<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997
SECURITIES ACT FILE NO. 33-54005
INVESTMENT COMPANY ACT FILE NO. 811-7183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]
PRE-EFFECTIVE AMENDMENT NO.
[_]
[X]
POST-EFFECTIVE AMENDMENT NO. 6
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 8 [X]
(Check appropriate box or boxes)
MERRILL LYNCH ASSET GROWTH FUND, INC.
(formerly Merrill Lynch Asset Allocation Growth Fund, Inc.)
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH ASSET GROWTH FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
Copies to:
COUNSEL FOR THE COMPANY: PHILIP L. KIRSTEIN, ESQ.
LEONARD B. MACKEY, JR., ESQ. MERRILL LYNCH ASSET
ROGERS & WELLS MANAGEMENT L.P.
200 PARK AVENUE P.O. BOX 9011
NEW YORK, NEW YORK 10166 PRINCETON, N.J. 08543-9011
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF CLASS A SHARES, CLASS B
SHARES, CLASS C SHARES AND CLASS D SHARES UNDER THE SECURITIES ACT OF 1933
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE
REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON
OCTOBER 10, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART A. ITEM NOS. 1-9
There is hereby incorporated by reference the information contained in Post-
Effective Amendment No. 5 to the Fund's Registration Statement on Form N-1A as
filed with the Securities and Exchange Commission on December 26, 1996 (File
Nos. 33-54005 and 811-7183).
PART B. ITEM NOS. 10-23
There is hereby incorporated by reference the information contained in Post-
Effective Amendment No. 5 to the Fund's Registration Statement on Form N-1A as
filed with the Securities and Exchange Commission on December 26, 1996 (File
Nos. 33-54005 and 811-7183).
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
----------------
This post-effective amendment consists of this page, Part C of this
Registration Statement and a signature page.
<PAGE>
MERRILL LYNCH ASSET GROWTH FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
----------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
PART A
<S> <C> <C>
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... Fee Table
Item 3. Financial Highlights........ Not Applicable
Item 4. General Description of Investment Objective and Policies;
Registrant................. Additional Information
Item 5. Management of the Fund...... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance........... Not Applicable
Item 6. Capital Stock and Other
Securities................. Cover Page; Additional Information
Item 7. Purchase of Securities Being Cover Page; Merrill Lynch Select
Offered.................... Pricing SM System; Shareholder
Services; Purchase of Shares
Item 8. Redemption or Repurchase.... Fee Table; Merrill Lynch Select
Pricing SM System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings... Not Applicable
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Back Cover Page
Item 12. General Information and
History.................... Not Applicable
Item 13. Investment Objectives and
Policies................... Investment Objective and Policies
Item 14. Management of the Fund...... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................. Management of the Fund
Item 16. Investment Advisory and Management of the Fund, Purchase of
Other Services............. Shares; General Information
Item 17. Brokerage Allocation and
Other Practices............ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities................. General Information
Item 19. Purchase, Redemption and
Pricing of Securities being Purchase of Shares; Redemption of
Offered.................... Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.................. Dividends and Distributions; Taxes
Item 21. Underwriters................ Purchase of Shares
Item 22. Calculation of Performance
Data....................... Performance Data
Item 23. Financial Statements........ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
DECEMBER 9, 1997
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 that seeks 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."
For more information on the Fund's investment objective and policies please
see "Investment Objective and Policies" on page 11.
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50 except that for participants in
certain fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Merrill Lynch may charge its customers a processing
fee (presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.
(the "Transfer Agent") are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated December 9, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and obtained, without charge, by calling or by writing the Fund
at the above telephone number or address. The Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information about the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT, L.P. -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed
on Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(d) 4.0% during the first 1.0% for one None(d)
price or redemption year, decreasing 1.0% year(f)
proceeds, whichever annually thereafter to 0.0%
is lower)............. after the fourth year
Exchange Fee........... None None(e) None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(g)............... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(h):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
Distribution Fees.... None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight
years and cease being
subject to distribution fees)
OTHER EXPENSES:
Custodial Fees...... 0.21% 0.21% 0.21% 0.21%
Shareholder
Servicing Costs(i). 0.26% 0.29% 0.31% 0.27%
Other............... 2.39% 2.42% 2.41% 2.44%
---- ---- ---- ----
Total Other Ex-
penses............ 2.86% 2.92% 2.93% 2.92%
---- ---- ---- ----
Total Fund Operating
Expenses(j)......... 3.61% 4.67% 4.68% 3.92%
==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 30 and "Shareholder Services--Fee-Based Programs"--page 41.
(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 32.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D shares"--
page 30.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% if redeemed within the first year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. See "Shareholder
Services--Fee Based Programs"--page 41.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee Based Program"--page 41.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee Based Programs"--page 41.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
25.
(h) See "Purchases of Shares--Distribution Plans"--page 35.
(i) See "Management of the Fund--Transfer Agency Services"--page 27.
(j) For the fiscal year ended August 31, 1997, Merrill Lynch Assets Management,
L.P. ("MLAM"), voluntarily reimbursed the Fund for all management fees.
Additionally, MLAM voluntarily reimbursed the Fund (exclusive of Rule 12b-1
fees) for a portion of other expenses. As MLAM may discontinue its waiver
of such fees, the table above has been restated to assume the absence of
any such waiver. During the fiscal year ended August 31, 1997, MLAM waived
management fees and reimbursement expenses totaling 0.82% for Class A
shares 0.83% for Class B shares, 0.82% for Class C shares and 0.87% for
Class D shares after which the Fund's total expense ratio was 2.79% for
Class A shares, 3.84% for Class B shares, 3.86% for Class C shares and
3.05% for Class D shares.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
----------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment
including the maximum
$40.00 initial sales
charge (Class A and
Class D shares only) and
assuming (1) the Total
Fund Operating Expenses
for each class set forth
on page 2; (2) a 5%
annual return throughout
the periods; and (3)
redemption at the end of
the period: (including
any applicable CDSC for
Class B and Class C
shares):
Class A................. $ 87 $ 157 $ 230 $ 419
Class B................. $ 87 $ 161 $ 235 $ 460*
Class C................. $ 57 $ 141 $ 236 $ 476
Class D................. $ 90 $ 166 $ 243 $ 445
An investor would pay the
following expenses on
the same $1,000
investment assuming no
redemption at the end of
the period:
Class A................. $ 87 $ 157 $ 230 $ 419
Class B................. $ 47 $ 141 $ 235 $ 460*
Class C................. $ 47 $ 141 $ 236 $ 476
Class D................. $ 90 $ 166 $ 243 $ 445
</TABLE>
- --------
* Assumes conversion to Class D Shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("NASD") Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset
Management, L.P. ("FAM" or the "Manager"). Funds advised by MLAM or FAM that
use the Merrill Lynch Select PricingSM System are referred to herein as "MLAM-
advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
3
<PAGE>
B and Class C shares of the Fund, as well as the account maintenance fees that
are imposed on the Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges 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 of the Fund are
the same as those of the CDSCs and distribution fees with respect to the Class
B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling
different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2),(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 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
annually to 0.0%(4) eight years(5)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 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. CDSC are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares participants in connection with certain fee-based programs. Class
A and Class D share purchases of $1,000,000 or more may not be subject to
an initial sales charge but, if the initial sales charge is waived, may be
subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain Fee-Based Programs. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-
based programs was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
4
<PAGE>
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares of the Fund. Investors that currently own Class A
shares of the Fund in a shareholder account are entitled to purchase
additional Class A shares of the Fund in that account. Other eligible
investors include participants in certain fee-based programs. In addi-
tion, Class A shares will be offered at net asset value to Merrill
Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsid-
iaries," when used herein with respect to ML & Co., includes MLAM, FAM
and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and their directors and employees and to mem-
bers of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge of 5.25%, is reduced for purchases of $25,000 and over
and waived for purchases by participants in connection with certain
fee-based programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived
such purchases may be subject to a 1.0% CDSC if the shares are re-
deemed within one year after purchase. Such CDSC may be waived in con-
nection with certain fee-based programs. Sales charges also are re-
duced under a right of accumulation that takes into account the in-
vestor'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 Class B Shares, an ongo-
ing distribution fee of 0.75% of the Fund's average net assets attrib-
utable to the Class B shares, and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no distribu-
tion fee. Class B shares of certain other MLAM-advised mutual funds
into which exchanges may be made convert into Class D shares automati-
cally 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 ex-
change will apply, and the holding period for the shares exchanged
will be tacked on to the holding period for the shares acquired. Auto-
matic 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 im-
position 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 rein-
vestment of dividends on Class B shares also will convert automati-
cally to Class D shares. The conversion period for dividend reinvest-
ment shares, and the conversion and holding periods for certain re-
tirement plans are modified as described under "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Con-
version of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75%, of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a 1.0% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs. Al-
though Class C shares are subject to a CDSC for only one year (as com-
pared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases
5
<PAGE>
of $1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived, such purchases may be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. The schedule of initial sales charges and
reductions for Class D shares is the same as the schedule for Class A
shares, except that there is no waiver for purchases by certain
retirement plans and participants in connection with certain fee-based
programs. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B." See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM 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 of the Fund 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 of the Fund. 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 of the Fund, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares of the Fund may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who previously purchased Class A
shares of the Fund 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 that may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have
lower total returns 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 of the Fund
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 of the Fund 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 of the Fund. 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 of the Fund 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 of the Fund 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 of the Fund. 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 of the Fund are subject to a shorter CDSC period at a lower rate,
they forgo the Class B conversion feature, making their investment subject to
account maintenance and distribution fees for an indefinite period of time. In
addition, while both Class B and Class C distribution fees are subject to the
limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges."
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the Financial Statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended
August 31, 1997, and the independent auditors' report thereon are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------- ---------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEAR YEAR SEPT. 2, YEAR YEAR SEPT. 2,
ENDED ENDED 1994+ TO ENDED ENDED 1994+ TO
AUG. 31, AUG. 31, AUG. 31, AUG. 31, AUG. 31, AUG. 31,
1997@ 1996 1995 1997@ 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $10.13 $ 9.90 $10.00 $10.09 $ 9.83 $ 10.00
------ ------ ------ ------ ------ -------
Investment income
(loss)--net............ .01 .12 .16 (.11) .01 .05
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.30 .34 (.22) 2.30 .35 (.21)
------ ------ ------ ------ ------ -------
Total from investment
operations............. 2.31 .46 (.06) 2.19 .36 (.16)
------ ------ ------ ------ ------ -------
LESS DIVIDENDS:
Investment income--net.. (.01) (.16) (.04) -- @@ (.07) (.01)
In excess of investment
income--net............ (.15) (.07) -- (.08) (.03) --
------ ------ ------ ------ ------ -------
Total dividends......... (.16) (.23) (.04) (.08) (.10) (.01)
------ ------ ------ ------ ------ -------
Net asset value, end of
period................. $12.28 $10.13 $ 9.90 $12.20 $10.09 $ 9.83
====== ====== ====== ====== ====== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 23.06% 4.71% (.59)%++ 21.81% 3.65% (1.60)%++
====== ====== ====== ====== ====== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... 2.79% 2.47% 2.47%* 3.84% 3.50% 3.50%*
====== ====== ====== ====== ====== =======
Expenses................ 3.61% 3.75% 3.31%* 4.67% 4.78% 4.37%*
====== ====== ====== ====== ====== =======
Investment income
(loss)--net............ .13% 1.16% 1.46%* (.94)% .13% .43%*
====== ====== ====== ====== ====== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $1,803 $1,352 $1,677 $8,403 $8,141 $11,835
====== ====== ====== ====== ====== =======
Portfolio turnover...... 128.28% 120.43% 42.50% 128.28% 120.43% 42.50%
====== ====== ====== ====== ====== =======
Average commission rate
paid+++................ $.0215 $.0184 -- $.0215 $.0184 --
====== ====== ====== ====== ====== =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
+++ For the fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
@ Based on average shares outstanding during the year.
@@ Amount is less than $.01 per share.
7
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------- --------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
YEAR YEAR OCT. 21, YEAR YEAR OCT. 21,
ENDED ENDED 1994+ TO ENDED ENDED 1994+ TO
AUG. 31, AUG. 31, AUG. 31, AUG. 31, AUG. 31, AUG. 31,
1997@ 1996 1995 1997@ 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $10.05 $ 9.82 $9.85 $10.11 $ 9.88 $ 9.86
------ ------ ----- ------ ------ ------
Investment income
(loss)--net............ (.11) (.04) .04 (.02) .08 .10
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 2.28 .39 (.05) 2.30 .36 (.04)
------ ------ ----- ------ ------ ------
Total from investment
operations............. 2.17 .35 (.01) 2.28 .44 .06
------ ------ ----- ------ ------ ------
LESS DIVIDENDS:
Investment income--net.. -- @@ (.08) (.02) (.01) (.15) (.04)
In excess of investment
income--net............ (.09) (.04) -- (.10) (.06) --
------ ------ ----- ------ ------ ------
Total dividends......... (.09) (.12) (.02) (.11) (.21) (.04)
------ ------ ----- ------ ------ ------
Net asset value, end of
period................. $12.13 $10.05 $9.82 $12.28 $10.11 $ 9.88
====== ====== ===== ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 21.71% 3.61% (.05)%++ 22.66% 4.51% .59%++
====== ====== ===== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... 3.86% 3.52% 3.51%* 3.05% 2.72% 2.75%*
====== ====== ===== ====== ====== ======
Expenses................ 4.68% 4.81% 4.58%* 3.92% 4.00% 4.32%*
====== ====== ===== ====== ====== ======
Investment income
(loss)--net............ (.94)% .09% .51%* (.21)% .93% 1.43%*
====== ====== ===== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $ 572 $ 438 $ 735 $ 564 $1,313 $1,697
====== ====== ===== ====== ====== ======
Portfolio turnover...... 128.28% 120.43% 42.50% 128.28% 120.43% 42.50%
====== ====== ===== ====== ====== ======
Average commission rate
paid++................. $.0215 $.0184 -- $.0215 $.0184 --
====== ====== ===== ====== ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
+++ For the fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
@Based on average shares outstanding during the year.
