return to the Fund would depend on intervening
fluctuations of the market values of such securities and the accrued interest on
the securities. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest more
than 10% of its net assets in repurchase agreements maturing in more than seven
days.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3 of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the 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 policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act. During the period of such a loan, the Fund receives
the income on the loaned securities and either receives the income on the
collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (a) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Among its fundamental policies,
the Fund may not invest more than 25% of its total assets, taken at market value
at the time of each investment, in the securities of issuers of any particular
industry (excluding the U.S. Government and its agencies or instrumentalities).
Other fundamental policies include policies which (i) limit investments in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including repurchase
agreements and purchase and sale contracts maturing in more than seven days, if,
regarding all such securities, more than 15% of its net assets, taken at market
value, would be invested
23
<PAGE> 24
in such securities, (ii) limit investments in securities of other investment
companies, except in connection with certain specified transactions and with
respect to investments of up to 5% of the Fund's assets in the securities of any
one investment company and up to an aggregate of 10% of the Fund's assets in
securities of investment companies and (iii) restrict the issuance of senior
securities and limit bank borrowings except that the Fund may borrow amounts of
up to 33 1/3% of its assets. The Fund will not purchase securities while
borrowings exceed 5% of its total assets. The Fund has no present intention to
borrow money in amounts exceeding 5% of its total assets. Although not a
fundamental policy, the Fund will include OTC options and the securities
underlying such options in calculating the amount of its total assets subject to
the limitation set forth in clause (i) above. However, as discussed above, the
Fund may treat the securities it uses as cover for written OTC options as
liquid, and, therefore, will be excluded from this restriction, provided it
follows a specified procedure. The Fund will not change or modify this policy
prior to the change or modification by the staff of the Securities and Exchange
Commission of its position regarding OTC options, as discussed above.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if in its judgment, such transactions are advisable in
light of a change in circumstances in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 200% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year. High portfolio turnover involves correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund. In addition, high portfolio turnover can be expected to
result in the recognition of capital gains and losses. To the extent the Fund
distributes short-term capital gains, such distributions will be taxable as
dividends. The Fund's ability to enter into certain short-term transactions will
be limited by the requirement that gains on certain securities held by the Fund
for less than three months may not exceed 30% of its annual gross income for
Federal income tax purposes.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund and their principal employment are as follows:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Manager and
Fund Asset Management, L.P.; President and Director of Princeton Services, Inc.;
Executive Vice President of Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"); and Director of Merrill Lynch
Funds Distributor, Inc.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
24
<PAGE> 25
WALTER MINTZ--Special Limited Partner of Cumberland Partners (investment
partnership).
MELVIN R. SEIDEN--President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD--Principal of Fernwood Associates (financial
consultants).
JOE GRILLS--Member of the Committee on Investment of Employee Benefits
Assets of the Financial Executives Institute.
HARRY WOOLF--Professor and former Director of the Institute for Advanced
Study (private institution devoted to the encouragement, support and patronage
of learning).
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business as
Merrill Lynch Asset Management, is owned and controlled by Merrill Lynch & Co.,
Inc., a financial services holding company and the parent of Merrill Lynch. The
Manager provides the Fund with management and investment advisory services. The
Manager or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the
manager for more than 100 registered investment companies. The Manager also
provides investment advisory services to individual and institutional accounts.
As of August 31, 1994, the Manager and FAM had a total of approximately $165.7
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places transactions
accordingly. The Manager is also obligated to perform certain administrative and
management services for the Fund and is obligated to provide all of the office
space, facilities, equipment and personnel necessary to perform its duties under
the Management Agreement. Joel Heymsfeld, who has been a Vice President of the
Manager since 1978, is primarily responsible for the day-to-day management of
the Fund's portfolio.
The Management Agreement provides that the Fund will pay the Manager a
monthly fee at the annual rate of 0.75% of the average daily net assets of the
Fund. This fee is higher than that of most mutual funds, but management of the
Fund believes this fee, which is typical for a global fund, is justified by the
global nature of the Fund.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the investment
advisory fee, legal and audit fees, registration fees, unaffiliated Directors'
fees and expenses, custodian and transfer agency fees, accounting costs, the
costs of issuing and redeeming shares and certain of the costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information. Accounting services are provided to the Fund by the Manager, and
the Fund reimburses the Manager for its costs in connection with such services
on a semi-annual basis.
25
<PAGE> 26
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly
owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement ( the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
an annual fee of $11.00 per Class A or Class D shareholder account and $14.00
per Class B or Class C shareholder account, nominal miscellaneous fees (e.g.,
account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and Merrill Lynch, acts as the distributor of the shares of the
Fund.
Shares of the Fund are offered continuously for sale by the Distributor and
other eligible securities dealers (including Merrill Lynch). Shares of the Fund
may be purchased from securities dealers or by mailing a purchase order directly
to the Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except for retirement plans, the minimum initial
purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which includes
orders received after the determination of the net asset value on the previous
day, the applicable offering price will be based on the net asset value as of
4:15 p.m., New York time, on the day the orders are placed with the Distributor,
provided the orders are received prior to 4:30 p.m., New York time, on that day.
If the purchase orders are not received by the Distributor prior to 4:30 p.m.,
New York time, such orders shall be deemed received on the next business day.
The Fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Any order may be rejected by the Distributor or the Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to benefit
themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous
26
<PAGE> 27
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a
contingent deferred sales charge and ongoing distribution fees. A discussion of
the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund, and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
27
<PAGE> 28
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2),(3)
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(4)
annually to 0.0%
- ------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
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 charges 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 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
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.
28
<PAGE> 29
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE THE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- ------------------ -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.17 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after October
21, 1994 may not be subject to an initial sales charge but will be subject to
a CDSC of 1% if the shares are redeemed within one year after purchase. Class
A purchases made prior to October 21, 1994 may be subject to a CDSC if the
shares are redeemed within one year of purchase at the following annual
rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and
0.25% on purchases of more than $5,000,000 in lieu of paying an initial sales
charge. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1 million or more of Class A
or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to select 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 shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act. For the period September
2, 1994 to September 30, 1994, the Fund sold 219,486 Class A shares, for
aggregate net proceeds of $2,190,807. The gross sales charge for the sale of
Class A shares of the Fund was $77,723, of which $401 and $77,322 were received
by the Distributor and Merrill Lynch, respectively.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services and
certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser
Program. In addition, Class A shares will be offered at net asset value to
Merrill Lynch & Co., Inc. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional
29
<PAGE> 30
Information are met. For example, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Merrill Lynch
Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors."
Class D shares are also offered at net asset value without sales charge to
an investor who has a business relationship with a financial consultant, if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, 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, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans." The proceeds
from the account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as
30
<PAGE> 31
the payment, from its own funds of compensation to financial consultants for
selling Class B and Class C shares. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge 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>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------------------- -------------------------
<S> <C>
0-1.................................................................... 4.00%
1-2.................................................................... 3.00%
2-3.................................................................... 2.00%
3-4.................................................................... 1.00%
4 and thereafter....................................................... 0.00%
</TABLE>
For the period September 2, 1994 to September 30, 1994, the Distributor
received CDSCs of $511 with respect to redemptions of Class B shares, all of
which were paid to Merrill Lynch.
In determining whether a contingent deferred sales charge 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
31
<PAGE> 32
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12, and during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the charge because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from Individual Retirement Accounts ("IRAs")
or other retirement plans or following the death or disability (as defined in
the Code) of a shareholder.
The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC
is also waived for any Class B shares which are purchased by an eligible 401(k)
or eligible 401(a) plan and which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC is also waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charge--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares 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 for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion
32
<PAGE> 33
of Class B shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Plan was established),
all Class B shares of all MLAM-advised mutual funds held in that Class B
Retirement Plan will be converted into Class D shares of the appropriate funds.
Subsequent to such conversion, that retirement plan will be sold Class D shares
of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
33
<PAGE> 34
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the period September 2, 1994 to September 30, 1994, the Fund paid the
Distributor distribution fees of $8,624 under the Class B Distribution Plan. The
Fund did not begin to offer shares of Class C or Class D publicly until the date
of this Prospectus. Accordingly, no payments have been made pursuant to the
Class C or Class D Distribution Plans prior to the date of this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expenses and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and
contingent deferred sales charges, and the expenses consist of financial
consultant compensation.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, 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."
34
<PAGE> 35
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the Fund's distribution fee and the CDSC borne
by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Funds
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent may
be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the notice must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices and
35
<PAGE> 36
certain other financial institutions) as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 4:30 p.m., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
36
<PAGE> 37
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch Blueprint(SM) Program.
Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various plans
and services, or to change options with respect thereto, can be obtained from
the Fund by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his Investment Account at any
time by mailing a check directly to the Transfer Agent. Shareholders also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund each
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire
37
<PAGE> 38
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund 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 Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the program of Class A or Class D shares of
a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch or by
38
<PAGE> 39
written notification or telephone call (1-800-MER-FUND) to the Transfer Agent if
the shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account in the form
of payments by check or through automatic payment by direct deposit to his bank
account on either a monthly or quarterly basis. A Class A or Class D shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by prearranged
charges of $50 or more to his regular bank account. Investors who maintain
CMA(R) accounts may arrange to have periodic investments made in the Fund in
their CMA(R) accounts or in certain related accounts in amounts of $250 or more
through the CMA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. With respect to such transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including applicable brokerage commission or dealer spread),
size of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Manager generally seeks reasonably competitive commission rates, the Fund will
not necessarily be paying the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of its portfolio transactions. The Fund pays brokerage fees to Merrill
Lynch in connection with portfolio transactions executed by Merrill Lynch.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Information so received is in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement, and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. Supplemental investment research
received by the Manager also may be used in connection with other investment
advisory accounts of the Manager and its affiliates. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return
39
<PAGE> 40
is computed separately for Class A, Class B, Class C and Class D shares in
accordance with a formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annualized rates of return calculations. Aside from
the impact on the performance data calculations of including or excluding the
maximum applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
annual rates of return reflect compounding; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time. In
advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or to reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the contingent deferred sales charge
and therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the contingent deferred sales charge, a lower amount of
expenses may be deducted. See "Purchase of Shares." The Fund's total return may
be expressed either as a percentage or as a dollar amount in order to illustrate
the effect of such total return on a hypothetical $1,000 investment in the Fund
at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk-adjusted performance ratings assigned by
40
<PAGE> 41
Morningstar Publications, Inc. in advertising or supplemental sales literature.
As with other performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid at least annually.
