Exhibit 17(b)
Merrill Lynch Growth Fund
February 16, 2001
PROSPECTUS
This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep
it for future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
Table of Contents
TABLE OF CONTENTS
MERRILL LYNCH GROWTH FUND AT A GLANCE
RISK/RETURN BAR CHART
FEES AND EXPENSES
HOW THE FUND INVESTS
INVESTMENT RISKS
MERRILL LYNCH SELECT PRICINGSM SYSTEM
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
PARTICIPATION IN FEE-BASED PROGRAMS
MERRILL LYNCH INVESTMENT MANAGERS
FINANCIAL HIGHLIGHTS
INVESTMENT OBJECTIVE AND POLICIES
Other Investment Policies, Practices and Risk Factors
Convertible Securities
Non-Diversification Risk
Foreign Investment Risks
Securities of Smaller Companies
Derivatives
When Issued Securities, Delayed Delivery Securities and Forward Commitments
Borrowing and Leverage
Standby Commitment Agreements
Junk Bonds
Investment Restrictions
Portfolio Turnover
MANAGEMENT OF THE FUND
Trustees and Officers
Compensation of Trustees
Management and Advisory Arrangements
Code of Ethics
PURCHASE OF SHARES
Initial Sales Charge Alternatives -- Class A and Class D Shares Reduced
Initial Sales Charges Deferred Sales Charge Alternatives -- Class B and
Class C Shares Distribution Plans Limitations on the Payment of Deferred
Sales Charges
REDEMPTION OF SHARES
Redemption Repurchase Reinstatement
Privilege -- Class A and Class D Shares
PRICING OF SHARES Determination
of Net Asset Value Computation of Offering Price Per Share
PORTFOLIO TRANSACTIONS AND BROKERAGE
SHAREHOLDER SERVICES Investment Account
Exchange Privilege Fee-Based Programs Retirement and Education Savings
Plans Automatic Investment Plans Automatic Dividend Reinvestment Plan
Systematic Withdrawal Plan
DIVIDENDS AND TAXES Dividends Taxes Tax
Treatment of Options and Futures Transactions Special Rules for Certain
Foreign Currency Transactions
PERFORMANCE DATA
GENERAL INFORMATION
Description of Shares Independent Auditors Custodian Transfer Agent
Legal Counsel Reports to Shareholders Shareholder Inquiries Additional
Information
FINANCIAL STATEMENTS
AMENDMENT TO DECLARATION OF TRUST
AMENDMENT TO DECLARATION OF TRUST
2ND AMENDED AND RESTATED BY-LAWS
FORM OF DISTRIBUTION AGREEMENT
ADMINISTRATIVE SERVICES AGREEMENT
CONSENT OF DELOITTE & TOUCHE LLP
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN LLP
FORM OF A/R CLASS B DISTRO PLAN
FORM OF A/R CLASS C DISTRO PLAN
FORM OF A/R CLASS D DISTRO PLAN
POWER OF ATTORNEY
PAGE
KEY FACTS
--------------------------------------------------------------------
Merrill Lynch Growth Fund at a Glance 3
Risk/Return Bar Chart 5
Fees and Expenses 6
DETAILS ABOUT THE FUND
--------------------------------------------------------------------
How the Fund Invests 8
Investment Risks 10
YOUR ACCOUNT
--------------------------------------------------------------------
Merrill Lynch Select PricingSM System 15
How to Buy, Sell, Transfer and Exchange Shares 21
Participation in Fee-Based Programs 26
MANAGEMENT OF THE FUND
--------------------------------------------------------------------
Merrill Lynch Investment Managers 28
Financial Highlights 30
FOR MORE INFORMATION
--------------------------------------------------------------------
Shareholder Reports Back Cover
Statement of Additional Information Back Cover
MERRILL LYNCH GROWTH FUND
Table of Contents
Key Facts
In an effort to help you better understand the many concepts involved in
making an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
Common Stock -- securities representing shares of ownership of a corporation.