@@Amount is less than $.01 per share.
8
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Suitability. The economic benefit from an investment in the Fund depends on
many factors beyond the control of the Fund, the Manager and its affiliates.
Because it is a global fund, the Fund should be considered as a vehicle for
diversification and not as a balanced investment program. The suitability for
any particular investor of a purchase of shares of the Fund will depend upon,
among other things, such investor's investment objectives and such investor's
ability to accept the risks of investing in global markets including the risk
of a loss of principal.
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
9
<PAGE>
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.
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.
10
<PAGE>
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 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 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
11
<PAGE>
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.
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
12
<PAGE>
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 by Standard &
Poor's Ratings Group ("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).
13
<PAGE>
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 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
14
<PAGE>
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 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,
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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 (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
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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 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
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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.
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.
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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 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 15% 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
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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.
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.
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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 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
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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 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
15% 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.
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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 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
23
<PAGE>
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 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.
24
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "non-affiliated persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Manager and its affiliate, Fund Asset
Management, L.P. ("FAM"); President and Director of Princeton Services, Inc.
("Princeton Services") and Executive Vice President of ML & Co.
Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee and Member of the Investment Advisory Committee of the State of New
York Common Retirement Fund, and the Howard Hughes Medical Institute; Director,
Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation.
Walter Mintz--Special Limited Partner of Cumberland Associates (investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
Stephen B. Swensrud--Chairman of Fernwood Associates (financial consultants).
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business as
Merrill Lynch Asset Management ("MLAM"), 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 140 registered investment companies.
The Manager also provides portfolio management and portfolio analysis services
to individual and institutional accounts. As of November 30, 1997, the Manager
and FAM had a total of approximately $273.9 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.
For the fiscal year ended August 31, 1997, the Manager received management fees
from the Fund in the amount of $83,088 (based on average net assets of
approximately $11.1 million), all of which was voluntarily reimbursed to the
Fund. The Manager also voluntarily reimbursed the Fund for additional expenses
of $8,947.
25
<PAGE>
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.
Thomas R. Robinson is the Portfolio Manager of the Fund and has been
responsible for the day-to-day management of the Fund's investment portfolio
since November 1995. He has been a First Vice President of the Manager since
1997 and a Vice President thereof since 1995.
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. The
Fund's ratio of total expenses to average net assets, before reimbursement of
expenses for the fiscal year ended August 31, 1997, was 3.61% for Class A
shares, 4.67% for Class B shares, 4.68% for Class C shares and 3.92% for Class
D shares. For the same period, the total expense ratio, net of reimbursement,
to average net assets was 2.79%, 3.84%, 3.86% and 3.05% for Class A, Class B,
Class C and Class D shares, respectively. 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. For the fiscal year ended
August 31, 1997, the Fund paid the Manager $37,254 in connection with
accounting services.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a
fee for providing investment advisory services to the Manager with respect to
the Fund in an amount to be determined from time to time by the Manager and
MLAM U.K., but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act that incorporates the Code of Ethics of the Manager (together,
the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In
26
<PAGE>
addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account, and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML
& Co. For the fiscal year ended August 31, 1997, the Fund paid the Transfer
Agent a total fee of $31,982 pursuant to the Transfer Agency Agreement for
providing transfer agency services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
each of the Manager, FAM and Merrill Lynch, acts as the distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by
the Distributor and other eligible securities dealers (including Merrill
Lynch). Shares of the Fund may be purchased from securities dealers or by
mailing a purchase order directly to the Transfer Agent. The minimum initial
purchase is $1,000 and the minimum subsequent purchase is $50, except that for
participants in certain fee-based programs, the minimum initial purchase is
$500 and the minimum subsequent purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally 4:00 p.m., New York City time), which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value as of 15 minutes after the close of business on the NYSE (generally 4:00
p.m., New York City time), on the day the orders are placed with the
Distributor, provided the orders are received prior to 30 minutes after the
close of business on the NYSE
27
<PAGE>
NYSE (generally 4:00 p.m., New York City time), on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE (generally 4:00 p.m., New York City 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 $5.35) to
confirm a sale of shares to such customers. Purchases made directly through
the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the 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 PricingSM System is set forth under "Merrill Lynch Select
PricingSM 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 of the Fund 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 of the Fund, 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 of the Fund each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). 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 of the Fund are the
same as those of the CDSCs and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not
be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares. Investors are advised that only Class A and Class D shares of the Fund
may be available for purchase through securities dealers, other than Merrill
Lynch, that are eligible to sell shares.
28
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2), (3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 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
annually to 0.0%(4) eight years(5)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
decreasing to 0.0% after the
first year(6)
- -------------------------------------------------------------------------------------------------
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 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 "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A by participants in connection with certain fee-based programs.
Class A or Class D purchases of $1,000,000 or more may not be subject to
an initial sales charge but, instead may be subject to a 1.0% CDSC if
redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee
based programs was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
29
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares of the Fund should purchase Class A shares rather than
Class D shares because there is an account maintenance fee imposed on Class D
shares.
The public offering price of Class A and Class D shares of the Fund 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.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by Participants in connection
with certain fee-based programs. If the sales charge is waived in connection
with a purchase of $1,000,000 or more, such purchases may be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
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. The proceeds from
the account maintenance fees are used to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) for providing continuing account
maintenance activities. For the fiscal year ended August 31, 1997, the Fund
sold 64,930 Class A shares, for aggregate net proceeds of $766,134. The gross
sales charge for the sale of Class A shares of the Fund was $142, of which $12
and $130 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended August 31, 1997, the Fund sold 24,261 Class D shares for
aggregate net proceeds of $273,733. The gross sales charge for the sale of
Class D shares of the Fund was $2,679, of which $194 and $2,485 were received
by the Distributor and Merrill Lynch, respectively.
Eligible Class A Investors. Class A shares of the Fund are offered to a
limited group of investors and also will be issued upon reinvestment of
dividends from outstanding Class A shares of the Fund. Investors who currently
own Class A shares of the Fund in a shareholder account including participants
in the Merrill Lynch BlueprintSM Program, are entitled to purchase additional
Class A shares of the Fund in that account. Certain employer sponsored
retirement or savings plans, including eligible 401(k) plans, may purchase
Class A shares of the Fund at net asset value provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by MLAM or any of its affiliates. Class A shares of the Fund are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign banking institutions provided that the
program or institution has $3 million or more initially invested in MLAM-
advised mutual funds. Also eligible to purchase Class A shares of the Fund at
net asset value are
30
<PAGE>
participants in certain investment programs including TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, certain Merrill Lynch investment programs that offer pricing
alternatives for securities transactions and certain purchases made in
connection with certain fee-based programs. In addition, Class A shares of the
Fund 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 in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class D
shares are offered at net asset value to Employee Access SM Accounts available
through authorized employers. Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.,
and subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Muni Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional Information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
31
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares of the Fund if they intend to hold their shares for an extended
period of time and Class C shares of the Fund 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 of the Fund 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 of the Fund are
subject to a four-year CDSC, which declines each year, while Class C shares of
the Fund 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 of the Fund
are subject to an account maintenance fee of 0.25% of net assets and a
distribution fee of 0.75% of net assets as discussed below under "Distribution
Plans."
Class B and Class C shares of the Fund 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 of the Fund at the time of purchase from its own funds.
See "Distribution Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment, 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 of the Fund without a sales charge being
deducted at the time of purchase. The proceeds from the account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.
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
of the Fund is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. 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.
32
<PAGE>
Contingent Deferred Sales Charge--Class B Shares. Class B shares of the Fund
that are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no 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>
CLASS B CDSC
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------- -----------------
<S> <C>
0-1........................................................... 4.00%
1-2........................................................... 3.00%
2-3........................................................... 2.00%
3-4........................................................... 1.00%
4 and thereafter.............................................. 0.00%
</TABLE>
For the fiscal year ended August 31, 1997, the Distributor received CDSCs of
$27,183 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a 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
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 is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder.
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The Class B CDSC also is waived on redemptions of shares by certain eligible
401(a) and eligible 401(k) plans. The CDSC also is waived for any Class B
shares that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption and for any Class B shares
that were acquired and held at the time of the redemption in the Employee
Access AccountSM available through employers providing eligible 401(k) plans.
The Class B CDSC also is waived for any Class B shares that are purchased by
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such
account at the time of redemption. The Class B CDSC also is waived for any
Class B shares that are purchased within qualifying Employee AccessSM Accounts.
Additional information concerning the waiver of the Class B CDSC is set forth
in the Statement of Additional Information. The terms of the CDSC may be
modified in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs."
Contingent Deferred Sales Charge--Class C Shares. Class C shares of the Fund
that are redeemed within one year of purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
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. For the fiscal year ended
August 31, 1997, the Distributor received CDSCs of $77 with respect to
redemptions of Class C shares of the Fund, all of which were paid to Merrill
Lynch.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares of the Fund 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 of the Fund will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset values
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares of the Fund 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 of the Fund will also 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.
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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 of the Fund 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 of the Fund 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 of the Fund through certain retirement plans that qualified for a waiver
of the CDSC normally imposed on purchases of Class B shares ("Class B
Retirement Plans"). When the first share of any MLAM-advised mutual fund
purchased by a Class B Retirement Plan has been held for ten years (i.e., ten
years from the date the relationship between MLAM-advised mutual funds and the
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 per share.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares of the Fund 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 in connection with such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including
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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 CDSCs and distribution fees provide for the financing of the
distribution of the Fund's Class B and Class C shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor
distribution and/or account maintenance fees of $82,939 (based on average net
assets of approximately $8.3 million) under the Class B Distribution Plan,
$5,491 (based on average net assets of approximately $0.6 million) under the
Class C Distribution Plan and $1,709 (based on average net assets of
approximately $0.7 million) under the Class D Distribution Plan.
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. For the fiscal year ended August 31, 1997, direct cash
revenues exceeded direct cash expenses of Class B shares of the Fund by
approximately $164,634. For the fiscal year ended August 31, 1997, direct cash
revenues exceeded direct cash expenses of Class C shares of the Fund by
approximately $8,266.
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 of the Fund will terminate upon conversion
of those Class B shares into Class D shares as set forth under "Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the Fund's
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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 of the Fund 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 all shares of the Fund for cash on receipt of
a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending
on the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by the 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 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
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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,
Federal Funds 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
NYSE on the day received and that such request is received by the Fund from
such dealer not later than 30 minutes after the close of business on the NYSE
(generally 4:00 p.m., New York City time), on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE (generally 4:00 p.m.,
New York City 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 that 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 $5.35) to confirm a repurchase of shares
to such customers. Repurchases made 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, may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and the stock power or letter requesting redemption,
in each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
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.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
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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 BlueprintSM Program.
Full details as to each of such services, copies of the various plans described
below and instructions as to how to participate in the various 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 capital gain distributions. The statements will
also show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
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 may 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 PricingSM 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
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Class A shares for shares of a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares of the Fund 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 of the Fund 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 of the Fund will be exchangeable with
shares of the same class of other MLAM-advised mutual funds.
Shares of the Fund that 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 for the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares of the Fund 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund without a sales charge at the net asset value
per share next determined after the close of NYSE on the ex-dividend date of
such dividend or distribution. A shareholder may at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or by telephone call (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have
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subsequent dividends or capital gains distributions, or both dividends and
capital gains distributions, paid in cash, rather than reinvested, in which
event payment will be mailed or directly deposited on or about the payment
date. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will be
imposed on redemption for shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans. A shareholder may elect to receive systematic
withdrawal payments from his or her Investment Account in the form of payments
by check or through automatic payment by direct deposit to his or her bank
account on either a monthly or quarterly basis. A shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions. With respect to redemptions of Class B or Class C shares pursuant
to a systematic withdrawal plan, the maximum number of Class B or Class C
shares that can be redeemed from an account annually shall not exceed 10% of
the value of shares of such class in that account at the time the election to
join the systematic withdrawal plan was made. Any CDSC that otherwise might be
due on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "Contingent Deferred
Sales Charges--Class C Shares." Where the systematic withdrawal plan is applied
to Class B Shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charges
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares."
Automatic Investment Plans. Regular additions of Class A, Class B, Class C or
Class D shares may be made to an investor's Investment Account by pre-arranged
charges of $50 or more to his or her regular bank account. Investors who
maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement plans) through the
CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an
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exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
a specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in such
Program's client agreement and from the Transfer Agent at (800) MER-FUND (637-
3863).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for the Fund's portfolio decisions and the placing of
the Fund's portfolio transactions. With respect to such transactions, the
Manager seeks to obtain the best net results for the Fund, taking into account
such factors as price (including 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.
For the fiscal year ended August 31, 1997, the Fund's portfolio turnover rate
was 128.28%. High portfolio turnover involves correspondingly greater
transaction costs in the form of commissions and dealer spreads, which are borne
directly by the Fund.
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 is computed
separately for Class A, Class B, Class C and Class D shares of the Fund 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
42
<PAGE>
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 of the Fund 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 distributed to investors whose purchases are
subject to waiver of the CDSC in the case of Class B and Class C shares of the
Fund (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 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, 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
Morningstar Publications, Inc. in advertising or supplemental sales literature.