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. All net realized long-or short-term
capital gains, if any, are distributed to the Fund's shareholders at least
annually.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Additional Information--Determination of Net
Asset Value." Dividends and distributions may be reinvested automatically in
shares of the Fund, at net asset value without a sales charge. Shareholders may
elect in writing to receive any such dividends or distributions, or both, in
cash. Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of the Fund or received in cash. From time
to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with a Federal income tax requirement that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be able
to make any ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as returns of capital to
shareholders, rather than as ordinary dividends, reducing each shareholder's tax
basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information--Taxes." If in any fiscal year the
Fund has net income from certain foreign currency transactions, such income will
be distributed annually.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
41
<PAGE> 42
DETERMINATION OF NET ASSET VALUE
Net asset value per share of all classes of the Fund is determined once
daily as of 4:15 p.m., New York time, on each day during which the New York
Stock Exchange is open for trading. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The net asset value is computed by dividing the market
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
and any account maintenance and/or distribution fees payable to the Distributor,
are accrued daily. The per share net asset value of the Class A shares generally
will be higher than the per share net asset value of shares of the other
classes, reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares and the daily expense accruals of the account maintenance
fees applicable with respect to Class D shares. Moreover, the per share net
asset value of Class D shares generally will be higher than the per share net
asset value of Class B and Class C shares, reflecting the daily expense accruals
of the distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge immediately after the payment
of dividends or distributions which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price 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 as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price or yield equivalents obtained from one or more
dealers in the over-the-counter market prior to the time of valuation. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Board of Directors of the Fund.
TAXES
The Fund intends to continue to elect to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. If it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income and gains.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
42
<PAGE> 43
Dividends are taxable to shareholders even if they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends and capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January that was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under an applicable tax treaty. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Dividends, interest and capital gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund expects to qualify for, and intends to make,
an election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such
withholding taxes in their U.S. income tax returns as gross income and treat
such proportionate shares as taxes paid by them. Shareholders will be entitled,
subject to certain limitations, to deduct such proportionate shares in computing
their taxable incomes or, alternatively, to use them as foreign tax credits
against their U.S. income taxes. No deductions for foreign taxes, however, may
be claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, certain non-corporate shareholders
may be subject to a 31% withholding tax on ordinary income dividends and capital
gain dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary dividend distributions, and any
distributions
43
<PAGE> 44
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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 or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on June 6, 1994. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance services
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares." The Fund has
received an order from the Securities and Exchange Commission permitting the
issuance and sale of multiple classes of Common Stock. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
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<PAGE> 45
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold 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. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Shares have the conversion rights
described in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Transfer Agency Mutual Fund Operations
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 Financial Data Services,
Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
45
<PAGE> 46
[This page is intentionally left blank.]
46
<PAGE> 47
MERRILL LYNCH ASSET GROWTH FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Asset Growth Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ...................................................
2. .......................................................... 5. ...................................................
3. .......................................................... 6. ...................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address ........................................................................
................................................ Date ........................
(Zip Code)
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Asset Growth Fund, Inc. Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name ......................................................................
Bank Number ................................. Account Number ...................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ...................... Date.............................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
A-1
<PAGE> 48
MERRILL LYNCH ASSET GROWTH FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
......................, 19 .......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Asset Growth Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13 month period which will equal or
exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Asset Growth Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Asset Growth Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- -- --
- -- --
This form when completed should be mailed to:
Merrill Lynch Asset Growth Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................
Dealer Name and Address
By.............................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
- --------- ------------ ..............................
Branch-Code F/C No. F/C Last Name
- --------- -----------------
- --------- -----------------
</TABLE>
Dealer's Customer A/C No.
A-2
<PAGE> 49
MERRILL LYNCH ASSET GROWTH FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name................................................................................
First Name Initial Last Name ------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Asset Growth
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on _____________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $______
or / / ___% of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address ........................................................................
........................................................................
Signature of Owner
.....................................................Date.......................
Signature of Co-Owner (if any) .................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ..................................Account Number....................
Bank Address ...................................................................
...................................................................
Signature of Depositor ..............................Date.......................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE> 50
MERRILL LYNCH ASSET GROWTH FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Asset Growth Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Asset Growth Fund, Inc., as indicated below:
Amount of each ACH debit $ ..................................................
Account No. .................................................................
Please date and invest ACH debits on the 20th of each month
beginning _____________ or as soon as thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE> 51
MANAGER
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 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
Attn: Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 18th Floor
Brooklyn, New York, 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
<PAGE> 52
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................... 2
Merrill Lynch Select Pricing(SM) System 3
Financial Highlights.................... 8
Risk Factors and Special
Considerations........................ 9
Investment Objective and Policies....... 10
Equity Securities..................... 12
Debt Securities....................... 13
Money Market Securities............... 15
Portfolio Strategies Involving Options
and Futures......................... 15
Other Investment Policies and
Practices........................... 20
Management of the Fund.................. 24
Board of Directors.................... 24
Management and Advisory
Arrangements........................ 25
Transfer Agency Services.............. 26
Purchase of Shares...................... 26
Initial Sales Charge Alternatives--
Class A and Class D Shares.......... 28
Deferred Sales Charge Alternatives--
Class B and Class C Shares.......... 30
Distribution Plans.................... 33
Limitations on the Payment of Deferred
Sales Charges....................... 35
Redemption of Shares.................... 35
Redemption............................ 35
Repurchase............................ 36
Reinstatement Privilege--Class A and
Class D Shares...................... 36
Shareholder Services.................... 37
Portfolio Transactions and Brokerage.... 39
Performance Data........................ 39
Additional Information.................. 41
Dividends and Distributions........... 41
Determination of Net Asset Value...... 42
Taxes................................. 42
Organization of the Fund.............. 44
Shareholder Reports................... 45
Shareholder Inquiries................. 45
Authorization Form...................... A-1
</TABLE>
Code 18237--1094
[L O G O]
MERRILL LYNCH
ASSET
GROWTH FUND, INC.
[A R T]
Prospectus
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ASSET GROWTH FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Asset Growth Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking high total investment return, consistent with prudent risk,
through an 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. Under normal conditions, at least 65%, and as
much as all, of the Fund's total assets will be invested in U.S. and foreign
equity securities. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may employ a variety of instruments and
techniques to enhance income and to hedge against market and currency risk.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE> 54
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high total investment return,
consistent with prudent risk, through an 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 which the Fund may not change without a vote of a majority of
the Fund's outstanding voting securities. Under normal conditions, at least 65%,
and as much as all, of the Fund's total assets will be invested in equity
securities. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
Although up to 100% of the Fund's total assets may be invested in equity
securities, the Manager anticipates that the Fund's portfolio generally will
include both equity and debt securities.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), 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 the Fund anticipates that its annual
turnover rate should not exceed 200% under normal conditions, it is impossible
to predict portfolio turnover rates. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. The Fund is subject to the
Federal income tax requirement that less than 30% of the Fund's gross income
must be derived from gains from the sale or other disposition of securities held
for less than three months.
The Fund'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 Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund 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 Fund does
not believe that these considerations will have any significant effect on its
portfolio strategy, although there can be no assurance in this regard.
PRECIOUS AND INDUSTRIAL METAL-RELATED SECURITIES
The Fund may invest in the equity securities of companies that explore for,
extract, process or deal in precious or industrial metals, i.e., gold, silver,
platinum, iron, copper and aluminum, and in asset-based securities indexed to
the value of such metals. Such securities may be purchased when they are
believed to be attractively priced in relation to the value of a company's
precious or industrial metal-related assets or when the value of precious or
industrial metals are expected to benefit from inflationary pressure or other
economic, political or financial uncertainty or instability. The prices of
precious and industrial metals and of the securities of precious and industrial
metal-related companies historically have been subject to high volatility. In
addition, the earnings of precious and industrial metal-related companies may be
adversely affected by volatile metals prices which may adversely affect the
financial condition of such companies.
2
<PAGE> 55
The major producers of gold include the Republic of South Africa, the
former republics of the Soviet Union, Canada, the United States, Brazil and
Australia. Sales of gold by the former republics of the Soviet Union are largely
unpredictable and often relate to political and economic considerations rather
than to market forces. Economic, social and political developments within South
Africa may significantly affect South African gold production.
The Fund may invest in debt securities, preferred stock or convertible
securities, the principal amount, redemption terms or conversion terms of which
are related to the market price of some metals such as gold bullion. These
securities are referred to as "asset-based securities." The Fund will purchase
only asset-based securities which are rated, or are issued by issuers that have
outstanding debt obligations rated, BBB or better by Standard & Poor's
Corporation ("S&P") or Baa or better by Moody's Investors Service, Inc.
("Moody's") or commercial paper rated A-1 by S&P or Prime-1 by Moody's or of
issuers that the Manager has determined to be of similar creditworthiness. If
the asset-based security is backed by a bank letter of credit or other similar
facility, the Manager may take such backing into account in determining the
creditworthiness of the issuer. While the market prices for an asset-based
security and the related natural resource asset generally are expected to move
in the same direction, there may not be perfect correlation in the two price
movements. Asset-based securities may not be secured by a security interest in
or claim on the underlying natural resource asset. The asset-based securities in
which the Fund may invest may bear interest or pay preferred dividends at below
market (or even at relatively nominal) rates. As an example, assume gold is
selling at a market price of $300 per ounce and an issuer sells a $1,000 face
amount gold related note with a seven year maturity, payable at maturity at the
greater of either $1,000 in cash or in the then market price of three ounces of
gold. If at maturity, the market price of gold is $400 per ounce, the amount
payable on the note would be $1,200. Certain asset-based securities may be
payable at maturity in cash at the stated principal amount or, at the option of
the holder, directly in a stated amount of the asset to which it is related. In
such instance, because the Fund presently does not intend to invest directly in
natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists, prior to maturity if the value of
the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
REAL ESTATE-RELATED SECURITIES
The real estate-related securities which will be emphasized by the Fund are
equity securities of real estate investment trusts, which own income-producing
properties, and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The securities of such
trusts generally pay above average dividends and may offer the potential for
capital appreciation. Such securities will be subject to the risks customarily
associated with the real estate industry, including declines in the value of the
real estate investments of the trusts. Real estate values are affected by
numerous factors including (i) governmental regulations (such as zoning and
environmental laws) and changes in tax laws, (ii) operating costs, (iii) the
location and the attractiveness of the properties, (iv) changes in economic
conditions (such as fluctuations in interest and inflation rates and business
conditions) and (v) supply and demand for improved real estate. Such trusts also
are dependent on management skill and may not be diversified in their
investments.
3
<PAGE> 56
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return through
the use of options on portfolio securities and to hedge its portfolio against
movements in the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in stock
index options, stock index futures and stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
transactions and foreign currency options and futures, and related options on
such futures. Each of such portfolio strategies is described in the Prospectus.
Although certain risks are involved in transactions in derivatives, such as
options and futures (as discussed in the Prospectus and below), the Manager
believes that, because the Fund will (i) write only covered call options on
portfolio securities and (ii) engage in other options and futures transactions
only for hedging purposes, the options and futures portfolio strategies of the
Fund will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of its shares, the net asset value of the Fund's shares will fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective. The
following is further information relating to portfolio strategies involving
options and futures that the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a particular hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt 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 Fund will be obligated to purchase the
4
<PAGE> 57
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. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, New York Stock Exchange, Philadelphia Stock Exchange and Pacific Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock Exchange
and the Amsterdam Stock Exchange. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect a
closing transaction in a particular option, with the result, in the case of a
covered call option, that the Fund will not be able to sell the underlying
security until the option expires or until it delivers the underlying security
upon exercise. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Clearing Corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Clearing Corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter option transactions ("OTC
options"), which are two party contracts with price and terms negotiated between
the buyer and seller. The staff of the Securities and Exchange Commission has
taken the position that OTC options and the assets used as cover for written OTC
options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
5
<PAGE> 58
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a "senior security" other than a borrowing from a bank.