As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.
43
<PAGE>
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 semi-annually. All net
realized 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 will be
reinvested automatically in shares of the Fund, at net asset value without a
sales charge. However, a shareholder whose account is maintained at the
Transfer Agent or whose account is maintained through Merrill Lynch may elect
in writing to receive any such dividends or distributions, or both, in cash.
See "Shareholders Services--Automatic Reinvestment of Dividends and
Distributions" for information as to how to elect either dividing reinvestment
or cash payments. Dividends and distributions are taxable to shareholders as
described below whether they are reinvested in shares of the Fund or received
in cash. From time to time, the Fund may declare a special distribution at or
about the end of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains
be distributed during the calendar year.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily by the Manager immediately after the declaration of dividends as of
15 minutes after the closing time (generally 4:00 p.m., New York City time) on
each day during which the New York Stock Exchange is open for trading and on
any other day on which there is sufficient trading in the Fund's securities
that net asset value might be materially affected but only if on any such day
the Fund is required to sell or redeem shares. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value per share 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 of the Fund 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 of the Fund 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 of the Fund
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge although not necessarily meet immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
44
<PAGE>
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter ("OTC") market
are valued at the last available bid price in the OTC market prior to the time
of valuation. Securities which are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options, or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Board of Directors of the
Fund. The Fund employs Merrill Lynch Securities Pricing Service ("MLSPS"), an
affiliate of MLPF&S, to provide certain securities prices for the Fund. For the
fiscal year ended August 31, 1997, the Fund paid $120 to MLSPS for such
service.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income 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 gains or losses from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Under the Taxpayer Relief Act of 1997, (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other non-
corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more
than one year but not more than 18 months and (iii) 20% for capital assets held
for more than 18 months. Shareholders should consult their own tax advisors
regarding the availability and effect of certain tax election to mark-to-market
Fund shares held on January 1, 2001. Capital gains or losses recognized by
corporate shareholders are subject to tax at the ordinary income tax rates
applicable to corporations. The new tax rates for capital gains under the 1997
Tax Act described above apply to distributions of capital gain dividends by
RICs such as the Fund as well as to sales and exchanges of shares in RICs such
as the Fund. With respect to capital losses recognized on dispositions of Fund
shares held six months or less where such losses are treated as long-term
capital losses to the extent of prior capital gain dividends received on such
shares, it is unclear how such capital losses offset the capital gains referred
to above. Shareholders should consult their own tax advisors as to the
application of the net capital gains rates to their particular circumstances.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after
45
<PAGE>
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even 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 or capital gain dividends. It is
anticipated that IRS guidance permitting categories of gain and related rates
to be passed through to shareholders would also require this written notice to
designate the amounts of various categories of capital gain income in capital
gain dividends. A portion of the Fund's ordinary income dividends may be
eligible for the dividends received deduction allowed to corporations under the
Code, if certain requirements are met. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under an applicable tax treaty. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends, interest and capital gains received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. 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 United States
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 United States
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
United States 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 United States 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, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
46
<PAGE>
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholders's Fund shares and resulting in a capital gain for
any shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
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 advisors 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.
47
<PAGE>
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 of the Fund bear certain expenses related to the account
maintenance services associated with such shares, and Class B and Class C
shares of the Fund 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 (except
that Class B shareholders have certain voting rights with respect to the Class
D Distribution Plan). 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.
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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at (800) 637-3863.
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.
48
<PAGE>
MERRILL LYNCH ASSET GROWTH FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address..........................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
[_] Check or [_] Direct Deposit to
bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
A-1
<PAGE>
MERRILL LYNCH ASSET GROWTH FUND, INC.--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM 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.
Signature of Owner................... Signature of Co-Owner (if any).......
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Date of Initial Purchase
Dear Sir/Madam:
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 the 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.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
Shareholder's signature.
- - -
This form, when completed, should .....................................
be mailed to: Dealer Name and Address
Merrill Lynch Asset Growth By ..................................
Fund, Inc. Authorized Signature of Dealer
c/o Merrill Lynch Financial
Data Services, Inc. [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch-Code F/C No. ...............
Jacksonville, FL 32232-5289 F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer Account No.
A-2
<PAGE>
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
Name of Owner.............................. [ ]
Social Security Number or
Taxpayer Identification
Number
Name of Co-Owner (if any)..................
Address....................................
.......................................
Account Number ...........
(Zip Code)
(if existing account)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill 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 withdrawal on (month) or as soon as
possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
[_] $ of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- -------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the Systematic
Withdrawal Plan is made.
A-3
<PAGE>
MERRILL LYNCH ASSET GROWTH FUND, INC.--AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. 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:
To...............................Bank
(Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account Number ................... City...... State...... Zip Code......
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
......(month) or as soon thereafter as charge to my account ACH debits
possible. drawn on my account by and payable
to Merrill Lynch Financial Data
I agree that you are drawing these Services, Inc. I agree that your
ACH debits voluntarily at my request rights in respect to each such debit
and that you shall not be liable for shall be the same as if it were a
any loss arising from any delay in check drawn on you and signed
preparing or failure to prepare any personally by me. This authority is
such debit. If I change banks or to remain in effect until revoked by
desire to terminate or suspend this me in writing. Until you receive
program, I agree to notify you such notice, you shall be fully
promptly in writing. I hereby protected in honoring any such
authorize you to take any action to debit. I further agree that if any
correct erroneous ACH debits of my such debit be dishonored, whether
bank account or purchases of fund with or without cause and whether
shares including liquidating shares intentionally or inadvertently, you
of the Fund and credit my bank shall be under no liability.
account. I further agree that if a
check or debit is not honored upon ............ .....................
presentation, Merrill Lynch Financial Date Signature of
Data Services, Inc. is authorized to Depositor
discontinue immediately the Automatic
Investment Plan and to liquidate ............ .....................
sufficient shares held in my account Bank Signature of Depositor
to offset the purchase made with the Account (If joint account,
dishonored debit. Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE>
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<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
MANAGER
Merrill Lynch Asset Management, LP
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE 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....................................................... 7
Risk Factors and Special Considerations.................................... 9
Investment Objective and Policies.......................................... 11
Equity Securities......................................................... 12
Debt Securities........................................................... 13
Money Market Securities................................................... 15
Portfolio Strategies Involving Options and Futures........................ 15
Other Investment Policies and Practices................................... 21
Management of the Fund..................................................... 25
Board of Directors........................................................ 25
Management and Advisory Arrangements...................................... 25
Code of Ethics............................................................ 26
Transfer Agency Services.................................................. 27
Purchase of Shares......................................................... 27
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 30
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 32
Distribution Plans........................................................ 35
Limitations on the Payment of Deferred Sales Charges...................... 36
Redemption of Shares....................................................... 37
Redemption................................................................ 37
Repurchase................................................................ 38
Reinstatement Privilege--Class A and Class D Shares....................... 38
Shareholder Services....................................................... 39
Fee-Based Programs........................................................ 41
Portfolio Transactions and Brokerage....................................... 42
Performance Data........................................................... 42
Additional Information..................................................... 44
Dividends and Distributions............................................... 44
Determination of Net Asset Value.......................................... 44
Taxes..................................................................... 45
Organization of the Fund.................................................. 48
Shareholder Reports....................................................... 48
Shareholder Inquiries..................................................... 48
Authorization Form......................................................... A-1
</TABLE>
Code #18237-1297
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Growth Fund, Inc.
[ART]
PROSPECTUS
December 9, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
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 that seeks 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 PricingSM 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 December
9, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is December 9, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund 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>
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 Ratings
Group ("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>
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
4
<PAGE>
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.
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
5
<PAGE>
options discussed below) if as a result of such purchase the aggregate cost of
all outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market." At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the 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
6
<PAGE>
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 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
7
<PAGE>
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 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
8
<PAGE>
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.
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.
9
<PAGE>
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, 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. 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.
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 securities 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
10
<PAGE>
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 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
non-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.
11
<PAGE>
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
this Statement of Additional Information, as they may be amended from time
to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent 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 permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provision) of the Investment Company Act, at any
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
(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 that 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.
Securities purchased in
12
<PAGE>
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).
(iv) 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 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 15% 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.
13
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages 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 08543-9081.
Arthur Zeikel (65)--President and Director (1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessor) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of ML & Co. since 1990.
Joe Grills (62)--Director--P.O. Box 98, Rapidan, Virginia 22733. Member of
the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; Member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Fund from 1986 until 1993; Member of the Investment
Advisory Committee of the State of New York Common Retirement Fund; Member of
Investment Advisory Committee of the Howard Hughes Medical Institute; Director
Duke Management Company since 1993; Director, LaSalle Street Street Fund since
1995; Director Kimco Realty Corporation since January 1997.
Walter Mintz (68)--Director--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982.
Robert S. Salomon, Jr. (61)--Director--106 Dolphin Cove Quay, Stamford,
Connecticut 06902--Principal of STI Management (investment adviser); Director,
Common Fund; Chairman and CEO of Salomon Brothers Asset Management from 1992
until 1995; Chairman of Salomon Brothers equity mutual funds from 1992 until
1995; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers
from 1975 until 1991.
Melvin R. Seiden (67) --Director--780 Third Avenue, Suite 2502, New York, New
York 10017. Director of Silbanc Properties, Ltd. (real estate, consulting and
investments) since 1996 and President thereof since 1987; Chairman and
President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to
1987.
Stephen B. Swensrud (64)--Director--24 Federal Street, Boston, Massachusetts
02110. Chairman of Fernwood Associates (financial consultants) since 1996 and
Principal thereof since 1975.
Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
Donald C. Burke (37)--First Vice President of FAM since 1997; Vice President
of FAM from 1990 to 1997 and Director of Taxation of the Manager since 1990.
14
<PAGE>
Norman Harvey (64)--Senior Vice President (1)(2)--Senior Vice President of
the Manager since 1982.
Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President since 1981.
Thomas R. Robinson (54)--Vice President (1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1995 until 1996.
Manager of International Equity Strategy of ML & Co.'s Global Securities
Research and Economics Group from 1989 to 1995.
Barbara G. Fraser (53)--Secretary (1)(2)--First Vice President of the
Manager since 1996; Vice President of the Manager from 1994 until 1996.
- --------
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Company.
(2) The officers of the Fund are officers of certain other investment
companies for which the Manager or FAM acts as investment adviser.
The following table sets forth for the fiscal year ending August 31, 1997,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by the Manager and its
affiliate, FAM ("MLAM/FAM Advised Funds"), to the non-affiliated Directors:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION FROM
AGGREGATE RETIREMENT BENEFITS FUND AND MLAM/FAM
COMPENSATION ACCRUED AS PART ADVISED FUNDS
NAME OF DIRECTOR FROM FUND OF FUND EXPENSE PAID TO DIRECTORS(1)
---------------- ------------ ------------------- -----------------------
<S> <C> <C> <C>
Walter Mintz(1)......... $2,500 None $164,000
Melvin R. Seiden(1)..... $2,500 None $164,000
Stephen B. Swensrud(1).. $2,500 None $154,250
Joe Grills(1)........... $2,500 None $164,000
Robert S. Salomon,
Jr.(1)................. $2,500 None $187,167
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Grills (19 registered investment companies consisting of 47
portfolios); Mr. Mintz (18 registered investment companies consisting of
37 portfolios); Mr. Salomon (18 registered investment companies consisting
of 37 portfolios); Mr. Seiden (18 registered investment companies
consisting of 37 portfolios); Mr. Swensrud (21 registered investment
companies consisting of 52 portfolios).
At October 31, 1997, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of 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 non-affiliated with the Manager a fee of $750
per year plus $125 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 $750 per year, plus a fee at the rate
of $125 per meeting attended. For the fiscal year ended August 31, 1997, fees
and expenses paid to the non-affiliated directors of the Fund aggregated
$12,680 .
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.
15
<PAGE>
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.
For the fiscal year ended August 31, 1997, the Management fees paid by the
Fund to the Manager totaled $83,088, all of which was voluntarily reimbursed to
the Fund. The Manager also voluntarily reimbursed the Fund for additional
expenses of $8,947.
For the fiscal year ended August 31, 1996, the Management fees paid by the
Fund to the Manager totaled $99,790, all of which was reimbursed to the Fund
pursuant to the state expense limitation which was applicable prior to the
enactment of the Improvement Act. The Manager also reimbursed the Fund for
additional expenses of $71,797.
For the period September 2, 1994 (commencement of operations) to August 31,
1995, the Management fees paid by the Fund to the Manager totaled $126,499, all
of which was reimbursed to the Fund pursuant to the state expense limitation
which was applicable prior to the enactment of the Improvement Act. The Manager
also reimbursed the Fund for additional expenses of $25,694.
The Manager may discontinue waiver of its management fee and any voluntary
reimbursement by the Manager of the Fund's expenses in whole or in part at any
time without notice.
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
16
<PAGE>
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.
For the period September 2, 1994 (commencement of operations) to August 31,
1995, the amount of such reimbursement for accounting services was $46,081.
For the fiscal years ended August 31, 1996 and 1997, the amount of such
reimbursement for accounting services was $51,835 and $37,254. 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.
ML & Co. and Princeton Services are "controlling persons" of the Manager as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.; Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., a subsidiary of ML & Co.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect wholly-owned subsidiary of ML & Co.
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K.
a fee for providing investment advisory services to the Manager with respect
to the Fund in an amount to be determined from time to time by the Manager and
MLAM U.K., but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.