The staff of the Securities and Exchange Commission has in the past indicated
that a futures contract may be a "senior security" under the Investment Company
Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash basis at the spot rate of
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with
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respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular foreign currency. If
the Fund enters into a position hedging transaction, its custodian will place
cash or liquid equity or debt securities in a separate account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
commitment with respect to such contracts. The Fund will enter into such
transactions only to the extent, if any, deemed appropriate by the Manager. The
Fund will not enter into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund 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 Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the cost
of acquiring such a put option, the Fund 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 Fund gives up the opportunity to
profit without limit from increases in the relative value of the yen to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
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 the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of
derivatives such as options and futures involves the risk of imperfect
correlation in movements in the prices of options and futures contracts and
movements in the prices of the securities and currencies which are the subject
of the hedge. If the price of the options and futures contract moves more or
less than the prices of the hedged securities or currencies, the Fund will
experience a gain or loss which will not be completely offset by movements in
the prices of the securities and currencies which are the subject of the hedge.
The successful use of options and futures also depends on the Manager's ability
to correctly predict price movements in the market involved in a particular
options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call
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or put options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary market
for such options or futures. However, there can be no assurance that a liquid
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an option
or futures position. The Fund will acquire only over-the-counter options for
which management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option), unless there is only one dealer, in which case that
dealer's price is used. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security or currency underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
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. An exchange
may order the liquidation of positions found to be in violation of these limits,
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. However, the Fund's investments will be limited
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended. See "Dividends, Distributions and
Taxes--Taxes." To qualify, among other requirements, the Fund will limit 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 Fund'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 Fund 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 Fund assumes large positions in the
securities of a small number of issuers, the Fund'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.
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When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will 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 amount of its commitment
in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund 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 Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreement only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and 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 10% of its
assets taken at the time of acquisition of such commitment or security. The Fund
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 the value of the security, if issued, 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, the Fund
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
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund'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. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the other party
agrees, upon entering into the contract with the Fund, 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 it may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect the
accrued interest on the underlying obligations. Such agreements usually cover
short periods,
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often 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, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but constitute only collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs of possible losses in connection with the
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 Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund would depend on
intervening fluctuations of the market values of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest more than 10% of its net assets in repurchase agreements maturing in more
than seven days.
Lending of Portfolio Securities. Subject to investment restriction (5)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
U.S. Government which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The purpose of such
loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion of
the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
High Yield, High Risk Bonds. The Fund is authorized to invest a portion of
its assets in fixed income securities rated below investment grade by a
nationally recognized statistical rating agency or in unrated bonds which, in
the Manager's judgment, possess similar credit characteristics ("high yield,
high risk bonds"). Issuers of high yield, high risk bonds may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield, high risk bonds may be more likely to experience
financial stress, especially if such issuers are highly leveraged. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments or the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holder of high yield, high risk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. The Fund's Board of Directors has
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adopted a policy that the Fund will not invest more than 35% of its assets in
obligations rated below Baa or BBB by Moody's or S&P, respectively.
High yield, high risk bonds frequently have call or redemption features
which would permit issuers to repurchase such securities from the Fund. If a
call were exercised by an issuer during a period of declining interest rates,
the Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield, high risk
bonds because there may be a thin trading market for such securities. The
secondary trading market for high yield, high risk bonds is generally not as
liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield,
high risk bonds, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield, high risk bonds are likely to affect
adversely the Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default on a
portfolio holding or to participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
The Fund 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
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
this Statement of Additional Information, as they may be amended from time
to time.
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6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Additional investment restrictions adopted by the Fund, which may be
changed by the Directors, provide that the Fund may not:
(i) Purchase securities of other investment companies except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies, except in connection with a plan of merger,
consolidation, reorganization, or acquisition, or by purchase in the open
market of securities of investment companies where no underwriter or
dealer's commission or profit, other than the customary broker's
commission, is involved and only if immediately thereafter not more than
(i) 3% of the total outstanding voting stock of such company is owned by
the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, 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 investment company. Investments
by the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies.
(ii) Make short sales of securities or maintain a short position
except to the extent permitted by applicable law. The Fund currently does
not intend to engage in short sales, except short sales "against the box."
(iii) 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 to a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days, or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation
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herein, to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund will
observe such limitation. As of the date hereof, therefore, the Fund will
not invest more than 10% of its total assets in securities which are
subject to this investment restriction (iii). Securities purchased in
accordance with Rule 144A under the Securities Act (a "Rule 144A security")
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (iii).
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction (iii), the State of Ohio does not recognize Rule
144A securities as securities that are free of restrictions as to resale.
To the extent required by Ohio law, the Fund will not invest more than 5%
of its total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
(iv) Invest in warrants if at the time of acquisition its investment
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(v) Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction will not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
(vi) Purchase or retain the securities of any issuer, if those
individual officers and Directors of the Fund, the Manager or any
subsidiary thereof each owning beneficially more than one-half of one
percent of the securities of such issuer own in the aggregate more than 5%
of the securities of such issuer.
(vii) Invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development
programs, except that the Fund may invest in securities issued by companies
that engage in oil, gas or other mineral exploration or development
activities.
(viii) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
(ix) Notwithstanding fundamental investment restriction (7) above, the
Fund currently does not intend to borrow amounts in excess of 33 1/3% of
its total assets, taken at market value, and then only from banks as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. In addition, the Fund will not purchase
securities while borrowings are outstanding.
The Fund has undertaken to certain state securities administrators that as
a matter of operating policy it will not:
(a) Purchase securities of issuers which the Fund is restricted from
selling to the public without registration under the Securities Act of 1933
(including restricted securities determined by the Fund or the Board of
Directors to be liquid) if by any reason thereof the value of its aggregate
investment in such securities will exceed 10% of its total assets;
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(b) Invest more than 5% of its total assets in the securities of
unseasoned issuers, including equity securities of issuers which are not
readily marketable;
(c) Invest more than 10% of its total assets in securities of one or
more real estate investment trusts;
(d) Engage in short term trading; or
(e) Invest in the securities of any open-end investment company.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options if,
as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 10% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
as to OTC options is not a fundamental policy of the Fund and may be amended by
the Directors of the Fund without the approval of the Fund's shareholders.
However, the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order, the
Fund would be prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933, as
amended, in which such firm or any of its affiliates participate as an
underwriter or dealer.
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MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977 and
Chief Investment Officer and Director of the Manager since 1976; President and
Chief Investment Officer 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; Director
of Merrill Lynch Funds Distributor, Inc.; Executive Vice President of Merrill
Lynch & Co., Inc. and of Merrill Lynch, Pierce, Fenner & Smith Incorporated
since 1990.
JOE GRILLS--Director(2)--183 Soundview Lane, New Canaan, Connecticut 06840.
Member of the Committee on 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 the IBM Retirement Funds from 1986 until 1992.
WALTER MINTZ--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982.
MELVIN R. SEIDEN--Director(2)--780 Third Avenue, New York, New York 10017.
President of Silbanc Properties, Ltd. (real estate, consulting and investments)
since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private
investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD--Director(2)--24 Federal Street, Boston, Massachusetts
02110. Principal of Fernwood Associates (financial consultants); Director,
Hitchiner Manufacturing Company.
HARRY WOOLF--Director(2)--The Institute for Advanced Study, Olden Lane,
Princeton, New Jersey 08540. Professor and former Director of the Institute for
Advanced Study (private institution devoted to the encouragement, support and
patronage of learning) since 1976; Director, Alex. Brown Funds, Flag Investors
Funds and Advanced Technology Laboratories and Space Labs Medical (medical
equipment manufacturing and marketing).
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM since 1983 and Director since 1991; President and Director
of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1986;
Executive Vice President and Director of Princeton Services since 1993; and
Director of Financial Data Services, Inc. since 1985.
BERNARD D. DURNIN--Senior Vice President(1)(2)--Senior Vice President of
the Manager since 1981 and Vice-President from 1977 to 1981.
DONALD C. BURKE--Vice President(1)(2)--Vice President of the Manager since
1990; employee of Deloitte & Touche LLP from 1982 to 1990.
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JOEL HEYMSFELD--Vice President(1)(2)--Vice President of the Manager since
1978.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and FAM since 1984; Treasurer of the Distributor since 1984 and Vice
President since 1981; and Senior Vice President and Treasurer of Princeton
Services since 1993.
MARK B. GOLDFUS--Secretary(1)(2)--Vice President of the Manager since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act of 1940, of the
Company.
(2) Mr. Zeikel is a director or trustee and officer, Messrs. Grills, Mintz,
Seiden, Swensrud and Woolf are directors, trustees or members of the
advisory board, and Messrs. Glenn, Durnin, Burke, Heymsfeld, Richard and
Goldfus are officers, of certain other investment companies for which the
Manager or FAM acts as investment adviser.
At September 30, 1994, the officers and Directors of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund, owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Manager a fee of $2,600
per year plus $250 per Board meeting attended, together with such Director's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the non-
affiliated Directors, with a fee of $800 per year, plus a fee at the rate of
$150 per meeting attended.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Management
Agreement provides that the Fund will pay the Manager a monthly fee at the
annual rate of 0.75% of the average daily net assets of the Fund. This fee is
higher than that of most mutual funds, but management of the Fund believes this
fee, which is typical for a global fund, is justified by the global nature of
the Fund.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as
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litigation costs) from exceeding 2.5% of the Fund's first $30 million of average
daily net assets, 2.0% of the next $70 million of average daily net assets and
1.5% of the remaining average daily net assets. The Manager's obligation to
reimburse the Fund is limited to the amount of the management fee. No fee
payment will be made to the Manager during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation applicable at the
time of such payment.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
their affiliates. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Manager, and the Fund reimburses the Manager for its costs in connection
with such services on a semi-annual basis. The Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of its
shares. Certain expenses in connection with the distribution of shares will be
financed by the Fund pursuant to distribution plans in compliance with Rule
12b-1 under the Investment Company Act. See "Purchase of Shares--Distribution
Plans."
The Manager is a limited partnership, the partners of which are Merrill
Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and Princeton
Services, Inc.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contracts or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees
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<PAGE> 70
and the additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which the account maintenance and/or
distribution fees are paid. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by MLAM or its affiliate, FAM. Funds advised by MLAM or FAM are
referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of each class of shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of each class of shares of the
Fund. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provision as the Management Agreement described under "Management of the
Fund--Management and Advisory Arrangements."