Duration and Termination. Renewal of the Management Agreement for one-year
was approved by the Board of Directors, including a majority of the
disinterested directors, on October 16, 1996. 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
17
<PAGE>
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 of the
Fund bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect
to such class pursuant to which the account maintenance and/or distribution
fees are paid (except that Class B shareholders may vote upon any material
changes to expenses charged under the Class D Distribution Plan). Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM which utilize the Merrill Lynch Select Pricing SM
System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous 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 ALTERNATIVES--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. For the fiscal year
ended August 31, 1997, the Fund sold 64,930 Class A shares, for aggregate net
proceeds of $766,134. The gross sales charge for the sale of Class A shares of
the Fund was $142, of which $12 and $130 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended August 31, 1997, the
Fund sold 24,261 Class D shares for aggregate net proceeds of $273,733. The
gross sales charge for the sale of Class D shares of the Fund was $2,679, of
which $194 and $2,485 were
18
<PAGE>
received by the Distributor and Merrill Lynch, respectively. For the fiscal
year ended August 31, 1996, the Fund sold 36,673 Class A shares, for aggregate
net proceeds of $368,782. The gross sales charge for the sale of Class A shares
of the Fund was $320, of which $9 and $311 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended August 31, 1996, the
Fund sold 44,926 Class D shares for aggregate net proceeds of $449,969. The
gross sales charge for the sale of Class D shares of the Fund was $1,587, of
which $99 and $1,488 were received by the Distributor and Merrill Lynch,
respectively. For the period September 2, 1994 (commencement of operations) to
August 31, 1995, the Fund sold 275,032 Class A shares, for aggregate net
proceeds of $2,724,867. The gross sales charge for the sale of Class A shares
of the Fund was $8,918, of which $390 and $8,528 were received by the
Distributor and Merrill Lynch, respectively. For the period October 21, 1994
(commencement of operations) to August 31, 1995, the Fund sold 186,141 Class D
shares for aggregate net proceeds of $1,722,943. The gross sales charge for the
sale of Class D shares of the Fund was $9,004, of which $456 and $8,548 were
received by the Distributor and Merrill Lynch, respectively.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of all classes of
shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's 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 of the
Fund; 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
19
<PAGE>
difference between the sales charge on the Class A or Class D shares of the
Fund purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares of the
Fund 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.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access Accounts SM available through authorized employers that
provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
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 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 of the Fund 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
20
<PAGE>
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.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies and ML & 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 ML & 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 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 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date Merrill Lynch Select PricingSM System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after
21
<PAGE>
October 21, 1994 and wish to reinvest the net proceeds from a sale of their
closed-end fund shares are offered Class A shares (if eligible to buy Class A
shares) or Class D shares of the Fund and other MLAM-advised mutual funds
("Eligible Class D shares") if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or Class
D shares. Second, the closed-end fund shares must either have been acquired in
the initial public offering or be shares representing dividends from shares of
common stock acquired in such offering. Third, the closed-end fund shares must
have been continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be
held in the same account as the existing Class A shares and the other
requirements pertaining to the reinvestment privilege are met. In order to
exercise this investment option, a shareholder or one of the above-referenced
continuously offered closed-end funds (an "eligible fund") must sell his or her
shares of common stock of the eligible fund (the "eligible shares") back to the
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible
fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at the
net asset value of the designated class of the Fund on such day.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a public or private investment company. The value of the
assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities 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 that is readily
ascertainable, that are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
22
<PAGE>
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Fee-Based Investment Programs. Certain Merrill Lynch fee-based investment
programs, including pricing alternatives for securities transactions (each
referred to in this paragraph as a "Program"), may permit the purchase of Class
A shares at net asset value. Under specified circumstances, participants in
certain Programs may deposit other classes of shares, which will be exchanged
for Class A shares. Initial or deferred sales charges otherwise due in
connection with such exchanges may be waived or modified. Termination of
participation in a Program may result in the redemption of such shares or the
automatic exchange thereof to another class at net asset value. In addition,
upon termination of participation in a Program, shares that have been held for
less than specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally prohibit
such shares from being transferred to another account at Merrill Lynch, to
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the
imposition of initial or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject to Program
fees. Additional information regarding a specific Program (including charges
and limitations on transferability applicable to shares that may be held in
such Program) is available in the Program's client agreement and from the
Transfer Agent at (800) MER-FUND (637-3863).
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan. Certain
other plans may purchase Class B shares with a waiver of the CDSC upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately ten years after the plan purchases the first share
of any MLAM-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by employer-
sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
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 of the Fund 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
23
<PAGE>
class of 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.
The following tables set forth comparative information as of August 31, 1997
with respect to the Class B shares and Class C shares of the Fund indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B Shares of the Fund, the
Distributor's voluntary maximum for the period from September 2, 1994
(commencement of operations) to August 31, 1996 for Class B shares.
24
<PAGE>
DATA CALCULATED AS OF AUGUST 31, 1997
(IN THOUSANDS)
CLASS B SHARES
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(4) SALES CHARGES BALANCE(1) PAYABLE DISTRIBUTOR(2) BALANCE LEVEL(3)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $17,087 $1,068 $243 $1,311 $349 $962 $63
Under Distributor's
Voluntary Waiver....... $17,087 $1,068 $ 85 $1,153 $349 $804 $63
</TABLE>
(IN THOUSANDS)
CLASS C SHARES
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(4) SALES CHARGES BALANCE(1) PAYABLE DISTRIBUTOR(2) BALANCE LEVEL(3)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,443 $90 $19 $109 $13 $96 $4
</TABLE>
- --------
(1) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1% as permitted under the NASD
Rule.
(2) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A Shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(3) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the NASD
maximum or, with respect to Class B shares, the voluntary maximum.
(4) Purchase price of all eligible Class B shares sold since September 2, 1994
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
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
25
<PAGE>
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 ALTERNATIVES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
certain instances including in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or 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 in
the case of such withdrawals under a tax-deferred retirement plan or attaining
age 59 1/2 in the case of an IRA or other retirement plan, or part of a series
of equal periodic payments (not less frequently than annually) made for the
life (or life expectancy) or any redemption resulting from the tax-free return
of an excess contribution to an IRA or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability.
For the fiscal year ended August 31, 1997, Merrill Lynch received CDSCs of
$27,183 and $77 with respect to the Class B and Class C shares of the Fund,
respectively, all of which were paid to Merrill Lynch. For the fiscal year
ended August 31, 1996 for Class B shares, and Class C shares, Merrill Lynch
received CDSCs of $34,821 and $326. For the period September 2, 1994
(commencement of operations) to August 31, 1995 for Class B shares, and for
the period October 21, 1994 (commencement of operations) to August 31, 1995
for Class C shares, Merrill Lynch received CDSCs of $43,463 and $334,
respectively, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain Fee-
Based Programs.
Merrill Lynch Blueprint SM Program. Class B shares of the Fund 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 that does not meet the qualifications
to purchase Class A or Class D shares of the Fund 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
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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 that 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 that 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 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. The CDSC is also
waived for any Class B shares that were acquired and held at the time of
redemption by Employee Access Accounts available through employers that provide
Eligible 401(k) Plans. The initial minimum for such accounts is $500, except
that the initial minimum for shares purchased for such accounts pursuant to the
Automatic Investment Program is $50.
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 NASD 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.
For the fiscal years ended August 31, 1996 and 1997, the Fund's portfolio
turnover rate was 120.43% and 128.28%, respectively.
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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
("OTC") 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 OTC
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
OTC transactions conducted on an agency basis provided that, among other
things, the fee or commission received by such affiliated broker is reasonable
and fair compared to the fee or commission received by non-affiliated brokers
in connection with comparable transactions.
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.
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $28,798 of which $3,252 or 11.29% was paid to Merrill Lynch for
effecting 10.80% of the aggregate amount
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of transactions on which Fund paid brokerage commissions. For the fiscal year
ended August 31, 1996, the Fund paid total brokerage commissions of $54,999 of
which $3,293 or 6.0% was paid to Merrill Lynch for effecting 9.1% of the
aggregate amount of transactions on which the Fund paid brokerage commissions.
For the period September 2, 1994 (commencement of operations) to August 31,
1995, the Fund paid total brokerage commissions of $78,819 of which $8,056 or
10.2% was paid to Merrill Lynch for effecting 8.9% of the aggregate amount of
transactions on which the Fund paid brokerage commissions.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 44 of the Prospectus. The net asset value of the shares of the
Fund is determined once daily by the Manager immediately after the declaration
of dividends as of 15 minutes after the closing time (generally 4:00 p.m., New
York City time) on each day during which the New York Stock Exchange is open
for trading and on any other day on which there is sufficient trading in the
Fund's securities that net asset value might be materially affected but only if
on any such day the Fund is required to sell or redeem shares. The New York
Stock Exchange is not open on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. 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 of the Fund 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 of the Fund 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 value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.
Securities traded in the OTC market are valued at the last available bid
price in the OTC 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 an
option, the amount of the premium received is recorded on the books of the Fund
as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last bid price. Portfolio securities which are traded on stock exchanges
are valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued, or lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the securities are
valued on the exchange designated by or under the authority of the Board of
Directors as the
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<PAGE>
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.
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 of the Fund 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 $100 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 full and fractional shares of
the Fund. Such reinvestment will be at the net asset value per share (i.e.,
without a sales charge)
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next determined on the ex-dividend date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date. Cash payments can also
be directly deposited to the shareholder's bank account.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to
have the dividends and/or capital gains distributions reinvested in shares of
the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, such instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired shares
of the Fund having a value, based on cost or the current offering price, of
$5,000 or more and monthly withdrawals for shareholders with shares having a
value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York City time) on the 24th day of each month or the 24th day of
the last month of each quarter, whichever is applicable. If the NYSE is not
open for business on such date, the shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed or the direct deposit of the withdrawal payment will be made on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in the shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales--Class B Shares" and "--Contingent Deferred Sales Charge--Class
C Shares" in the Prospectus. Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
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Class D Shares" in the Prospectus; if an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as
well as in other securities. Merrill Lynch charges an initial establishment fee
and an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100, and the minimum subsequent
purchase is $1.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should review specific tax
laws relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
U.S. Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select PricingSM System, Class A
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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 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
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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 five years.
Shareholders also may exchange shares of the Fund into shares of certain
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 that were
acquired as a result of an exchange for Class B or Class C shares of the fund
may, in turn, be exchanged back into Class B or Class C shares respectively of
any fund offering such shares, in which event the holding period for Class B
or Class C shares of the newly acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") 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 that the shareholder continues to hold for an additional one
and a half years, any subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated 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.
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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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Recent legislation creates
additional categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. Any loss upon the sale or exchange of Fund shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
35
<PAGE>
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends. It is
anticipated that IRS guidance permitting categories of gain and related rates
to be passed through to shareholders would also require this written notice to
designate the amounts of various categories of capital gain income in capital
gain dividends. A portion of the Fund's ordinary income dividends may be
eligible for the dividends received deduction allowed to corporations under the
Code, if certain requirements are met. For this purpose, the Fund will allocate
dividends eligible for the dividends received deduction among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
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
36
<PAGE>
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 of the Fund. 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 of the
Fund.
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
37
<PAGE>
Code Section 988. The Fund may, nonetheless, elect to treat the gain or loss
from certain forward foreign exchange contracts as capital. In this case, gain
or loss realized in connection with a forward foreign exchange contract that is
a Section 1256 contract will be characterized as 60% long-term and 40% short-
term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's 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. Under recently enacted
legislation, this requirement will no longer apply to the Fund after its fiscal
year ending August 31, 1998.
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.
38
<PAGE>
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 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 of the Fund 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.
39
<PAGE>
Set forth below is total return information for the Class A, Class B, Class C
and Class D shares of the Fund.
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD
- ------ --------------------- ------------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
One Year Ending August
31, 1997
Class A............... 16.60% $ 1,166.00
Class B............... 17.81% $ 1,178.10
Inception (September 2,
1994) to August 31,
1997
Class A............... 6.68% $ 1,213.70
Class B............... 6.93% $ 1,222.30
One Year Ending August
31, 1997
Class C............... 20.71% $ 1,207.10
Class D............... 16.22% $ 1,162.20
Inception (October 21,
1994) to August 31,
1997
Class C............... 8.42% $ 1,260.30
Class D............... 7.25% $ 1,221.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
One Year Ending August
31, 1997
Class A............... 23.06% $ 1,230.60
Class B............... 21.81% $ 1,218.10
One Year Ending August
31, 1997
Class C............... 21.71% $ 1,217.10
Class D............... 22.66% $ 1,226.60
One Year Ending August
31, 1996
Class A............... 4.71% $ 1,047.10
Class B............... 3.65% $ 1,036.50
Inception (September 2,
1994) to August 31,
1995
Class A............... (0.59)% $ 994.00
Class B............... (1.60)% $ 984.00
One Year Ending August
31, 1996
Class C............... 3.61% $ 1,036.10
Class D............... 4.51% $ 1,045.10
Inception (October 21,
1994) to August 31,
1995
Class C............... (0.05)% $ 999.50
Class D............... 0.59% $ 1,005.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
Inception (September 2,
1994) to August 31,
1997
Class A............... 21.37% $ 1,213.70
Class B............... 22.23% $ 1,222.30
Inception (October 21,
1994) to August 31,
1997
Class C............... 26.03% $ 1,260.30
Class D............... 22.17% $ 1,221.70
</TABLE>
40
<PAGE>
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 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.
41
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of August 31, 1997, is calculated as set forth below. 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 CLASS C CLASS D
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net Assets............................. $1,803,323 $8,403,038 $571,945 $564,113
========== ========== ======== ========
Number of Shares Outstanding........... 146,895 689,006 47,148 45,922
========== ========== ======== ========
Net Asset Value Per Share (net assets
divided by number of shares outstand-
ing).................................. $ 12.28 $ 12.20 $ 12.13 $ 12.28
Sales Charge (for Class A and Class D
shares: 5.25% of offering price; 5.54%
of net asset value per share)*........ .68 ** ** .68
---------- ---------- -------- --------
Offering Price......................... $ 12.96 $ 12.20 $ 12.13 $ 12.96
========== ========== ======== ========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus.
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
Merrill Lynch Financial Data Services, Inc., 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.
42
<PAGE>
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.
Certain Record Holders. To the knowledge of the Fund, no person or entity
owned beneficially 5% or more of the Fund's shares on November 1, 1997 with the
exception of Merrill Lynch Trust Company of America Trustee FBO.
43
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
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.
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.
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.
44
<PAGE>
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 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.
45
<PAGE>
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:
"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.
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.
46
<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("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.
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
Grade predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
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
47
<PAGE>
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C The rating C 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.
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.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP 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:
48
<PAGE>
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.
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 RATINGS GROUP 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.
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.
49
<PAGE>
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
B balance, as predominately speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. "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.
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.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Asset Growth Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Asset Growth Fund, Inc. as of
August 31, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the two-year
period then ended and for the period September 2, 1994 (commencement of
operations) to August 31, 1995. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Asset
Growth Fund, Inc. as of August 31, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 7, 1997
51
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52
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
(in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Petroleum 4,500 Yacimientos Petroliferos
Fiscales S.A. (ADR) (a) $ 106,570 $ 146,531 1.3%
----------- ----------- --------
Total Common
Stocks in Argentina 106,570 146,531 1.3
=========== =========== ========
Australia Diversified 9,000 Broken Hill
Proprietary Co., Ltd. 118,416 112,938 1.0
----------- ----------- --------
Total Common
Stocks in Australia 118,416 112,938 1.0
=========== =========== ========
Brazil Banking 1,700 Uniao de Bancos
Brasileiros S.A.
(GDR) (b) 57,375 59,500 0.5
Beverages 150,000 Companhia
Cervejaria Brahma
S.A.
PN (Preferred) 87,058 100,559 0.9
Telecommunications 800 Telecomunicacoes
Brasileiras S.A.
-Telebras (ADR)(a) 49,928 94,400 0.8
----------- ----------- --------
Total Common
Stocks in Brazil 194,361 254,459 2.2
=========== =========== ========
Canada Automobile Parts 1,900 Magna International, Inc. 92,803 125,875 1.1
Entertainment 2,800 +Imax Corporation 45,392 66,150 0.6
Mining 1,500 Potash Corp. of 110,576 110,906 1.0
Saskatchewan, Inc. ----------- ----------- --------
Total Common
Stocks in Canada 248,771 302,931 2.7
=========== =========== ========
Finland Diversified 3,900 +Amer Group Ltd. 69,340 75,593 0.7
Paper & Forest
Products 5,000 UPM - Kymmene OY 105,987 118,696 1.0
Pharmaceuticals 1,800 Orion - yhtymae 68,840 57,816 0.5
OY (Class B)
Transportation 2,600 Finnlines OY 48,128 74,393 0.7
----------- ----------- --------
Total Common
Stocks in Finland 292,295 326,498 2.9
=========== =========== ========
France Iron & Steel 6,100 Usinor - Sacilor S.A. 99,172 106,135 1.0
Reinsurance 3,100 Scor S.A. 118,452 127,801 1.1
Semiconductor
Capital 1,500 +SGS - Thomson
Equipment Microelectronics
N.V. (NY Registered
Shares) 70,718 139,313 1.2
----------- ----------- --------
Total Common
Stocks in France 288,342 373,249 3.3
=========== =========== ========
Germany Chemicals 200 Henkel KGaA 8,891 9,254 0.1
1,600 Henkel KGaA (Preferred) 68,038 81,059 0.7
----------- ----------- --------
76,929 90,313 0.8
Electrical Equipment 1,900 Siemens AG 86,269 116,967 1.0
Machinery & Equipment 275 Mannesmann AG 91,316 127,850 1.1
---------- ----------- --------
Total Common
Stocks in Germany 254,514 335,130 2.9
=========== =========== ========
Hong Kong Banking 3,200 HSBC Holdings PLC 51,510 97,458 0.9
----------- ----------- --------
Total Common
Stocks in Hong Kong 51,510 97,458 0.9
=========== =========== ========
Indonesia Telecommunications 4,290 P.T. Indonesian
Satellite Corp.
(ADR)(a) 144,283 93,039 0.8
----------- ----------- --------
Total Common
Stocks in Indonesia 144,283 93,039 0.8
=========== =========== ========
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Italy Apparel 1,800 Gucci Group N.V.
(NY Registered
Shares) 130,623 109,575 0.9
Machinery 23,000 Danieli & C.
Officine
Meccaniche
S.p.A. 67,768 81,723 0.7
Publishing 7,000 Mondadori
(Arnoldo) Editore
S.p.A. 59,094 41,522 0.4
----------- ----------- --------
Total Common
Stocks in Italy 257,485 232,820 2.0
=========== =========== ========
Japan Automobile Parts 1,000 Autobacs Seven
Co., Ltd. 58,806 63,619 0.6
Building &
Construction 10,000 Maeda Corp. 102,085 43,717 0.4
5,000 Matsushita Electric
Works, Ltd. 56,912 54,126 0.4
12,000 Okumura Corp. 96,740 67,449 0.6
----------- ----------- --------
255,737 165,292 1.4
Capital Goods 18,000 Mitsubishi Heavy
Industries, Ltd. 132,433 119,760 1.0
Consumer --
Electronics 6,000 Matsushita
Electric
Industrial Co., Ltd. 97,202 110,917 1.0
Electrical Equipment 22,000 Mitsubishi Electric Co. 138,107 101,307 0.9
Electronics 1,000 Rohm Co., Ltd. 42,944 104,089 0.9
1,000 Sony Corporation 72,316 87,434 0.8
400 Sony Corporation (ADR)(a) 29,432 35,250 0.3
----------- ----------- --------
144,692 226,773 2.0
Insurance 10,000 Tokio Marine &
Fire Insurance
Co., Ltd. 107,184 114,914 1.0
Merchandising 2,000 Amway Japan, Ltd. 69,732 52,960 0.5
Photography 4,000 Canon, Inc. 75,063 110,917 1.0
Textiles 16,000 Toray Industries, Inc. 98,636 106,587 0.9
Tires & Rubber 5,000 Bridgestone Corporation 86,184 111,167 1.0
Warehouse & Storage 9,000 Mitsui - Soko Co., Ltd. 73,996 40,919 0.4
----------- ----------- --------
Total Common
Stocks in Japan 1,337,772 1,325,132 11.7
=========== =========== ========
Mexico Beverages 3,600 Panamerican
Beverages, Inc. (Class A) 85,294 108,225 1.0
Financial Services 4,300 +Grupo Financiera Bancomer
S.A. (Class B) (ADR)(a) 61,970 54,825 0.5
Multi-Industry 10,200 Grupo Carso, S.A.
de C.V. (ADR)(a) 145,170 138,975 1.2
Telecommunications 2,300 Telefonos de
Mexico, S.A. de
C.V. (ADR)(a) 90,994 105,513 0.9
----------- ----------- --------
Total Common
Stocks in Mexico 383,428 407,538 3.6
=========== =========== ========
Netherlands Banking 4,400 ABN AMRO Holding N.V. 61,651 86,709 0.8
----------- ----------- --------
Total Common Stocks
in the Netherlands 61,651 86,709 0.8
=========== =========== ========
Norway Cruise Lines 10,000 Color Line ASA 37,601 45,001 0.4
----------- ----------- --------
Total Common
Stocks in Norway 37,601 45,001 0.4
=========== =========== ========
Philippines Beverages 40,920 San Miguel Corp. (Class B) 122,824 67,973 0.6
----------- ----------- --------
Total Common Stocks in
the Philippines 122,824 67,973 0.6
=========== =========== ========
South Africa Diversified 10,000 Sasol Ltd. 116,199 133,262 1.2
Mining 4,200 De Beers
Consolidated
Mines Ltd. (ADR)(a) 142,103 134,138 1.2
----------- ----------- --------
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Common Stocks in
South Africa 258,302 267,400 2.4
=========== =========== ========
South Korea Engineering &
Construction 3,553 Hyundai Engineering &
Construction Co., Ltd.
(GDR)(b)(c) 45,605 13,324 0.1
----------- ----------- --------
Total Common
Stocks in South Korea 45,605 13,324 0.1
=========== =========== ========
Spain Petroleum 2,900 Repsol, S.A. (ADR)(a) 100,275 114,188 1.0
----------- ----------- --------
Total Common
Stocks in Spain 100,275 114,188 1.0
=========== =========== ========
Sweden Banking 3,200 Sparbanken 40,252 69,757 0.6
Sverige AB (Class A)
Chemicals 3,000 Perstorp AB 56,249 53,924 0.5
(Class B)
Investment Management 4,500 Bure Investment AB 37,938 54,497 0.5
Real Estate
Investment Trusts 2,600 +Castellum AB 17,442 21,213 0.2
----------- ----------- --------
Total Common
Stocks in Sweden 151,881 199,391 1.8
=========== =========== ========
Switzerland Electrical Equipment 85 ABB AG 87,949 125,610 1.1
Pharmaceuticals 1,100 Novartis AG (ADR)(a) 47,575 78,650 0.7
13 Roche Holding AG 108,704 109,939 1.0
----------- ----------- --------
156,279 188,589 1.7
----------- ----------- --------
Total Common Stocks
in Switzerland 244,228 314,199 2.8
=========== =========== ========
United Kingdom Automobile Parts 40,100 LucasVarity PLC 131,353 127,223 1.1
Beverages 9,500 Grand Metropolitan PLC 64,774 87,292 0.8
Chemicals 8,100 Imperial Chemical
Industries PLC
(Ordinary) 100,372 131,119 1.2
Merchandising 9,300 Boots Company PLC 95,557 120,149 1.1
Mining 7,500 Rio Tinto PLC 114,244 118,430 1.0
Office Equipment 640 Danka Business Systems
PLC (ADR) (a) 31,542 29,840 0.3
Retail Stores 5,900 Dixons Group PLC 62,128 62,204 0.5
Telecommunications 21,000 Vodafone Group PLC 73,076 105,252 0.9
----------- ----------- --------
Total Common Stocks in
the United Kingdom 673,046 781,509 6.9
=========== =========== ========
United States Aerospace & Defense 550 AlliedSignal, Inc. 41,038 45,409 0.4
1,000 GenCorp, Inc. 29,255 26,750 0.2
600 United Technologies Corp. 26,530 46,838 0.4
----------- ----------- --------
96,823 118,997 1.0
Airlines 1,200 +US Airways Group Inc. 44,104 40,950 0.4
Appliances 1,400 Sunbeam Corp. 53,084 61,600 0.5
Automobile Parts 850 Federal - Mogul Corp. 31,127 30,388 0.3
Automobile Rental &
Leasing 1,000 Hertz Corp. (Class A) 29,921 34,563 0.3
Banking 1,282 Banc One Corp. 56,014 68,747 0.6
1,400 Bank of New York
Company, Inc.
(The) 29,967 62,475 0.6
600 BankAmerica Corp. 30,788 39,488 0.3
----------- ----------- --------
116,769 170,710 1.5
Broadcasting -- 500 +Tele-Communications, Inc.