INITIAL SALES CHARGE ALTERNATIVE--CLASS A AND CLASS D SHARES
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company," as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it does not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other MLAM-advised mutual funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by
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<PAGE> 71
the purchaser or the purchaser's securities dealer, with sufficient information
to permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or custodian under
pension, profit-sharing, or other employee benefit plans may not be combined
with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such Letter. An
exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of Intention
for the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group Individual Retirement Accounts ("IRAs") and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $300.01 to $5,000 at
3.25% plus $3.00 and $5,000.01 or more at the standard sales charge rates
disclosed in the Prospectus). In addition, Class A or Class D shares of the Fund
are offered at net asset value plus a sales charge of 1/2 of 1% for corporate or
group IRA programs placing orders to purchase their Class A and Class D shares
through Blueprint. Services, including the exchange privilege, available to
Class A and Class D
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<PAGE> 72
investors through Blueprint, however, may differ from those available to other
investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value, to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch
Directed IRA Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A shares and Class D
shares are offered at net asset value to Employer Sponsored Retirement or
Savings Plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
deferred compensation plans within the meaning of Section 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as "Employer Sponsored Retirement or Savings Plans," provided the
plan has accumulated at least $5 million in MLAM-advised mutual funds for Class
D shares or at least $20 million in MLAM-advised mutual funds for Class A
shares. Class D shares may be offered at net asset value to new Employer
Sponsored Retirement or Savings Plans, provided the plan has at least $3 million
initially invested in MLAM-advised mutual funds. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. Class A shares and Class D shares are also offered at
net asset value, provided the plan has between 500-999 employees eligible to
participate in the plan for Class D shares or at least 1,000 employees eligible
to participate in the plan for Class A shares. Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch Blueprint(SM)
Program, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement or
Savings Plan which does not meet the above described qualifications to purchase
Class A shares or Class D shares at net asset value has the option of (i)
purchasing Class A shares at the initial sales charge schedule and possible CDSC
schedule disclosed in the Prospectuses if it is otherwise eligible to purchase
Class A shares, (ii) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, (iii) if the Employer
Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption; or if the
Employer Sponsored Retirement or Savings Plan does not qualify to purchase Class
B shares with a
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<PAGE> 73
waiver of the CDSC upon redemption, then it may purchase Class C shares at the
CDSC schedule disclosed in the Prospectus. The minimum initial and subsequent
purchase requirements are waived in connection with all the above referenced
Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies and Merrill Lynch & Co.,
Inc. and its subsidiaries (the term "subsidiaries," when used herein with
respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other
entities directly or indirectly wholly-owned and controlled by Merrill Lynch &
Co., Inc.) and their directors and employees, and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value. Class D shares of the Fund will be
offered at net asset value, without a sales charge, to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch from
another investment firm within six months prior to the date of purchase by such
investor if the following conditions are satisfied. First, the investor must
advise Merrill Lynch that they will purchase Class D shares of the Fund with
proceeds from a redemption of shares of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a sales charge either at
the time of purchase or on a deferred basis. Second, the investor must also
establish that such redemption had been made within 60 days prior to the
investment in the Fund, and the proceeds from the redemption had been maintained
in the interim in cash or a money market fund.
Class A shares of the Fund are offered at net asset value to shareholders
of Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund, Inc. shares as to which no
Early Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus)
is applicable. Purchase orders from Senior Floating Rate Fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related Senior Floating Rate Fund tender offer terminates and will be
effected at the net asset value of the Fund at such day.
Class A shares of the Fund and other MLAM-advised mutual funds ("Eligible
Class A Shares") are offered at net asset value to shareholders of certain
closed-end funds advised by the Manager 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 shares of the Fund, if
the conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares") if the
following conditions are met. Closed-end fund shareholders must (i) sell their
closed-end fund shares through Merrill Lynch and reinvest the proceeds
immediately in the Fund, (ii) have acquired the shares in the closed-end fund's
initial public offering or through reinvestment of dividends earned on shares
purchased in such offering, (iii) have maintained their closed-end fund shares
continuously in a Merrill Lynch account, and (iv) purchase a minimum of $250
worth of Fund shares.
Class D shares of the Fund will be offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the
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<PAGE> 74
investor must advise Merrill Lynch that they will purchase Class D shares of the
Fund with proceeds from a redemption of such shares of other mutual funds that
have been outstanding for a period of no less than six months. Second, the
investor must also establish that such purchase of Class D shares had been made
within 60 days after the redemption and the proceeds from the redemption must
have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are 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 the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; and second,
such purchase of Class D shares must be made within 90 days after such notice of
termination.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
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") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"General Information--Description of Shares." Among other things, each
Distribution Plan provides that the Distributor will provide and the Directors
will review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and to its related class of
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<PAGE> 75
shareholders. Each Distribution Plan further provides that, so long as such
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), will 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 Fund and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the Independent
Directors or by the vote of the holders of a majority of the outstanding related
class of voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any reports
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such reports, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B and Class C shares, computed separately (defined to exclude shares
issued pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the prime
rate plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC). In connection
with the Class B shares, the Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the "voluntary maximum") in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the voluntary
maximum, the Fund will not make further payments of the distribution fee with
respect to Class B shares, and any CDSCs will be paid to the Fund rather than to
the Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares. The right to
redeem shares or to receive payment with respect to any such redemption may be
suspended only for any period during which trading on the New York Stock
Exchange is restricted as determined by the Commission or such Exchange is
closed (other than customary weekend and holiday closings), for any period
during which an emergency exists as defined by the Commission as a result of
which disposal of portfolio securities or determination of the net asset value
of the
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Fund is not reasonably practicable, and for such other periods as the Commission
may by order permit for the protection of shareholders of the Fund.
DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a tax-free distribution following
retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the
case of an IRA or other retirement plan, or part of a series of equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) or any redemption resulting from the tax-free return of an excess
contribution to an IRA or (b) any partial or complete redemption following the
death or disability (as defined in the Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death or initial
determination of disability.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as trade associations and credit unions. Class B shares of the Fund
are offered through Blueprint only to members of certain affinity groups. The
CDSC is waived in connection with purchase orders placed through Blueprint.
Services, including the exchange privilege, available to Class B investors
through Blueprint, however, may differ from those available to other investors
in Class B shares. Orders for purchases and redemptions of Class B shares of the
Fund will be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum initial
or subsequent purchase requirement for investors who are part of the Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value may
purchase Class B shares with a waiver of the CDSC upon redemption if the
following qualifications are met. The CDSC is waived for any Eligible 401(k)
Plan redeeming Class B shares. "Eligible 401(k) Plan" is defined as a retirement
plan qualified under section 401(k) of the Code with a salary reduction feature
offering a menu of investments to plan participants. CDSC is also waived for
Class B redemptions from a 401(a) plan qualified under the Code, provided that
each such plan has the same or an affiliated sponsoring employer as an Eligible
401(k) Plan purchasing Class B shares ("Eligible 401(a) Plan"). Other tax
qualified retirement plans within the meaning of Section 401(a) and 403(b) of
the Code which are provided specialized services (e.g., plans whose participants
may direct on a daily basis their plan allocations among a menu of investments)
by independent administration firms contracted through Merrill Lynch may also
purchase Class B shares with a waiver of the CDSC. The CDSC is also waived for
any Class B shares which are purchased by an Eligible 401(k) Plan or Eligible
401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of
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<PAGE> 77
redemption. The Class B CDSC is also waived for shares purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above-referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices-- Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. Subject to obtaining the best
price and execution, brokers who provide supplemental investment research to the
Manager may receive orders for transactions by the Fund. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Manager under the Management Agreement, and the expenses of the Manager
will not necessarily be reduced as a result of the receipt of such supplemental
information. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and policies established by the
Directors of the Fund, the Manager may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund. It is possible that certain of the supplementary investment
research so received will primarily benefit one or more other investment
companies or other accounts for which investment discretion is exercised.
Conversely, the Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other accounts
or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States 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 Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and
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fair compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions.
The Fund'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 Fund are redeemable on a daily
basis in U.S. dollars, the Fund 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. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering all
factors deemed relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.
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 the Fund is determined once daily Monday
through Friday as of 4:15 p.m., New York time, on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is not open on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. Net asset value is computed by dividing the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Manager and the Distributor,
are accrued daily. The per share net asset value of Class A shares generally
will be higher than the per share net asset value of the other classes,
reflecting the daily expense accruals of the account maintenance and transfer
agency fees applicable with respect to the Class B and Class C shares and the
daily expense accruals of the account maintenance fees applicable with respect
to Class D shares. Moreover, the per share net asset value of the Class D shares
generally will be higher than the per share net asset value of the Class B and
Class C shares, reflecting the daily expense accruals of the distribution fees
applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset
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<PAGE> 79
value of the four classes will tend to converge immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential between the classes.
Securities traded in the over-the-counter market are valued at the last
available bid price or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. The Fund employs
Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the Manager,
to provide securities prices for the Fund. When the Fund writes a call option,
the amount of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based upon the
last asked price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the average of the last asked
price as obtained from one or more dealers. Options purchased by the Fund are
valued at their last bid price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter market, the average of the last
bid price as obtained from two or more dealers unless there is only one dealer,
in which case that dealer's price is used. Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the principal market 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. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith under the direction of the Board of
Directors of the Fund, including valuations furnished by a pricing service
retained by the Fund, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent showing any reinvestments of dividends and capital gains
distributions activity in the account since the previous statement. Shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
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<PAGE> 80
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the transfer agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. An investor whose shares of the Fund
are held within a CMA(R) account may arrange to have periodic investments made
in the Fund in amounts of $150 or more ($1 for retirement accounts) through the
CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the ex-dividend date of the dividend or distribution.
Shareholders may elect in writing to receive either their dividends or capital
gains distributions, or both, in cash, in which event payment will be mailed or
direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business of the New York Stock Exchange on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is applicable. If
the Exchange is not open for business on such date, the Class A or Class D
shares will be redeemed at the close of business on the following business day.
The check for the withdrawal payment will be mailed, or the direct deposit of
the withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in Fund Class A or Class D shares,
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<PAGE> 81
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Fund's
transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of exchange, the
shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C and Class D shares. Shares with
a net asset value of at least $100 are
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<PAGE> 82
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for at least 15 days. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D shares, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
deferred sales charge schedule relating to the new Class B shares acquired
through use of the exchange privilege. In addition, Class B shares of the Fund
acquired through use of the exchange privilege will be subject to the Fund's
CDSC schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the sales charge that may be payable on a disposition of the new
Class B or Class C shares, the holding period for the outstanding Class B or
Class C shares is "tacked" to the holding period of the new Class B or Class C
shares. For example, an investor may exchange Class B shares of the Fund for
those of Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural
Resources Trust) after having held the Fund's Class B shares for two and a half
years. The 2% sales charge 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 Merrill Lynch Global Resources Trust and receive cash. There
will be no contingent deferred sales charge due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares to
the three year holding period for the Merrill Lynch Global Resources Trust Class
B shares, the investor will be deemed to have held the new Class B shares for
more than four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager of 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, toward satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the fund may, in
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turn, be exchanged back into Class B or Class C shares respectively of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the fund will be aggregated with previous holding periods for purposes
of reducing the CDSC. Thus, for example, an investor may exchange Class B shares
of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Class B shares for two and a half years and three
years later decide to redeem the shares of Institutional Fund for cash. At the
time of this redemption, the 2% CDSC that would have been due had the Class B
shares of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio
of adjustable rate securities,
consisting principally of
mortgage-backed and asset-backed
securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC. A high level of current income,
consistent with prudent investment
risk, by investing primarily in
debt securities denominated in a
currency of a country located in
the Western Hemisphere (i.e., North
and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term investment
grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series
Trust, a series fund, whose
objective is to provide as high a
level of income exempt from
Federal and Arizona income taxes
as is consistent with prudent
investment management.
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MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Arkansas income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH ASSET INCOME FUND, INC. A high level of current income
through investment primarily in
United States fixed income
securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT As high a level of total investment
return as is consistent with
reasonable risk by investing in
common stocks and other types of
securities, including fixed income
securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND, INC. Capital appreciation and,
secondarily, income through
investment in securities, primarily
equities, that are undervalued and
therefore represent basic
investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
California Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management through investment in a
portfolio consisting primarily of
insured California Municipal Bonds.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and California income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term investment
grade California Municipal Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
California Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management.
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MERRILL LYNCH CAPITAL FUND, INC. The highest total investment return
consistent with prudent risk
through a fully managed investment
policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Colorado income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Connecticut income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. Current income from three separate
diversified portfolios of fixed
income securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. Long-term appreciation through
investment in securities,
principally equities, of issuers in
countries having smaller capital
markets.
MERRILL LYNCH DRAGON FUND, INC. Capital appreciation primarily
through investment in equity and
debt securities of issuers
domiciled in developing countries
located in Asia and the Pacific
Basin, other than Japan, Australia
and New Zealand.
MERRILL LYNCH EUROFUND Capital appreciation primarily
through investment in equity
securities of corporations
domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST High current return through
investments in U.S. Government and
Government agency securities,
including GNMA mortgage-backed
certificates and other
mortgage-backed Government
securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund,
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<PAGE> 86
whose objective is to provide as
high a level of income exempt from
Federal income taxes as is
consistent with prudent investment
management while serving to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management, while
seeking to offer shareholders the
opportunity to own securities
exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND FOR
TOMORROW, INC. Long-term growth through investment
in a portfolio of good quality
securities, primarily common stock,
potentially positioned to benefit
from demographic and cultural
changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC. Long-term growth of capital through
investment in a diversified
portfolio of equity securities
placing particular emphasis on
companies that have exhibited an
above-average growth rate in
earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. High total investment return,
consistent with prudent risk,
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.
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND RETIREMENT High total investment return from
investment in a global portfolio of
debt instruments denominated
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in various currencies and
multinational currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. High total return from investment
primarily in an internationally
diversified portfolio of
convertible debt securities,
convertible preferred stock and
"synthetic" convertible securities
consisting of a combination of debt
securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(RESIDENTS OF ARIZONA MUST
MEET INVESTOR SUITABILITY
STANDARDS) The highest total investment return
consistent with prudent risk
through worldwide investment in an
internationally diversified
portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST Long-term growth and protection of
capital from investment in
securities of domestic and foreign
companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC. Long-term growth of capital by
investing primarily in equity
securities of companies with
relatively small market
capitalizations located in various
foreign countries and in the United
States.
MERRILL LYNCH GLOBAL UTILITY
FUND, INC. Capital appreciation and current
income through investment of at
least 65% of its total assets in
equity and debt securities issued
by domestic and foreign companies
which are primarily engaged in the
ownership or operation of
facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal
emphasis on those securities which
management of the fund believes to
be undervalued.
35
<PAGE> 88
MERRILL LYNCH HEALTHCARE
FUND, INC. (RESIDENTS OF
WISCONSIN MUST MEET INVESTOR
SUITABILITY STANDARDS) Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND Capital appreciation and,
secondarily, income by investing in
a diversified portfolio of equity
securities of issuers located in
countries other than the United
States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. Capital appreciation by investing
primarily in Latin American equity
and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and Massachusetts
income taxes as is consistent with
prudent investment management
through investment in a portfolio
primarily of intermediate-term
investment grade Massachusetts
Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of
36
<PAGE> 89
income exempt from Federal and
Michigan income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Minnesota income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND Currently the only portfolio of
Merrill Lynch Municipal Series
Trust, a series fund, whose
objective is to provide as high a
level as possible of income exempt
from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and New Jersey income
taxes as is consistent with prudent
investment management through a
portfolio primarily of
intermediate-term investment grade
New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from
37
<PAGE> 90
Federal and New Jersey income taxes
as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and New
Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal, New York State and
New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal, New
York State and New York City income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and Ohio
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH OREGON MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from
38
<PAGE> 91
Federal and Oregon income taxes as
is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND, INC. Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and
Western Pacific countries,
including Japan, Australia, Hong
Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management
through investment in a portfolio
of intermediate-term investment
grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal and
Pennsylvania income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC. Long-term growth of capital by
investing in equity and fixed
income securities, including
tax-exempt securities, of issuers
in weak financial condition or
experiencing poor operating results
believed to be undervalued relative
to the current or prospective
condition of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME
FUND, INC. As high a level of current income as
is consistent with prudent
investment management from a global
portfolio of high quality debt
securities denominated in various
currencies and multinational
currency units and having remaining
maturities not exceeding three
years.
MERRILL LYNCH SPECIAL VALUE FUND, INC Long-term growth of capital from
investments in securities,
primarily common stocks, of
relatively small companies believed
to have special investment value
and emerging growth companies
regardless of size.
39
<PAGE> 92
MERRILL LYNCH STRATEGIC DIVIDEND FUND Long-term total return from
investment in dividend paying
common stocks which yield more than
Standard & Poor's 500 Composite
Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC. Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of
long-term, investment grade
obligations issued by the State of
Texas, its political subdivisions,
agencies and instrumentalities.
MERRILL LYNCH UTILITY INCOME
FUND, INC. High current income through
investment in equity and debt
securities issued by companies
which are primarily engaged in the
ownership or operation of
facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS TRUST Preservation of capital, liquidity
and the highest possible current
income consistent with the
foregoing objectives from the
short-term money market securities
in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (AVAILABLE ONLY IF
THE EXCHANGE OCCURS WITHIN CERTAIN
RETIREMENT PLANS) Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose
objectives are current income,
preservation of capital and
40
<PAGE> 93
liquidity available from investing
in a diversified portfolio of
short-term money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES Preservation of capital, current
income and liquidity available from
investing in direct obligations of
the U.S. Government and repurchase
agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND Preservation of capital, liquidity
and current income through
investment exclusively in a
diversified portfolio of short-term
marketable securities which are
direct obligations of the U.S.
Treasury.
Class B, Class C and Class D Share
Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
current income consistent with
liquidity and security of principal
from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
maximum current income consistent
with liquidity and the maintenance
of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
current income exempt from Federal
income taxes, preservation of
capital and liquidity available
from investing in a diversified
portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
current income consistent with
liquidity and security of principal
from investment in direct
obligations of the U.S. Treasury
and up to 10% of its total assets
in repurchase agreements secured by
such obligations.
41
<PAGE> 94
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares at any time and may thereafter resume such offering
from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid at least annually.
All net realized long-or short-term capital gains, if any, are distributed to
the Fund's shareholders at least annually. From time to time, the Fund may
declare a special distribution at or about the end of the calendar year in order
to comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the taxable year. See
"Shareholder Services--Automatic Reinvestment of Dividends and Capital Gains
Distributions" for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares. Similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value."
TAXES
The Fund intends to elect to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Internal Revenue Code of 1986,
as amended (the "Code"). If it so qualifies, the Fund (but not its shareholders)
will not be subject to Federal income tax on the part of its net ordinary income
and net realized capital gains which it distributes to Class A, Class B, Class C
and Class D shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income and gains.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-
42
<PAGE> 95
term gains from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are held
as a capital asset). Any loss upon the sale or exchange of Fund 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.
Dividends are taxable to shareholders even if they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends and capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction between the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of two classes of stock) that is based on the
gross income allocable to Class A, Class B, Class C and Class D shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. If the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under an applicable tax treaty. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, certain non-corporate shareholders
may be subject to a 31% withholding tax on certain ordinary income dividends and
capital gain dividends and on redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Dividends, interest and capital gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax treaties between
certain countries and the U.S. may reduce or eliminate such taxes. Shareholders
may be able to claim U.S. foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund expects to qualify for, and intends to make,
an election with the Internal Revenue Service pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such
withholding taxes in their U.S. income tax returns as gross income and treat
such proportionate shares as taxes paid by them. Shareholders will be entitled,
subject to certain limitations to deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No
43
<PAGE> 96
deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding tax
on the income resulting from the Fund's election described in this paragraph but
may not be able to claim a credit or deduction against such U.S. tax for the
foreign taxes treated as having been paid by such shareholder. The Fund will
report annually to its shareholders the amount per share of such withholding
taxes. For this purpose, the Fund will allocate foreign taxes and foreign source
income between the shareholders of each class according to a method similar to
that described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions. The Fund may write, purchase or sell options, futures or forward
foreign exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency and the Fund elects to have gain or loss in connection with
the contract treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange
44
<PAGE> 97
contract that is a Section 1256 contract will be characterized as 60% long-term
and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an options or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies will be qualifying income for purposes of
determining whether the Fund qualifies as a RIC. It is currently unclear,
however, who will be treated as the issuer of a foreign currency instrument or
how foreign currency options, foreign currency futures and forward foreign
exchange contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund intends to monitor developments in
this area and may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain or loss
treatment for such transactions. Regulated futures contracts, as described
above, will be taxed under Code Section 1256 unless application of Section 988
is elected by the Fund. In general, however, Code Section 988 gains or losses
will increase or decrease the amount of the Fund's income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other ordinary income during a taxable year, the Fund would
not be able to make any ordinary dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares. These rules and the mark-to-market
rules described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with respect
to its investments.
-------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
45
<PAGE> 98
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included. Actual
annual or annualized total return data generally will be lower than average
annual total return data since the average rates of return reflect compounding
of return; aggregate total return data generally will be higher than average
annual total return data since the aggregate rates of return reflect compounding
over longer periods of time.
46
<PAGE> 99
Set forth below is total return information for the Class A and Class B
shares of the Fund. Since Class C and Class D shares have not been issued prior
to the date of this Statement of Additional Information, performance information
concerning Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------- -------------------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ------------------------------- ------------------ --------------------- ------------------ ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to
September 30, 1994........... (61.44)% $929.50 (54.86)% $940.80
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to
September 30, 1994........... (1.90)% $981.00 (2.00)% $980.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to
September 30, 1994........... (7.05)% $929.50 (5.92)% $940.80
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the contingent deferred sales charge, in the
case of Class B or Class C shares, applicable to certain investors, as described
under "Purchase of Shares" and "Redemption of Shares," respectively, the total
return data quoted by the Fund in advertisements directed to such investors may
take into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 6, 1994. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and distribution expenditures. The
Fund has received an order from the Commission permitting the issuance and sale
of multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does
47
<PAGE> 100
not intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent accountants. Also, the by-laws of the Fund require that
a special meeting of stockholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Redemption and
conversion rights are discussed elsewhere herein and in the Prospectus. Each
share is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund upon liquidation or dissolution
after satisfaction of outstanding liabilities. Stock certificates are issued by
the transfer agent only on specific request. Certificates for fractional shares
are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each of Class A and Class B stock for an aggregate of $100,000. Such
shares were acquired for investment and can only be disposed of by redemption.