Cable (Class A) 7,189 8,719 0.1
Chemicals 1,000 du Pont (E.I.) de
Nemours & Co. 54,569 62,313 0.5
Computer Services &
Software 1,000 Computer Associates
International, Inc. 41,029 66,875 0.6
500 International Business
Machines Corp. 27,474 50,438 0.4
200 +Microsoft Corp. 24,211 26,437 0.2
1,068 +Oracle Corp. 23,818 40,651 0.4
----------- ----------- --------
116,532 184,401 1.6
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Computers 1,150 +COMPAQ Computer Corp. 34,217 75,325 0.7
1,100 +Quantum Corp. 31,289 38,500 0.3
----------- ----------- --------
65,506 113,825 1.0
Consumer Products 1,000 Black & Decker
Corporation 33,358 38,312 0.3
Containers 1,600 +Owens-Illinois, Inc. 46,170 55,700 0.5
Cosmetics &
Toiletries 875 Avon Products, Inc. 60,732 56,055 0.5
Dental Supplies &
Equipment 600 DENTSPLY International Inc. 30,168 33,675 0.3
Electronics 720 Intel Corp. 48,921 66,195 0.6
Financial Services 800 American Express Company 38,967 62,200 0.6
1,370 MGIC Investment Corp. 52,998 68,928 0.6
----------- ----------- --------
91,965 131,128 1.2
Health Care --
Managed
Care 900 +Oxford Health Plans, Inc. 56,624 65,756 0.6
Insurance 400 Allstate Corp. 16,373 29,225 0.2
400 Hartford Life, Inc. (Class A) 12,983 14,925 0.1
500 Nationwide Financial Services,
Inc. 11,750 13,875 0.1
100 Provident Companies, Inc. 6,407 6,512 0.1
1,000 Travelers Group, Inc. 53,925 63,500 0.6
450 Travelers Property Casualty
Corp. (Class A) 17,942 18,112 0.2
1,000 UNUM Corporation 31,736 41,250 0.4
----------- ----------- --------
151,116 187,399 1.7
Leisure/Tourism 2,100 Brunswick Corporation 52,568 64,050 0.6
514 TCI Pacific Communications
(Convertible Preferred) 45,616 56,925 0.5
----------- ----------- --------
98,184 120,975 1.1
Machinery 1,200 American Standard
Companies, Inc. 39,338 56,400 0.5
1,150 Ingersoll-Rand Company 51,790 69,144 0.6
300 SPX Corp. 16,368 17,437 0.2
----------- ----------- --------
107,496 142,981 1.3
Medical Services 880 +HEALTHSOUTH Corp. 23,874 21,945 0.2
100 +Horizon/CMS Healthcare
Corp. 2,158 2,056 0.0
----------- ----------- --------
26,032 24,001 0.2
Natural Gas 1,100 El Paso Natural Gas Co. 56,692 61,875 0.5
1,400 Enron Corp. 54,689 53,987 0.5
----------- ----------- --------
111,381 115,862 1.0
Oil Services 1,500 Dresser Industries, Inc. 29,046 62,625 0.5
400 Schlumberger Ltd. 12,862 30,475 0.3
650 +Smith International, Inc. 29,748 47,287 0.4
----------- ----------- --------
71,656 140,387 1.2
Petroleum 400 Pennzoil Company 16,054 30,875 0.3
1,000 Unocal Corp. 33,402 39,062 0.3
----------- ----------- --------
49,456 69,937 0.6
Pharmaceuticals 900 American Home
Products Corporation 52,940 64,800 0.6
600 Merck & Co., Inc. 20,511 55,087 0.5
----------- ----------- --------
73,451 119,887 1.1
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Railroads 500 Burlington Northern
Santa Fe 41,528 45,844 0.4
Real Estate
Investment 1,400 Prentiss Properties Trust 28,797 38,675 0.4
Trusts 800 Starwood Lodging Trust 36,000 36,950 0.3
----------- ----------- --------
64,797 75,625 0.7
Retail Stores 1,255 Rite Aid Corporation 42,351 62,828 0.6
300 +Safeway, Inc. 15,883 15,281 0.1
1,100 Sears, Roebuck & Co. 44,048 62,425 0.5
----------- ----------- --------
102,282 140,534 1.2
Software -- Computer 1,100 +BMC Software, Inc. 41,343 68,750 0.6
Telecommunications 1,000 +Airtouch Communications,
Inc. 27,955 33,812 0.3
1,600 +WorldCom, Inc. 39,831 47,900 0.4
----------- ----------- --------
67,786 81,712 0.7
Tobacco 850 Philip Morris
Companies, Inc. 28,323 37,081 0.3
Travel & Lodging 1,400 Carnival Corporation
(Class A) 40,147 61,337 0.5
Utilities -- Electric 2,300 Edison International 43,145 55,487 0.5
----------- ----------- --------
Total Common Stocks in
the United States 2,101,685 2,761,086 24.3
=========== =========== ========
Total Investments
in Common Stocks 7,474,845 8,658,503 76.4
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Fixed-Income Securities
<S> <C> <C> <C> <C> <C> <C>
Canada Foreign Government
Obligations C$ 100,000 Canadian Government Bonds,
7% due 12/01/2006 75,972 77,219 0.7
----------- ----------- --------
Total Fixed-Income
Securities in
Canada 75,972 77,219 0.7
=========== =========== ========
Denmark Foreign Government
Obligations Dkr 1,000,000 Danish Government Bonds,
7% due 11/15/2007 159,760 153,496 1.4
----------- ----------- --------
Total Fixed-Income
Securities in Denmark 159,760 153,496 1.4
=========== =========== ========
Germany Foreign Government Bundesrepublik
Obligations DM 120,000 Deutschland:
7.125% due
12/20/2002 83,338 73,160 0.6
225,000 6.50% due 10/14/2005 142,066 132,733 1.2
75,000 Treuhandanstalt, 6.875% due
6/11/2003 49,876 45,304 0.4
----------- ----------- --------
Total Fixed-Income
Securities in
Germany 275,280 251,197 2.2
=========== =========== ========
Italy Foreign Government
Obligations Lit 240,000,000 Buoni Poliennali
del Tesoro,
8.50% due 1/01/2004 147,590 149,737 1.3
----------- ----------- --------
Total Fixed-Income
Securities in Italy 147,590 149,737 1.3
=========== =========== ========
Spain Foreign
Government
Obligations Pta 20,000,000 Spanish Government Bonds,
7.90% due 2/28/2002 162,076 143,389 1.3
----------- ----------- --------
Total Fixed-Income
Securities in Spain 162,076 143,389 1.3
=========== =========== ========
Sweden Foreign Government Government of
Obligations Sweden:
Skr 600,000 10.25% due 5/05/2000 101,118 85,490 0.8
600,000 8% due 8/15/2007 84,621 84,172 0.7
----------- ----------- --------
Total Fixed-Income
Securities in Sweden 185,739 169,662 1.5
=========== =========== ========
United Kingdom Foreign Government
Obligations [#] 135,000 UK Treasury Gilt,
7.25% due 12/07/2007 223,453 221,379 1.9
----------- ----------- --------
Total Fixed-Income
Securities in
the United Kingdom 223,453 221,379 1.9
=========== =========== ========
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
United States US Government
Obligations US$ 395,000 US Treasury
Bonds, 6.625% due
2/15/2027 387,757 393,949 3.5
US Treasury Notes:
500,000 6% due 8/15/1999 501,367 500,080 4.4
110,000 6.50% due 5/31/2002 110,739 111,118 1.0
175,000 6.25% due 2/15/2007 176,395 173,222 1.5
95,000 6.625% due 5/15/2007 96,174 96,633 0.8
----------- ----------- --------
Total Fixed-Income
Securities in
the United States 1,272,432 1,275,002 11.2
=========== =========== ========
Total Investments in
Fixed-Income Securities 2,502,302 2,441,081 21.5
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Short-Term Securities
<S> <C> <C> <C> <C> <C>
United States Commercial Paper* 389,000 General Motors Acceptance Corp.,
5.69% due 9/02/1997 388,816 388,816 3.4
----------- ----------- --------
Total Investments in
Short-Term Securities 388,816 388,816 3.4
=========== =========== ========
Total Investments $10,365,963 11,488,400 101.3
=========== =========== ========
Unrealized Depreciation on Forward Foreign Exchange Contracts** (66,629) (0.6)
Liabilities in Excess of Other Assets (79,352) (0.7)
----------- --------
Net Assets $11,342,419 100.0%
=========== ========
</TABLE>
(a) American Depositary Receipts (ADR).
(b) Global Depositary Receipts (GDR).
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
+ Non-income producing security.
* 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.
** Forward foreign exchange contracts as of August 31, 1997 were as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Expiration (Depreciation)
Foreign Currency Sold Date (Note 1b)
<S> <C> <C>
A $165,000 September 1997 $ 1,320
Chf 525,000 September 1997 (7,090)
DM 1,175,000 September 1997 (25,430)
Dkr 1,070,000 September 1997 (1,016)
Fim 1,875,000 September 1997 (6,222)
Frf 2,250,000 September 1997 (15,563)
[#] 530,000 September 1997 (24,066)
Lit 700,000,000 September 1997 (1,856)
Pta 39,500,000 September 1997 (8,466)
Skr 2,900,000 September 1997 (1,478)
(yen) 160,000,000 September 1997 23,238
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts -- Net (US$ Commitment -- $5,159,188) $(66,629)
========
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $10,365,963) (Note 1a) $11,488,400
Receivables:
Interest $ 40,207
Dividends 15,679
Capital shares sold 6,693 62,579
-----------
Deferred organization expenses (Note 1f) 44,460
Prepaid registration fees and other assets (Note 1f) 26,146
-----------
Total assets 11,621,585
-----------
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1b) 66,629
Payables:
Securities purchased 91,575
Capital shares redeemed 35,792
Distributor (Note 2) 7,552 134,919
-----------
Accrued expenses and other liabilities 77,618
-----------
Total liabilities 279,166
-----------
Net Assets: Net assets $11,342,419
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 14,690
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 68,901
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 4,715
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 4,592
Paid-in capital in excess of par 8,954,740
Undistributed investment income -- net 260,927
Undistributed realized capital gains on investments and foreign currency
transactions -- net 979,569
Unrealized appreciation on investments and foreign currency
transactions -- net 1,054,285
-----------
Net assets $11,342,419
===========
Net Asset Value: Class A -- Based on net assets of $1,803,323 and 146,895 shares
outstanding $12.28
===========
Class B -- Based on net assets of $8,403,038 and 689,006 shares
outstanding $12.20
===========
Class C -- Based on net assets of $571,945 and 47,148 shares
outstanding $12.13
===========
Class D -- Based on net assets of $564,113 and 45,922 shares
outstanding $12.28
===========
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended August 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Dividends (net of $14,418 foreign witholding tax) $187,352
Income Interest and discount earned (net of $277 foreign witholding tax) 133,552
(Notes 1d & 1e): --------
Total income 320,904
--------
Expenses: Investment advisory fees (Note 2) $ 83,088
Account maintenance and distribution fees -- Class B (Note 2) 82,939
Registration fees (Note 1f) 64,463
Professional fees 63,666
Printing and shareholder reports 43,399
Accounting services (Note 2) 37,254
Transfer agent fees -- Class B (Note 2) 24,357
Custodian fees 23,167
Amortization of organization expenses (Note 1f) 22,230
Directors' fees and expenses 12,680
Pricing fees 7,540
Account maintenance and distribution fees -- Class C (Note 2) 5,491
Transfer agent fees -- Class A (Note 2) 4,070
Transfer agent fees -- Class D (Note 2) 1,828
Transfer agent fees -- Class C (Note 2) 1,727
Account maintenance fees -- Class D (Note 2) 1,709
Other 16,287
----------
Total expenses before reimbursement 495,895
Reimbursement of expenses (Note 2) (92,035)
----------
Total expenses after reimbursement 403,860
---------
Investment loss -- net (82,956)
---------
Realized & Realized gain from:
Unrealized Investments -- net 1,370,449
Gain (Loss) on Foreign currency transactions -- net 346,184 1,716,633
Investments & ---------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net 630,794
(Notes 1b, 1c, Foreign currency transactions -- net (68,424) 562,370
1e & 3): ---------- ----------
Net realized and unrealized gain on investments and foreign currency
transactions 2,279,003
----------
Net Increase in Net Assets Resulting from Operations $2,196,047
==========
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income (loss) -- net $(82,956) $45,807
Realized gain on investments and foreign currency transactions -- net 1,716,633 3,841
Change in unrealized appreciation on investments and foreign currency
transactions -- net 562,370 475,895
----------- -----------
Net increase in net assets resulting from operations 2,196,047 525,543
----------- -----------
Dividends to Investment income -- net:
Shareholders Class A (1,155) (24,902)
(Note 1g): Class B (3,263) (67,838)
Class C (248) (5,670)
Class D (286) (24,710)
In excess of investment income -- net:
Class A (19,884) (10,554)
Class B (56,180) (28,754)
Class C (4,268) (2,403)
Class D (4,925) (10,474)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (90,209) (175,305)
----------- -----------
Capital Share Net decrease in net assets derived from capital share transactions (2,007,510) (5,049,797)
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase (decrease) in net assets 98,328 (4,699,559)
Beginning of year 11,244,091 15,943,650
----------- -----------
End of year* $11,342,419 $11,244,091
=========== ===========
* Undistributed investment income -- net (Note 1h) $260,927 $87,908
=========== ===========
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Class A Class B
For the For the
For the Period For the Period
Year Sept. 2, Year Sept. 2,
The following per share data and ratios have been derived Ended 1994+ to Ended 1994+ to
from information provided in the financial statements. Aug. 31, Aug. 31, Aug. 31, Aug. 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997++++ 1996 1995 1997++++ 1996 1995
Increase (Decrease) in Net Asset Value:
Per Share Net asset value, beginning of period $10.13 $9.90 $10.00 $10.09 $9.83 $10.00
Operating --------- --------- -------- -------- --------- ---------
Performance:
Investment income (loss) -- net .01 .12 .16 (.11) .01 .05
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 2.30 .34 (.22) 2.30 .35 (.21)
--------- ------- --------- --------- ------- ----------
Total from investment operations 2.31 .46 (.06) 2.19 .36 (.16)
--------- ------- --------- --------- ------- ----------
Less dividends:
Investment income -- net (.01) (.16) (.04) --+++++ (.07) (.01)
In excess of investment income --
net (.15) (.07) -- (.08) (.03) --
--------- ------- --------- --------- ------- ----------
Total dividends (.16) (.23) (.04) (.08) (.10) (.01)
--------- ------- --------- --------- ------- ----------
Net asset value, end of period $12.28 $10.13 $9.90 $12.20 $10.09 $9.83
========= ======= ========= ========= ======= ==========
Total Investment Based on net asset value per share 23.06% 4.71% (.59%)++ 21.81% 3.65% (1.60%)++
Return:** ========= ========= ========= ======= ========= =========
Ratios to Expenses, net of reimbursement 2.79% 2.47% 2.47%* 3.84% 3.50% 3.50%*
Average Net ========= ========= ========= ======= ========= =========
Assets: Expenses 3.61% 3.75% 3.31%* 4.67% 4.78% 4.37%*
========= ======= ========= ========= ======= =========
Investment income (loss) -- net .13% 1.16% 1.46%* (.94%) .13% .43%*
========= ======= ========= ========= ======= ==========
Supplemental Net assets, end of period (in
Data: thousands) $ 1,803 $1,352 $1,677 $8,403 $8,141 $11,835
========= ======= ====== ======= ====== =======
Portfolio turnover 128.28% 120.43% 42.50% 128.28% 120.43% 42.50%
========= ======= ========= ========= ======= ========
Average commission rate paid+++ $.0215 $ .0184 -- $.0215 $ .0184 --
========= ======= ========= ========= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
Year Oct. 21, Year Oct. 21,
The following per share data and ratios have been derived Ended 1994+ to Ended 1994+ to
information provided in the financial statements. Aug. 31, Aug. 31, Aug. 31, Aug. 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997++++ 1996 1995 1997++++ 1996 1995
Increase (Decrease) in Net
Asset Value:
Per Share Net asset value, beginning of period $10.05 $9.82 $9.85 $10.11 $9.88 $9.86
Operating -------- ------- -------- --------- --------- --------
Performance: Investment income (loss) -- net (.11) (.04) .04 (.02) .08 .10
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 2.28 .39 (.05) 2.30 .36 (.04)
--------- ------- --------- --------- ------- --------
Total from investment operations 2.17 .35 (.01) 2.28 .44 .06
--------- ------- --------- --------- ------- --------
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Less dividends:
Investment income -- net --+++++ (.08) (.02) (.01) (.15) (.04)
In excess of investment income --
net (.09) (.04) -- (.10) (.06) --
--------- ------- --------- --------- ------- --------
Total dividends (.09) (.12) (.02) (.11) (.21) (.04)
--------- ------- --------- --------- ------- --------
Net asset value, end of period $12.13 $10.05 $9.82 $12.28 $10.11 $9.88
========= ======= ========= ========= ======= ========
Total Investment Based on net asset value per share 21.71% 3.61% (.05%)++ 22.66% 4.51% .59%++
Return:** ======== ======= ========= ======= ======== ========
Ratios to Expenses, net of reimbursement 3.86% 3.52% 3.51%* 3.05% 2.72% 2.75%*
Average Net ======== ======= ========= ======= ======== ========
Assets: Expenses 4.68% 4.81% 4.58%* 3.92% 4.00% 4.32%*
========= ======= ========= ======= ======= ========
Investment income (loss) -- net (.94%) .09% .51%* (.21%) .93% 1.43%*
========= ======= ========= ========= ======= ========
Supplemental Net assets, end of period (in
Data: thousands) $572 $438 $735 $564 $1,313 $1,697
========= ======= ========= ========= ======= ========
Portfolio turnover 128.28% 120.43% 42.50% 128.28% 120.43% 42.50%
========= ======= ========= ========= ======= ========
Average commission rate paid+++ $.0215 $.0184 -- $.0215 $.0184 --
====== ======= ======= ========= ======== =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Aggregate total investment return.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may significantly affect the rate shown.