The organizational expenses of the Fund will be paid by the Fund and amortized
over a period not exceeding five years. The proceeds realized by the Manager
upon redemption of any of such shares will be reduced by the proportionate
amount of the unamortized organizational expenses which the number of shares
redeemed bears to the number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund, based on the
value of the Fund's net assets and number of shares outstanding as of September
30, 1994, is calculated as set forth below. Information is not provided for
Class C or Class D shares since no Class C or Class D shares were publicly
offered prior to the date of this Statement of Additional Information. The
offering price for Class B and Class C shares of the Fund is the net asset value
of Class B and Class C shares, respectively.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- -----------
<S> <C> <C>
Net Assets.................................................. $2,082,247 $12,334,055
========= ==========
Number of Shares Outstanding................................ 212,216 1,258,015
========= ==========
Net Asset Value Per Share (net assets divided by number of
shares outstanding)....................................... $ 9.81 $ 9.80
Sales Charge (for Class A shares: 5.25% of offering price
(5.54% of net amount invested))*.......................... 0.54 **
---------- -----------
Offering Price.............................................. $ 10.35 $ 9.80
========= ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B 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.
48
<PAGE> 101
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., 4 MetroTech Center, 18th Floor Brooklyn,
New York 11245 (the "Custodian"), acts as the custodian of the Fund's assets.
Under its contract with the Fund, the Custodian is authorized to establish
separate accounts in foreign currencies and to cause foreign securities owned by
the Fund to be held in its offices outside the U.S. and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484 (the "Transfer Agent"),
acts as the Fund's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts. See "Management of the Fund--Transfer Agency
Services" in the Prospectus.
LEGAL COUNSEL
Rogers & Wells, 200 Park Avenue, New York, New York 10166, is counsel for
the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on August 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
49
<PAGE> 102
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") CORPORATE RATINGS
<TABLE>
<CAPTION>
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.
<S> <C>
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and 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 the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
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.
50
<PAGE> 103
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 such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt 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.
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt 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.
PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short term 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.
NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments
51
<PAGE> 104
or other entities, but only as one factor in the total rating assessment.
Moody's makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement. You are cautioned to review with your
counsel any questions regarding particular support arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stock. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance the earnings and asset protection will
remain relatively well maintained in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protections are, nevertheless, expected to be
maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend payments. This
rating designation does not purport to indicate the future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payments.
"c" This is the lowest rated class of preferred or preference stock. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: 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.
52
<PAGE> 105
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt 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 any 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 circumstances.
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 in higher rated categories.
SPECULATIVE Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
GRADE 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.
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.
</TABLE>
53
<PAGE> 106
<TABLE>
<S> <C>
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 is typically applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in 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.
</TABLE>
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
categories.
N.R. indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
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 Legal Investment Laws of various states may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
54
<PAGE> 107
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 having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity for
timely payment. Issues in this category are delineated with the numbers 1, 2, and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for timely payment.
However, such capacity may be damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful capacity for
payment.
D 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.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
55
<PAGE> 108
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for a preferred stock in this category
than for issues in the "A" category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as predominately
B speculative with respect to the issuer's capacity to pay preferred stock obligations.
CCC "BB" indicates the lowest degree of speculation and "CCC" the highest degree of
speculation. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt
instruments.
</TABLE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
56
<PAGE> 109
THE FOLLOWING FINANCIAL STATEMENTS
FOR THE FUND FOR THE PERIOD SEPTEMBER 2, 1994
TO SEPTEMBER 30, 1994 ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal recurring
nature.
57
<PAGE> 110
MERRILL LYNCH ASSET GROWTH FUND, INC. SEPTEMBER 30, 1994
SCHEDULE OF INVESTMENTS (UNAUDITED) (IN U.S. DOLLARS)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRIES SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
-------------------- ----------- ------------------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Argentina Banking 5,500 Banco Frances del Rio de la
Plata S.A. (ADR)(1)........... $ 170,444 $ 165,000 1.1%
----------- ----------- ---
Total Common Stocks in
Argentina..................... 170,444 165,000 1.1
----------- ----------- ---
Australia Multi--Industry 50,000 CSR Limited.................... 170,559 165,760 1.2
50,000 Pacific Dunlop Ltd............. 151,296 151,700 1.1
----------- ----------- ---
Total Common Stocks in
Australia..................... 321,855 317,460 2.3
----------- ----------- ---
Canada Natural Resources 9,500 Canadian Pacific, Ltd. ........ 169,195 159,125 1.1
Telecommunications 5,000 Northern Telcom Ltd. .......... 174,050 173,750 1.2
----------- ----------- ---
Total Common Stocks in
Canada........................ 343,245 332,875 2.3
----------- ----------- ---
Chile Banking 9,000 Banco O'Higgins S.A.
(ADR)(1)...................... 183,915 184,500 1.3
----------- ----------- ---
Total Common Stocks in Chile... 183,915 184,500 1.3
----------- ----------- ---
France Building &
Construction 1,400 Saint Gobain (Cie De).......... 168,830 167,379 1.2
Petroleum 3,000 Total SA-B..................... 178,190 176,611 1.2
Telecommunications &
Equipment 8,000 Alcatel Alsthom (ADR)(1)....... 174,480 148,000 1.0
----------- ----------- ---
Total Common Stocks in
France........................ 521,500 491,990 3.4
----------- ----------- ---
Germany Electronics 400 Siemens Corp. ................. 177,405 163,331 1.1
Machinery &
Equipment 600 Mannesmann AG.................. 167,773 150,872 1.0
----------- ----------- ---
Total Common Stocks in
Germany....................... 345,178 314,203 2.1
----------- ----------- ---
Hong Kong Multi--Industry 20,000 Swire Pacific 'a' Ltd. ........ 169,462 156,600 1.1
Real Estate 22,000 Sun Kung Kai Properties,
Ltd. ......................... 168,928 163,718 1.1
Utilities--Electric 32,000 China Light & Power Co.,
Ltd. ......................... 167,608 162,760 1.1
----------- ----------- ---
Total Common Stocks in Hong
Kong.......................... 505,998 483,078 3.3
----------- ----------- ---
Italy Building Materials 45,000 Italcementi S.p.A. ............ 183,136 175,649 1.2
----------- ----------- ---
Total Common Stocks in Italy... 183,136 175,649 1.2
----------- ----------- ---
Japan Capital Goods 20,000 Hitachi Cable, Ltd. ........... 172,962 170,243 1.2
20,000 Mitsubishi Heavy Industries,
Inc. ......................... 161,560 155,870 1.1
----------- ----------- ---
334,522 326,113 2.3
----------- ----------- ---
Consumer--Electronics 4,000 Rohm Co. ...................... 171,777 174,899 1.2
----------- ----------- ---
Electronics 10,000 Matsushita Electric Industrial
Co., Ltd. .................... 168,023 159,919 1.1
9,000 Sharp Corp. ................... 161,720 160,324 1.1
17,000 Sumitomo Electric Industries... 171,167 166,903 1.2
----------- ----------- ---
500,910 487,146 3.4
----------- ----------- ---
Insurance 20,000 Nippon Fire & Marine Insurance
Co., Ltd. .................... 150,777 145,749 1.0
14,000 Tokio Marine & Fire Insurance
Co., Ltd. .................... 168,933 167,206 1.2
----------- ----------- ---
319,710 312,955 2.2
----------- ----------- ---
Machinery 20,000 Makino Milling Machine......... 177,637 184,211 1.3
----------- ----------- ---
Miscellaneous 14,000 Asahi Glass.................... 172,319 172,874 1.2
15,000 Kamigumi Co., Ltd. ............ 174,860 171,559 1.2
24,000 Mitsubishi Electric Corp. ..... 165,781 171,498 1.2
21,000 Toray Industries............... 165,267 163,664 1.1
----------- ----------- ---
678,227 679,595 4.7
----------- ----------- ---
Petroleum 23,000 No. 8 Nippon Oil Co. .......... 170,284 160,162 1.1
</TABLE>
58
<PAGE> 111
MERRILL LYNCH ASSET GROWTH FUND, INC. SEPTEMBER 30, 1994
SCHEDULE OF INVESTMENTS (UNAUDITED) (IN U.S. DOLLARS)--(CONTINUED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRIES SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
-------------------- ----------- ------------------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Japan--
(concluded) Photography 9,000 Canon, Inc. ................... $ 156,955 $ 158,502 1.1%
----------- ----------- ---
Total Common Stocks in Japan... 2,150,022 2,483,583 17.3
----------- ----------- ---
Mexico Advertising 13,000 Consorcio G Grupo Dina, S.A. de
C.V. (ADR)(1)................. 171,405 156,000 1.1
Capital Goods 19,000 Cementos Mexicanos, S.A. de
C.V.
(Class B) (Cemex)............. 171,411 174,993 1.2
Telecommunications 5,400 Empresas ICA Sociedad
Controladora S.A.