++++ Based on average shares outstanding during the year.
+++++ Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
63
<PAGE>
Merrill Lynch Asset Growth Fund, Inc., August 31, 1997
NOTES TO FINANCIAL STATEMENTS
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 Fund offers four classes of shares
under the Merrill Lynch Select PricingSM System. Shares of Class A and
Class D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B, Class C
and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class
has exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not available are
valued at their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors, including valuations
furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by
the Fund as unrealized gains or losses. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
[bullet] Foreign currency options and futures -- 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.
[bullet] Forward foreign exchange contracts -- 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.
[bullet] Options -- The Fund is authorized to write covered call and put
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 purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
64
<PAGE>
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(d) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends, and capital gains at various rates.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Dividend income is recorded on the ex-dividend dates. Dividends
from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income (including amortization of discount) is recognized on
the accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees --
Deferred organization expenses are charged to expense on a straight-line
basis over a five-year period. Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Dividends in excess of
net investment income are due primarily to differing tax treatments for
foreign currency transactions.
(h) Reclassification -- Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting for foreign
currency transactions. Accordingly, current year's permanent book/tax
differences of $346,184 have been reclassified between undistributed net
realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
The Fund has also entered into a Distribution Agreement and Distribution
Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis, of
the average daily value of the Fund's net assets. For the year ended
August 31, 1997, MLAM earned fees of $83,088, all of which was
voluntarily waived. MLAM also reimbursed the Fund for additional
expenses of $8,947.
Pursuant to the distribution plans (the "Distribution Plans") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company Act
of 1940, the Fund pays the Distributor ongoing account maintenance and
rates based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the year ended August 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $12 $130
Class D $194 $2,485
For the year ended August 31, 1997, MLPF&S received contingent deferred
sales charges of $35,456 and $77 relating to transactions in Class B and
Class C Shares, respectively.
65
<PAGE>
In addition, MLPF&S received $3,252 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August
31, 1997.
During the year ended August 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $120 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFDS, MLFD, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $13,652,229 and $15,573,229,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Gains Realized Gains Unrealized
(Losses) (Losses)
Long-term investments $1,370,449 $1,122,437
Forward foreign exchange contracts 432,929 (66,629)
Foreign currency transactions (86,745) (1,523)
---------- ----------
Total $1,716,633 $1,054,285
========== ==========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $1,109,191 of which $1,609,746, related to
appreciated securities and $500,555 related to depreciated securities.
At August 31, 1997, the aggregate cost of investments for Federal income
tax purposes was $10,379,209.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions were
$2,007,510 and $5,049,797 for the years ended August 31, 1997 and August
31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 64,930 $ 766,134
Shares issued to shareholders
in reinvestment of dividends 1,699 18,333
-------- -----------
Total issued 66,629 784,467
Shares redeemed (53,161) (620,321)
-------- -----------
Net increase 13,468 $ 164,146
======== ===========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 36,673 $ 368,782
Shares issued to shareholders
in reinvestment of dividends 2,989 28,966
-------- -----------
Total issued 39,662 397,748
Shares redeemed (75,614) (757,231)
-------- -----------
Net decrease (35,952) $ (359,483)
======== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 134,761 $ 1,545,773
Shares issued to shareholders
in reinvestment of dividends 4,415 47,640
-------- -----------
Total issued 139,176 1,593,413
Automatic conversion of shares (1,041) (12,375)
Shares redeemed (255,962) (2,880,538)
-------- -----------
Net decrease (117,827) $(1,299,500)
======== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 107,795 $ 1,080,559
Shares issued to shareholders
in reinvestment of dividends 7,835 76,236
-------- -----------
Total issued 115,630 1,156,795
Automatic conversion of shares (2,219) (22,220)
Shares redeemed (510,410) (5,087,031)
-------- -----------
Net decrease (396,999) $(3,952,456)
======== ===========
66
<PAGE>
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 26,773 $ 292,552
Shares issued to shareholders
in reinvestment of dividends 391 4,201
-------- -----------
Total issued 27,164 296,753
Shares redeemed (23,609) (265,841)
-------- -----------
Net increase 3,555 $ 30,912
======== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 8,016 $ 79,485
Shares issued to shareholders
in reinvestment of dividends 642 6,222
-------- -----------
Total issued 8,658 85,707
Shares redeemed (39,859) (397,832)
-------- -----------
Net decrease (31,201) $ (312,125)
======== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 24,261 $ 273,733
Automatic conversion of shares 1,037 12,375
Shares issued to shareholders
in reinvestment of dividends 437 4,728
-------- -----------
Total issued 25,735 290,836
Shares redeemed (109,712) (1,193,904)
-------- -----------
Net decrease (83,977) $ (903,068)
======== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 44,926 $ 449,969
Automatic conversion of shares 2,211 22,220
Shares issued to shareholders
in reinvestment of dividends 3,537 34,271
-------- -----------
Total issued 50,674 506,460
Shares redeemed (92,454) (932,193)
-------- -----------
Net decrease (41,780) $ (425,733)
======== ===========
5. Commitments:
At August 31, 1997, the Fund had foreign exchange contracts, in addition
to the contracts listed in the Schedule of Investments, under which it
had agreed to purchase various foreign currencies with approximate
values of $35,000.
67
<PAGE>
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..................................................... 14
Directors and Officers.................................................... 14
Management and Advisory Arrangements...................................... 15
Purchase of Shares......................................................... 17
Alternative Sales Arrangements............................................ 17
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 18
Reduced Initial Sales Charges............................................. 19
Distribution Plans........................................................ 23
Limitations on the Payment of Deferred Sales Charges...................... 24
Redemption of Shares....................................................... 25
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 26
Portfolio Transactions and Brokerage....................................... 27
Determination of Net Asset Value........................................... 29
Shareholder Services....................................................... 30
Investment Account........................................................ 30
Automatic Investment Plans................................................ 30
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 30
Systematic Withdrawal Plans............................................... 31
Retirement Plans.......................................................... 32
Exchange Privilege........................................................ 32
Dividends, Distributions and Taxes......................................... 35
Dividends and Distributions............................................... 35
Taxes..................................................................... 35
Performance Data........................................................... 39
General Information........................................................ 41
Description of Shares..................................................... 41
Computation of Offering Price Per Share................................... 42
Independent Auditors....................................................... 42
Custodian.................................................................. 42
Transfer Agent............................................................. 42
Legal Counsel.............................................................. 43
Reports to Shareholders.................................................... 43
Additional Information..................................................... 43
Appendix--Ratings of Fixed Income Securities............................... 44
Independent Auditors' Report............................................... 51
Financial Statements....................................................... 53
</TABLE>
Code #18239-1297
[LOGO] MERRILL LYNCH
Merrill Lynch
Asset Growth Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
December 9, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the two-year period ended
August 31, 1997 and for the period September 2, 1994, (commencement of
operations) to August 31, 1995.
Contained in Part B:
Schedule of Investments as of August 31, 1997.
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statements of Changes in Net Assets for each of the years in the two year
period ended August 31, 1997.
Financial Highlights for each of the years in the two-year period ended
August 31, 1997 and for the period September 2, 1994, (commencement of
operations) to August 31, 1995.
(b) EXHIBITS:
EXHIBIT
NUMBER
-------
1(a) --Articles of Incorporation of the Registrant as amended.*
(b) --Articles Supplementary to Articles of Incorporation.***
2 --By-Laws of the Registrant, as amended.*
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended,
and By-Laws of Registrant.(a)
5 --Form of Management Agreement between Registrant and Merrill Lynch
Asset Management, L.P.*
5(a) --Form of Sub-Advisory Agreement between Fund Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.****
6(a) --Form of Amended Class A Shares Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.**
(b) --Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.*
(c) --Form of Class C Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.**
(d) --Form of Class D Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.**
7 --None.
8 --Form of Custodian Agreement between Registrant and The Chase
Manhattan Bank, N.A.*
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.*
(b) --Form of Agreement between Merrill Lynch & Co., Inc. and the
Registrant relating to use by Registrant of Merrill Lynch name.*
10 --Opinion and consent of Rogers & Wells.*
--Opinion and consent of Galland, Kharasch, Morse & Garfinkle, P.C.*
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.****
12 --None.
13(a) --Certificate of Merrill Lynch Asset Management, L.P. relating to
Class A and Class B shares.*
(b) --Certificate of Merrill Lynch Asset Management, L.P. relating to
Class C and Class D shares.**
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
14 --None.
15(a) --Class B Distribution Plan of the Registrant and Distribution Plan
Sub-Agreement.*
(b) --Class C Distribution Plan of the Registrant and Distribution Plan
Sub-Agreement.**
(c) --Class D Distribution Plan of the Registrant and Distribution Plan
Sub-Agreement.**
16 --Schedule for computation of each performance in the quotation
provided in the Registration Statement in response to Item 22 (for
Class A, Class B, Class C and Class D shares).***
24 --Power of Attorney for Robert S. Salomon, Jr.***
27(a) --Financial Data Schedule--Class A shares.****
(b) --Financial Data Schedule--Class B Shares.****
(c) --Financial Data Schedule--Class C Shares.****
(d) --Financial Data Schedule--Class D Shares.****
</TABLE>
- --------
(a) Reference is made to Article II (Sections 3 and 4), Article V (Section 3),
Article IV, Article VI, Article VII and Article IX of the Registrant's
Articles of Incorporation, filed as Exhibit (1) to Amendment No. 2 to the
Registration Statement; and Article II, Article III (Sections 1, 3, 5, 6
and 17), Article IV (Section 2), Article V (Section 7), Article VI, Article
VII, Article XII, Article XIII, and Article XIV of the Registrant's By-
Laws, as amended, previously filed as Exhibit (2) to Amendment No. 2 to the
Registration Statement.
* Previously filed with Pre-Effective Amendment No. 2 to the Registration
Statement.
** Previously filed with Post-Effective Amendment No. 1 to the Registration
Statement.
*** Previously filed with Post-Effective Amendment No. 2 to the Registration
Statement.
**** Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS OCTOBER 31, 1997
-------------- ----------------
<S> <C>
Shares of Class A Common Stock, par value $0.10 per
share.................................................. 314
Shares of Class B Common Stock, par value $0.10 per
share.................................................. 1,083
Shares of Class C Common Stock, par value $0.10 per
share.................................................. 96
Shares of Class D Common Stock, par value $0.10 per
share.................................................. 52
</TABLE>
- --------
Note: The number of holders shown in the table above includes holders of record
plus beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
C-2
<PAGE>
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or
purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Class A, Class B and Class C Distribution Agreements
relating to the securities being offered hereby, the Registrant agrees to
indemnify the Distributor and each person, if any, who controls the Distributor
within the meaning of the Securities Act of 1933 (the "Act"), against certain
types of civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch
C-3
<PAGE>
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Insitutions Series,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MultiHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, Inc., MuniYield Arizona Fund, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York
Insured Fund Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P., ("MLAM" or the "Manager") acts an
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., and Hotchkis and Wiley Funds (advised by Hotchkis and
Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM and Princeton Services, Inc., ("Princeton
Services"), and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower, World
Financial Center, 250 Vesey Street, New York, New York 10281-1201. The address
of the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc.
("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-4
<PAGE>
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
September 1, 1992, for his or her own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is
Executive Vice President and Mr. Richard is Treasurer of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors or officers of
one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION PROFESSION, VOCATION
NAME WITH MANAGER OR EMPLOYMENT
---- ------------ ---------------------------
<S> <C> <C>
ML & Co. ................... Limited Partner Financial Services Holding
Company; Limited Partner of FAM
Princeton Services.......... General Partner General Partner of FAM.
Arthur Zeikel............... President President of FAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.
Terry K. Glenn.............. Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of Merrill
Lynch Funds Distributor, Inc.
(the "Distributor"); Director of
FDS; President of Princeton
Administrators, L.P.
Linda L. Federici........... Senior Vice President Senior Vice President of FAM and
Senior Vice President of
Princeton Services
Philip L. Kirstein.......... Senior Vice President, Senior Vice President, General
General Counsel and Secretary Counsel and Secretary of FAM;
Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services
Vincent R. Giordano......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Elizabeth A. Griffin........ Senior Vice President Senior Vice President of FAM and
Senior Vice President of
Princeton Services
Norman R. Harvey............ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Michael J. Hennewinkel...... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Ronald M. Kloss............. Senior Vice President Senior Vice President and
and Controller Controller of FAM; Senior Vice
President and Controller of
Princeton Services
Debra Landsman-Yaros........ Senior Vice President Senior Vice President of FAM;
Vice President of MLFD and Senior
Vice President of Princeton
Services
Stephen M.M. Miller......... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. ..... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION PROFESSION, VOCATION
NAME WITH MANAGER OR EMPLOYMENT
---- ------------ ---------------------------
<S> <C> <C>
Michael L. Quinn............ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice President
of Merrill Lynch from 1989 to
1995
Richard L. Reller........... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services and Director
of MLFD
Gerald M. Richard........... Senior Vice President Senior Vice President and
and Treasurer Treasurer of FAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of the
Distributor
Gregory D. Upah............. Senior Vice President Senior Vice President of FAM and
Senior Vice President of
Princeton Services
Ronald L. Welburn........... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies; Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Convertible Fund, Inc. Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Series Trust Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., and Worldwide DollarVest Fund,
Inc. The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1995, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition, Messrs. Zeikel, Albert and Richard are officers of one or more of
the registered investment companies listed in the first two paragraphs of this
Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME MLAM U.K. OR EMPLOYMENT
---- ------------- ---------------------------
<S> <C> <C>
Arthur Zeikel............... Director and Chairman President of the Manager and FAM;
President and Director of
Princeton Services, Executive
Vice President of ML & Co.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME MLAM U.K. OR EMPLOYMENT
---- ------------- ---------------------------
<S> <C> <C>
Alan J. Albert.............. Senior Managing Director Vice President of the Manager
Terry K. Glenn.............. Director Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
Gerald M. Richard........... Senior Vice President Senior Vice President and
Treasurer of the Manager and FAM;
Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
the Distributor
Carol Ann Langham........... Company Secretary None
Debra Anne Searle........... Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O. Box
9011, Princeton, New Jersey 08543-9081, except that the address of Messrs.
Cook, Aldrich, Brady, Breen, Fatseas, and Wasel is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITIONS AND OFFICES
NAME WITH DISTRIBUTOR WITH REGISTRANT
---- ------------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Richard L. Reller....... Director None
Thomas J. Verage........ First Vice President and Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-Yaros. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
C-7
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder are
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 and its transfer agent, Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
(d) The Fund, if requested to do so by the holders of at least 10% of the
Fund's outstanding shares, will call a meeting of shareholders for the purpose
of voting upon the question of removal of a director or directors and will
assist communications with other shareholders as required by Section 16(c) of
the Investment Company Act of 1940.
C-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT CERTIFIES THAT
IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE
AMENDMENT TO ITS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE
SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY ON THE TH
DAY OF , 1997.
MERRILL LYNCH ASSET GROWTH FUND,
INC.
/s/ Arthur Zeikel
By __________________________________
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------ Director , 1997
(ARTHUR ZEIKEL) (Principal
Executive Officer)
Joe Grills* Director
- ------------------------------------
(JOE GRILLS)
Walter Mintz* Director
- ------------------------------------
(WALTER MINTZ)
Melvin R. Seiden* Director
- ------------------------------------
(MELVIN R. SEIDEN)
Robert S. Salomon, Jr.* Director
- ------------------------------------
(ROBERT S. SALOMON, JR.)
Stephen B. Swensrud* Director
- ------------------------------------
(STEPHEN B. SWENSRUD)
Gerald M. Richard* Treasurer
- ------------------------------------ (Principal , 1997
(GERALD M. RICHARD) Financial and
Accounting
Officer)
*By /s/ Arthur Zeikel
- ------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
, 1997
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
5(a) --Form of Sub-Advisory Agreement between Fund Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited*............
11 --Consent of Deloitte & Touche llp, independent auditors of the
Registrant*......................................................
27(a) --Financial Data Schedule--Class A shares*........................
(b) --Financial Data Schedule--Class B Shares*........................
(c) --Financial Data Schedule--Class C Shares*........................
(d) --Financial Data Schedule--Class D Shares*........................
</TABLE>
- --------
* Filed herewith.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH ASSET GROWTH FUND, INC. - CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 10365963
<INVESTMENTS-AT-VALUE> 11488400
<RECEIVABLES> 62579
<ASSETS-OTHER> 70606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11621585
<PAYABLE-FOR-SECURITIES> 91575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 187591
<TOTAL-LIABILITIES> 279166
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9047638
<SHARES-COMMON-STOCK> 146895
<SHARES-COMMON-PRIOR> 133427
<ACCUMULATED-NII-CURRENT> 260927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 979569
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1054285
<NET-ASSETS> 1803323
<DIVIDEND-INCOME> 187352
<INTEREST-INCOME> 133552
<OTHER-INCOME> 0
<EXPENSES-NET> (403860)
<NET-INVESTMENT-INCOME> (82956)
<REALIZED-GAINS-CURRENT> 1716633
<APPREC-INCREASE-CURRENT> 562370
<NET-CHANGE-FROM-OPS> 2196047
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21039)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 64930
<NUMBER-OF-SHARES-REDEEMED> (53161)
<SHARES-REINVESTED> 1699
<NET-CHANGE-IN-ASSETS> 98328
<ACCUMULATED-NII-PRIOR> 87908
<ACCUMULATED-GAINS-PRIOR> (390880)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 495895
<AVERAGE-NET-ASSETS> 1556033
<PER-SHARE-NAV-BEGIN> 10.13
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 2.30
<PER-SHARE-DIVIDEND> (.16)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.28
<EXPENSE-RATIO> 3.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH ASSET GROWTH FUND, INC. - CLASS B SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 10365963
<INVESTMENTS-AT-VALUE> 11488400
<RECEIVABLES> 62579
<ASSETS-OTHER> 70606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11621585
<PAYABLE-FOR-SECURITIES> 91575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 187591
<TOTAL-LIABILITIES> 279166
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9047638
<SHARES-COMMON-STOCK> 689006
<SHARES-COMMON-PRIOR> 806833
<ACCUMULATED-NII-CURRENT> 260927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 979569
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1054285
<NET-ASSETS> 8403038
<DIVIDEND-INCOME> 187352
<INTEREST-INCOME> 133552
<OTHER-INCOME> 0
<EXPENSES-NET> (403860)
<NET-INVESTMENT-INCOME> (82956)
<REALIZED-GAINS-CURRENT> 1716633
<APPREC-INCREASE-CURRENT> 562370
<NET-CHANGE-FROM-OPS> 2196047
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59443)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 134761
<NUMBER-OF-SHARES-REDEEMED> (257003)
<SHARES-REINVESTED> 4415
<NET-CHANGE-IN-ASSETS> 98328
<ACCUMULATED-NII-PRIOR> 87908
<ACCUMULATED-GAINS-PRIOR> (390880)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 495895
<AVERAGE-NET-ASSETS> 8316700
<PER-SHARE-NAV-BEGIN> 10.09
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> 2.30
<PER-SHARE-DIVIDEND> (.08)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.20
<EXPENSE-RATIO> 4.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH ASSET GROWTH FUND, INC. - CLASS C SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 10365963
<INVESTMENTS-AT-VALUE> 11488400
<RECEIVABLES> 62579
<ASSETS-OTHER> 70606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11621585
<PAYABLE-FOR-SECURITIES> 91575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 187591
<TOTAL-LIABILITIES> 279166
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9047638
<SHARES-COMMON-STOCK> 47148
<SHARES-COMMON-PRIOR> 43593
<ACCUMULATED-NII-CURRENT> 260927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 979569
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1054285
<NET-ASSETS> 571945
<DIVIDEND-INCOME> 187352
<INTEREST-INCOME> 133552
<OTHER-INCOME> 0
<EXPENSES-NET> (403860)
<NET-INVESTMENT-INCOME> (82956)
<REALIZED-GAINS-CURRENT> 1716633
<APPREC-INCREASE-CURRENT> 562370
<NET-CHANGE-FROM-OPS> 2196047
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4516)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26773
<NUMBER-OF-SHARES-REDEEMED> (23609)
<SHARES-REINVESTED> 391
<NET-CHANGE-IN-ASSETS> 98328
<ACCUMULATED-NII-PRIOR> 87908
<ACCUMULATED-GAINS-PRIOR> (390880)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 495895
<AVERAGE-NET-ASSETS> 550580
<PER-SHARE-NAV-BEGIN> 10.05
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> 2.28
<PER-SHARE-DIVIDEND> (.09)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.13
<EXPENSE-RATIO> 4.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH ASSET GROWTH FUND, INC. - CLASS D SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 10365963
<INVESTMENTS-AT-VALUE> 11488400
<RECEIVABLES> 62579
<ASSETS-OTHER> 70606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11621585
<PAYABLE-FOR-SECURITIES> 91575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 187591
<TOTAL-LIABILITIES> 279166
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9047638
<SHARES-COMMON-STOCK> 45922
<SHARES-COMMON-PRIOR> 129899
<ACCUMULATED-NII-CURRENT> 260927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 979569
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1054285
<NET-ASSETS> 564113
<DIVIDEND-INCOME> 187352
<INTEREST-INCOME> 133552
<OTHER-INCOME> 0
<EXPENSES-NET> (403860)
<NET-INVESTMENT-INCOME> (82956)
<REALIZED-GAINS-CURRENT> 1716633
<APPREC-INCREASE-CURRENT> 562370
<NET-CHANGE-FROM-OPS> 2196047
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5211)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25298
<NUMBER-OF-SHARES-REDEEMED> (109712)
<SHARES-REINVESTED> 437
<NET-CHANGE-IN-ASSETS> 98328
<ACCUMULATED-NII-PRIOR> 87908
<ACCUMULATED-GAINS-PRIOR> (390880)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83088
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 495895
<AVERAGE-NET-ASSETS> 685471
<PER-SHARE-NAV-BEGIN> 10.11
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 2.30
<PER-SHARE-DIVIDEND> (.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.28
<EXPENSE-RATIO> 3.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(a)
FORM OF SUB-ADVISORY AGREEMENT
Agreement made as of the th day of January, 1997, by and between Fund Asset
Management, l.p., a Delaware limited partnership (hereinafter referred to as
"FAM"), and Merrill Lynch Asset Management U.K. Limited, a corporation
organized under the laws of England and Wales (hereinafter referred to as "MLAM
U.K.").
Witnesseth:
Whereas, Merrill Lynch Corporate Bond Fund, Inc. (the "Fund") is a Maryland
corporation engaged in business as a non-diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
Whereas, FAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
Whereas, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
Whereas, FAM has entered into a management agreement (the "Management
Agreement") dated , pursuant to which FAM provides management and
investment and advisory services to the Fund; and
Whereas, MLAM U.K. is willing to provide investment advisory services to FAM
in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
Now, Therefore, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and FAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
FAM hereby employs MLAM U.K. to act as investment adviser to FAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of FAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to
assume the obligations herein set forth for the compensation provided for
herein. FAM and its affiliates shall for all purposes herein be deemed a
Professional Investor as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided of authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on FAM and shall
provide FAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the assets of the
Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the Fund's
<PAGE>
investment objective, investment policies and investment restrictions as the
same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and
any other rights pertaining to the portfolio securities of the Fund shall be
exercised.
MLAM U.K. will not hold money on behalf of FAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of FAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof and shall pay all compensation of
officers of the Fund and all Directors of the Fund who are affiliated persons
of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., FAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by FAM and MLAM U.K. but in no event in excess of the amount that
FAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of
its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for FAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
2
<PAGE>
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. FAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO
directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures of contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above written and
shall remain in force until the date of termination of the Management Agreement
(but not later than two years after the date hereof) and thereafter, but only
so long as such continuance is specifically approved at least annually by (i)
the Directors of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund and (ii) a majority of those Directors who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by FAM or by vote of a majority of the outstanding voting securities
of the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Management Agreement. Any termination
shall be without prejudice to the completion of transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement of interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meaning specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
3
<PAGE>
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
In Witness Whereof, the parties hereto have executed and delivered this
Agreement as of the date first above written.
Fund Asset Management, L.P.
By______________________________
Title
Merrill Lynch Asset Management U.K.
Limited
By______________________________
Title
4
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Growth Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 6 to Registration
Statement No. 33-54005 of our report dated October 7, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which is also a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
December 8, 1997