de C.V........................ 169,074 174,150 1.2
----------- ----------- ---
Total Common Stocks in
Mexico........................ 511,890 505,143 3.5
----------- ----------- ---
Netherlands Oil--International 1,500 Royal Dutch Petroleum,
ADR(1)........................ 162,683 161,063 1.1
----------- ----------- ---
Total Common Stocks in The
Netherlands................... 162,683 161,063 1.1
----------- ----------- ---
Norway Capital Goods 4,000 Kvaerner Inc., B Shares
w/Voting Rights............... 175,700 169,029 1.2
Diagnostics 9,000 Hafslund Nycomed............... 163,629 153,000 1.1
----------- ----------- ---
Total Common Stocks in
Norway........................ 339,329 322,029 2.3
----------- ----------- ---
Singapore Machinery 17,000 Jurong Shipyard................ 162,465 158,300 1.1
Shipping 110,000 Neptune Orient................. 170,752 162,551 1.1
----------- ----------- ---
Total Common Stocks in
Singapore..................... 333,217 320,851 2.2
----------- ----------- ---
Spain Energy and Petroleum 5,000 Repsol S.A. (ADR)(1)........... 160,925 153,125 1.1
Telecommunications 4,300 Telefonica Nacional de Espana
S.A........................... 171,226 174,150 1.2
----------- ----------- ---
Total Common Stocks in Spain... 332,151 327,275 2.3
----------- ----------- ---
Sweden Engineering &
Construction 9,000 SKF 'B' Free................... 160,889 157,126 1.1
----------- ----------- ---
Total Common Stocks in
Sweden........................ 160,889 157,126 1.1
----------- ----------- ---
Switzerland Building &
Construction 200 Holderbank Financiere Glaris
AG............................ 147,046 147,139 1.0
Electrical Equipment 200 BBC Brown Boveri & Cie
(Bearer)...................... 181,431 172,830 1.2
----------- ----------- ---
Total Common Stocks in
Switzerland................... 328,477 319,969 2.2
----------- ----------- ---
United Kingdom Building Materials 6,200 Grand Metropolitan PLC
(ADR)(1)...................... 170,432 160,425 1.1
Business Services 55,000 Lucas Industries PLC, Ord. .... 171,851 169,567 1.2
Conglomerates 8,500 Hanson PLC (ADR)(1)............ 163,072 154,063 1.1
Electrical Equipment 37,000 General Electric Co. PLC....... 167,508 170,087 1.2
Miscellaneous 3,300 Imperial Chemical Industries
PLC (ADR)(1).................. 170,627 172,425 1.2
Utilities--Gas 3,600 British Gas PLC (ADR)(1)....... 165,852 166,300 1.2
----------- ----------- ---
Total Common Stocks in the
United Kingdom................ 1,009,342 994,867 7.0
----------- ----------- ---
United States Aerospace & Defense 2,600 United Technologies Corp. ..... 164,307 162,825 1.1
Agriculture 6,500 Archer-Daniels-Midland Co. .... 168,578 169,000 1.2
Banking 2,700 Morgan (J.P.) & Co. Inc. ...... 171,666 164,025 1.1
Capital Equipment 1,900 Hewlett-Packard Co. ........... 169,964 166,012 1.2
Chemicals 5,100 Nalco Chemical Co. ............ 168,231 167,662 1.2
----------- ----------- ---
Miscellaneous 5,600 Kelly Services, Inc. .......... 171,500 147,000 1.0
8,700 Keystone International,
Inc. ......................... 171,259 169,650 1.2
----------- ----------- ---
342,759 316,650 2.2
----------- ----------- ---
Oil--Integrated 5,000 Phillips Petroleum Co. ........ 174,050 171,250 1.2
----------- ----------- ---
</TABLE>
59
<PAGE> 112
MERRILL LYNCH ASSET GROWTH FUND, INC. SEPTEMBER 30, 1994
SCHEDULE OF INVESTMENTS (UNAUDITED) (IN U.S. DOLLARS)--(CONTINUED)
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRIES SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
-------------------- ----------- ------------------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States--
(concluded) Oil Services 8,000 Dresser Industries, Inc. ...... $ 163,480 $ 162,000 1.1%
3,000 Schlumberger Ltd., Inc. ....... 170,865 163,125 1.1
----------- ----------- ---
334,345 325,125 2.2
----------- ----------- ---
Pharmaceuticals 5,000 Merck & Co. ................... 170,925 177,500 1.2
Photography 3,000 Eastman Chemical Co. .......... 159,585 163,125 1.1
3,200 Eastman Kodak Co. ............. 170,256 165,600 1.1
----------- ----------- ---
329,841 328,725 2.2
----------- ----------- ---
Pollution Control 10,000 Wheelabrator Technologies
Inc. ......................... 165,600 153,750 1.1
Semiconductor
Production
Equipment 6,000 Teradyne Inc. ................. 172,860 176,250 1.2
Communications 3,200 A T & T Corp. ................. 168,035 167,400 1.2
----------- ----------- ---
Total Common Stocks in the
United
States........................ 2,780,161 2,646,174 18.3
----------- ----------- ---
Total Investments in Common
Stocks........................ 10,964,432 10,702,835 74.3
----------- ----------- ---
<CAPTION>
FACE
AMOUNT FIXED-INCOME SECURITIES
----------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States US$ $ 200,000 ADT Operations, 9.25% due
8/01/2003..................... 191,250 190,000 1.3
200,000 Flagstar Corp., 11.375% due
9/15/2003..................... 176,000 172,000 1.2
325,000 GI Holdings Inc., 11.38% due
10/01/1998.................... 202,134 201,500 1.4
200,000 Grand Union Co., 11.25% due
7/15/2000..................... 187,500 182,000 1.3
200,000 Host Marriott Hospitality,
10.375% due 6/15/2011......... 201,000 200,000 1.4
200,000 Reliance Group Holdings, Inc.,
9.75% due 11/15/2003.......... 180,000 181,000 1.3
200,000 Stone Container Corp.,
11.50% due 10/01/2004......... 198,564 200,750 1.4
200,000 USAir Inc., 30.375% due
3/01/2013..................... 178,000 173,000 1.2
200,000 Westpoint Stevens Inc., 9.375%
due 12/15/2005................ 182,000 180,500 1.3
----------- ----------- ---
Total Investments in
Fixed-Income
Securities.................... 1,696,448 1,680,750 11.8
----------- ----------- ---
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES
-------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper* US$ Federal Home Loan Mortgage
Corp.:
700,000 4.80% due 10/05/1994........... 699,626 699,626 4.8
200,000 4.73% due 11/02/1994........... 199,159 199,159 1.3
800,000 Federal National Mortgage
Association,
4.81% due 10/13/1994......... 798,717 798,717 5.5
433,000 General Electric Corp.,
4.95% due 10/03/1994......... 432,800 432,180 3.0
</TABLE>
60
<PAGE> 113
MERRILL LYNCH ASSET GROWTH FUND, INC. SEPTEMBER 30, 1994
SCHEDULE OF INVESTMENTS (UNAUDITED) (IN U.S. DOLLARS)--(CONTINUED)
<TABLE>
<CAPTION>
FACE VALUE PERCENT OF
INDUSTRIES AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
-------------------- ----------- ------------------------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial
Paper*--
(concluded) US$ (concluded) 500,000 Student Loan Marketing
Association,
4.72% due 10/17/1994......... $ 498,951 $ 498,951 3.4%
----------- ----------- ---
Total Investments in Short-Term
Securities.................... 2,629,333 2,629,133 18.0
----------- ----------- ---
Total Investments.............. $15,290,213 15,012,918 104.1
----------- ----------- ---
Liabilities in Excess of Other
Assets........................ (596,616) (4.2)
----------- ---
Net Assets..................... $14,416,302 100.0%
============ ===========
</TABLE>
- ---------------
* Commercial Paper is traded on a discount basis; the interest rate shown is
the discount rate paid at the time of purchase by the Fund.
(1) American Depositary Receipt (ADR).
See Notes to Financial Statements.
61
<PAGE> 114
MERRILL LYNCH ASSET GROWTH FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES AS OF SEPTEMBER 30, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$15,290,213) (Note 1a)........... $15,012,918
Cash..................................................................... 430
Receivables:
Securities sold...................................................... $1,099,000
Capital shares sold.................................................. 558,103
Interest............................................................. 29,493
Dividends............................................................ 13,323
Investment adviser (Note 2).......................................... 1,176 1,701,095
----------
Deferred organization expenses (Note 1h)................................. 57,350
Prepaid registration fees and other assets (Note 1h)..................... 110,726
-----------
Total assets.................................................... 16,882,519
-----------
LIABILITIES:
Payables:
Securities purchased................................................. 2,216,155
Capital shares redeemed.............................................. 101,990
Distributor (Note 2)................................................. 8,624 2,326,769
----------
Accrued expenses and other liabilities................................... 139,448
-----------
Total liabilities............................................... 2,466,217
-----------
NET ASSETS:
Net assets...................................................... $14,416,302
===========
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized............................................................. $ 21,222
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized............................................................. 125,802
Paid-in capital in excess of par......................................... 14,531,647
Undistributed investment income--net..................................... 15,497
Accumulated realized capital losses on investments and foreign currency
transactions--net...................................................... (1,221)
Unrealized depreciation on investments and foreign currency
transactions--net...................................................... (276,645)
-----------
Net assets...................................................... $14,416,302
===========
NET ASSET VALUE:
Class A--Based on net assets of $2,082,247 and 212,216 shares
outstanding............................................................ $9.81
=====
Class B--Based on net assets of $12,334,055 and 1,258,015 shares
outstanding............................................................ $9.80
=====
</TABLE>
See Notes to Financial Statements.
62
<PAGE> 115
MERRILL LYNCH ASSET GROWTH FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF OPERATIONS FOR THE PERIOD SEPTEMBER 2, 1994+ TO SEPTEMBER 30, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1F & 1G):
Interest and discount earned........................................ $ 36,034
Dividends (net of $1,390 foreign withholding tax)................... 13,359
---------
Total income.............................................. 49,393
---------
EXPENSES:
Registration fees (Note 1h)......................................... 9,119
Distribution fees--Class B (Note 2)................................. 8,624
Investment advisory fees (Note 2)................................... 7,582
Printing and shareholder reports.................................... 5,565
Accounting services (Note 2)........................................ 3,057
Directors' fees and expenses........................................ 2,214
Professional fees................................................... 1,960
Transfer agent fees--Class B (Note 2)............................... 1,580
Custodian fees...................................................... 1,505
Amortization of organization expenses (Note 1h)..................... 899
Transfer agent fees--Class A (Note 2)............................... 237
Other............................................................... 312
---------
Total expenses before reimbursement................................. 42,654
Reimbursement of expenses (Note 2).................................. (8,758)
---------
Total expenses after reimbursement.................................. 33,896
---------
Investment income--net.............................................. 15,497
---------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENT & FOREIGN CURRENCY
TRANSACTIONS--NET (NOTES 1C, 1G & 3):
Realized loss from:
Investment--net................................................ $ (99)
Foreign currency transactions--net............................. (1,122) (1,221)
---------
Changes in unrealized appreciation/depreciation on:
Investments--net............................................... (277,295)
Foreign currency transactions--net............................. 650 (276,645)
--------- ---------
Net realized and unrealized loss on investments and foreign currency
transactions...................................................... (277,866)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $(262,369)
=========
</TABLE>
- --------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements.
63
<PAGE> 116
MERRILL LYNCH ASSET GROWTH FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 2, 1994+
TO SEPTEMBER 30, 1994
---------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Investment income--net.................................................. $ 15,497
Realized loss on investments and foreign currency transactions--net..... (1,221)
Change in unrealized depreciation on investments and foreign currency
transactions--net...................................................... (276,645)
-----------
Net decrease in net assets resulting from operations.................... (262,369)
-----------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital share transactions...... 14,578,671
-----------
NET ASSETS:
Total increase in net assets............................................ 14,316,302
Beginning of period..................................................... 100,000
-----------
End of period*.......................................................... $14,416,302
==========
*Undistributed investment income--net........................................ $15,497
=======
</TABLE>
- --------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements.
64
<PAGE> 117
MERRILL LYNCH ASSET GROWTH FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 2, 1994+ TO
SEPTEMBER 30, 1994
---------------------
CLASS A CLASS B
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................................... $10.00 $ 10.00
------- -------
Investment income--net.................................................... 0.02 0.01
Realized and unrealized loss on investments and foreign currency
transactions--net....................................................... (0.21) (0.21)
------- -------
Total from investment operations.......................................... (0.19) (0.20)
------- -------
Net asset value, end of period............................................ $ 9.81 $ 9.80
======= ========
TOTAL INVESTMENT RETURN**:
Based on net asset value per share........................................ (1.90)% (2.00)%
======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees and net of reimbursement............ 2.48 %* 2.50%*
======= ========
Expenses, net of reimbursement............................................ 2.48 %* 3.50%*
======= ========
Expenses.................................................................. 3.36 %* 4.37%*
======= ========
Investment income--net.................................................... 2.40 %* 1.38%*
======= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................. $2,082 $12,334
======= ========
Portfolio turnover........................................................ 0.00 % 0.00%
======= ========
</TABLE>
- --------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effect of sales loads. Amount shown
represents the aggregate total investment return.
+ Commencement of Operations.
See Notes to Financial Statements.
65
<PAGE> 118
MERRILL LYNCH ASSET GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF SEPTEMBER 30, 1994
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Asset Growth Fund, Inc., (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The shares of the Fund are divided into Class A Shares and
Class B Shares. Class A Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B Shares bear certain expenses
related to the account maintenance and distribution of such shares and have
exclusive voting rights with respect to matters relating to such account
maintenance distribution expenditures. On August 3, 1994, the directors approved
the implementation of the Merrill Lynch Select Pricing(SM) System, which will
offer two new classes, Class C and Class D. Prior to commencement of operations
on September 2, 1994, the Fund had no operations other than those relating to
organizational matters and the sale of 5,000 Class A Shares and 5,000 Class B
Shares of common stock on June 6, 1994 to Merrill Lynch Asset Management, L.P.
("MLAM") for $100,000. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the principal market 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 or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. The Fund employs
Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of MLAM, to
provide securities prices for the Fund. 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. Other
investments, including futures contracts and related options, are stated at
market value. Short-term securities are valued at amortized cost which
approximates market.
Options written by the Fund are valued at the last asked price in the case
of exchanged-traded options or, in the case of options traded in the
over-the-counter market, the average of the last asked price as obtained from
one or more dealers. Options purchased by the Fund are valued at their last bid
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last bid price obtained from
two or more dealers, unless there is only one dealer, in which case that
dealer's price is used.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix system for
valuations.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
66
<PAGE> 119
MERRILL LYNCH ASSET GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
AS OF SEPTEMBER 30, 1994
1. SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(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) receivables or payables expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange sales on investments.
The Fund is authorized to enter into forward foreign exchange contracts as
a hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
The Fund 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 Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund.
(d) Options--The Fund can write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current value of
the option written.
When a security is sold through an exercise of an option, the related
premium received (or paid) is deducted from (or added to) the basis of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the 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.
(e) Financial futures contracts--The Fund may purchase or sell stock index
futures contracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
67
<PAGE> 120
MERRILL LYNCH ASSET GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
AS OF SEPTEMBER 30, 1994
(f) Income taxes--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(g) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(h) 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.
(i) Dividends and distributions--Dividends and distributions paid by the
Fund are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). Effective January 1, 1994 the investment
advisory business of MLAM was reorganized from a corporation to a limited
partnership. Both prior to and after the reorganization, ultimate control of
MLAM was vested with Merrill Lynch & Co. ("ML & Co.").
The general partner of MLAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML & Co. and
Merrill Lynch Investment Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co. The Fund has also entered into a
Distribution Agreement and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee of 0.75%, on an annual basis, of the average daily value of the
Fund's net assets. Certain of the states in which the shares of the Fund are
qualified for sale impose limitations on the expenses of the Fund. The most
restrictive annual expense limitation requires that the Investment Adviser
reimburse the Fund to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets, and 1.5% of the average daily
net assets in excess thereof. MLAM's obligation to reimburse the Fund is limited
to the amount of the management fee. No fee
68
<PAGE> 121
MERRILL LYNCH ASSET GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
AS OF SEPTEMBER 30, 1994
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:--(CONCLUDED)
payment will be made to MLAM during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation applicable at the
time of such payment.
Pursuant to a distribution plan (the "Distribution Plan") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor an ongoing account maintenance fee and a distribution
fee, which are accrued daily and paid monthly, at the annual rates of 0.25% and
0.75%, respectively, of the average daily net assets of the Class B shares of
the Fund. Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner, and Smith ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B shareholders. The ongoing distribution fee
compensates the Distributor and MLPF&S for providing shareholder and
distribution services and bearing certain distribution-related expenses of the
Fund.
For the period ended September 30, 1994, MLFD earned underwriting discounts
of $401, and MLPF&S received dealer concessions of $77,322 on sales of the
Fund's Class A Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML &
Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
For the period September 2, 1994 to September 30, 1994 the distributor
received CDSC's of $511 with respect to redemptions of Class B Shares, all of
which were paid to Merrill Lynch.
Certain officers and/or directors of the Fund are officers and/or directors
of MLAM, MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period
ended September 30, 1994 was $12,659,432.
Net realized and unrealized gains (losses) as of September 30, 1994 were as
follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS GAINS
(LOSSES) (LOSSES)
------- ----------
<S> <C> <C>
Long-term investments......................................... -- $(277,295 )
Short-term investments........................................ $ (99 ) --
Foreign currency transactions................................. (1,122 ) 650
------- ----------
Total......................................................... $(1,221) $(276,645 )
======= ==========
</TABLE>
69
<PAGE> 122
MERRILL LYNCH ASSET GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
AS OF SEPTEMBER 30, 1994
3. INVESTMENT:--(CONCLUDED)
As of September 30, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $277,295, of which $54,118 related to appreciated
securities and $331,413 related to depreciated securities. The aggregate cost of
investments at September 30, 1994 for Federal income tax purposes was
$15,290,213.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$14,578,671 for the period ended September 30, 1994.
Transactions in capital shares for Class A and Class B Shares were as
follows:
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE PERIOD DOLLAR
SEPTEMBER 2, 1994+ TO SEPTEMBER 30, 1994 SHARES AMOUNT
-------------------------------------------------------------- --------- ----------
<S> <C> <C>
Shares sold................................................... 219,486 $2,190,807
Shares issued to shareholders in reinvestment of dividends and
distributions............................................... -- --
--------- ----------
Total issued.................................................. 219,486 2,190,807
Shares redeemed............................................... (12,270) (122,010)
--------- ----------
Net increase.................................................. 207,216 $2,068,797
======== =========
</TABLE>
- ---------------
+ Commencement of operations. Prior to September 2, 1994 the Fund issued 5,000
shares to MLAM for $50,000.
<TABLE>
<CAPTION>
CLASS B SHARES FOR THE PERIOD DOLLAR
SEPTEMBER 2, 1994+ TO SEPTEMBER 30, 1994 SHARES AMOUNT
------------------------------------------------------------- --------- -----------
<S> <C> <C>
Shares sold.................................................. 1,293,241 $12,909,317
Shares issued to shareholders in reinvestment of dividends
and distributions.......................................... -- --
--------- -----------
Total issued................................................. 1,293,241 12,909,317
Shares redeemed.............................................. (40,226) (399,443)
--------- -----------
Net increase................................................. 1,253,015 $12,509,874
======== ==========
</TABLE>
- ---------------
+ Commencement of operations. Prior to September 2, 1994 the Fund issued 5,000
shares to MLAM for $50,000.
5. COMMITMENTS:
At September 30, 1994, the Fund had entered into forward foreign exchange
contracts under which it had agreed to purchase various foreign currency with an
approximate value of $703,000.
70
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
MERRILL LYNCH ASSET GROWTH FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Asset Growth Fund, Inc. as of July 22, 1994. This financial statement is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Asset Growth Fund, Inc. as of
July 22, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 26, 1994.
71
<PAGE> 124
MERRILL LYNCH ASSET GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JULY 22, 1994
<TABLE>
<S> <C>
Assets:
Cash in Bank................................................................. $100,000
Prepaid registration fees (Note 3)........................................... 53,450
Deferred organization expenses (Note 4)...................................... 57,100
--------
Total Assets...................................................................... 210,550
Liabilities--accrued expenses..................................................... (110,550)
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares of common stock
(par value $0.10) and 5,000 Class B shares of common stock (par value $0.10)
outstanding with 200,000,000 shares authorized) (Note 1)........................ $100,000
========
</TABLE>
- ---------------
(1) Merrill Lynch Asset Growth Fund, Inc. (the "Fund") was incorporated in the
State of Maryland on June 6, 1994. The Fund is registered under the
Investment Company Act of 1940 as an open-end investment company.
(2) The Fund intends to enter into an Investment Management Agreement (the
"Management Agreement") with Merrill Lynch Asset Management, L.P. (the
"Manager"), and a distribution agreement (the "Distribution Agreement") with
Merrill Lynch Funds Distributor, Inc. (the "Distributor"). (See "Management
and Advisory Arrangements" in the Statement of Additional Information.)
Certain officers and/or directors of the Fund are officers and/or directors
of the Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
issued.
(4) Deferred organization expenses will be amortized over a period from the date
the Fund commences operations not exceeding five years. In the event that
the Manager (or any subsequent holder) redeems any of its original shares
prior to the end of the five-year period, the proceeds of the redemption
payable in respect of such shares will be reduced by the pro rata share
(based on the proportionate share of the original shares redeemed to the
total number of original shares outstanding at the time of redemption) of
the unamortized deferred organization expenses as of the date of such
redemption. In the event that the Fund is liquidated prior to the end of the
five-year period, the Manager (or any subsequent holder) will bear the
unamortized deferred organization expenses.
72
<PAGE> 125
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73
<PAGE> 126
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74
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Investment Objective and Policies........ 2
Precious and Industrial Metal-Related
Securities........................... 2
Real Estate-Related Securities......... 3
Portfolio Strategies Involving Options
and Futures.......................... 4
Other Investment Policies and
Practices............................ 8
Investment Restrictions................ 11
Management of the Fund................... 15
Directors and Officers................. 15
Management and Advisory Arrangements... 16
Purchase of Shares....................... 17
Alternative Sales Arrangements......... 17
Initial Sales Charge Alternative--Class
A and Class D Shares................. 18
Reduced Initial Sales Charges.......... 18
Distribution Plans..................... 22
Limitations on the Payment of Deferred
Sales Charges........................ 23
Redemption of Shares..................... 23
Deferred Sales Charge--Class B
Shares............................... 24
Portfolio Transactions and Brokerage..... 25
Determination of Net Asset Value......... 26
Shareholder Services..................... 27
Investment Account..................... 27
Automatic Investment Plans............. 28
Automatic Reinvestment of Dividends and
Capital Gains Distributions.......... 28
Systematic Withdrawal Plans--Class A
and Class D Shares................... 28
Exchange Privilege..................... 29
Dividends, Distributions and Taxes....... 42
Dividends and Distributions............ 42
Taxes.................................. 42
Performance Data......................... 46
General Information...................... 47
Description of Shares.................. 47
Computation of Offering Price Per
Share................................ 48
Independent Auditors..................... 49
Custodian................................ 49
Transfer Agent........................... 49
Legal Counsel............................ 49
Reports to Shareholders.................. 49
Additional Information................... 49
Appendix................................. 50
Unaudited Financial Statements for the
Period September 2, 1994 to September
30, 1994............................... 57
Independent Auditors' Report............. 71
Audited Statement of Assets and
Liabilities as of July 22, 1994........ 72
</TABLE>
[L O G O]
MERRILL LYNCH
ASSET
GROWTH FUND, INC.
[A R T]
Statement of
Additional Information
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
Code 18239--1094
<PAGE> 128
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
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