Preferred Stock -- a class of stock that often pays dividends at a specified
rate and has preference over common stock in dividend payments and liquidation
of assets. Preferred stock may also be convertible into common stock.
Convertible Security -- a fixed income security, such as a bond or preferred
stock that is exchangeable for shares of common stock of the issuer or of
another company.
MERRILL LYNCH GROWTH FUND AT A GLANCE
- ------------------------------------------------------------------------------
What is the Fund's investment objective?
The investment objective of the Fund is to seek growth of capital and,
secondarily, income. In other words, it tries to choose investments that will
increase in value. The Fund may also select certain investments based on their
ability to produce current income. However, the Fund's investments emphasize
growth of capital more than current income.
What are the Fund's main investment strategies?
The Fund invests primarily in common stock of companies that Fund management
believes have the potential to achieve above average growth rates in earnings,
revenues, cash flow or earnings before interest, taxes, depreciation and
amortization (EBITDA). The Fund may also purchase preferred stock and
convertible securities. The Fund focuses on companies with medium to large
stock market capitalizations. The Fund invests a majority of its assets in
U.S. companies, but may invest up to 40% of its total assets in foreign
companies. The Fund may invest in securities denominated in foreign
currencies. The Fund is a non-diversified fund, which means that it can invest
more of its assets in fewer companies than other funds.
We cannot guarantee that the Fund will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur because
a particular stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. The
Fund may invest in non-U.S. securities. Because foreign markets may differ
significantly from U.S. markets in terms of both economic conditions and
government regulation, investments in foreign securities involve special
risks. In addition, investments in securities denominated in foreign
currencies involve the risk that these currencies may decline in value
relative to the U.S. dollar, which decreases the value of the investments in
U.S. dollar terms. If the value of the Fund's investments goes down, you may
lose money.
The Fund is a non-diversified fund, which means that it may invest
more of its assets in the securities of a single issuer than if it were a
diversified fund. If the Fund invests in a smaller number of issuers, the
Fund's risk is increased because developments affecting an individual issuer
have a greater impact on the Fund's performance.
MERRILL LYNCH GROWTH FUND
3
Table of Contents
Key Facts
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are investing with long term goals, such as retirement or funding a
child's education
o Want a professionally managed portfolio
o In seeking growth and, secondarily, income you are willing to accept
the risk that the value of your investment may decline
o Are not looking for a significant amount of current income
MERRILL LYNCH GROWTH FUND
4
Table of Contents
RISK/RETURN BAR CHART
- -------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each of the past ten calendar years. Sales charges are
not reflected in the bar chart. If these amounts were reflected, returns would
be less than those shown. The table compares the average annual total returns
for each class of the Fund's shares for the periods shown with those of the
S&P 500 Index. How the Fund performed in the past is not necessarily an
indication of how the Fund will perform in the future.
[BAR CHART]
Merrill Lynch Growth Fund - Class B Annual
Total Returns
1991 23.85
1992 8.79
1993 31.11
1994 0.72
1995 35.45
1996 28.38
1997 17.44
1998 -24.23
1999 26.15
2000 -19.10
During the ten year period shown in the bar chart, the highest return for a
quarter was 31.76% (quarter ended March 31, 1991) and the lowest return for a
quarter was (19.51)% (quarter ended September 30, 1998). The year-to-date
return as of December 31, 2000 was (19.10)%.
Average Annual Total Returns Past Ten Years/
(as of the calendar year Past Past Since
ended December 31, 2000) One Year Five Years Inception
------------------------------------------------------------------------
Merrill Lynch Growth Fund* A (22.57)% 3.06% 11.43%
S&P 500** (9.10)% 18.31% 17.44%
------------------------------------------------------------------------
Merrill Lynch Growth Fund* B (22.07)% 3.11% 10.88%#
S&P 500** (9.10)% 18.31% 17.44%
------------------------------------------------------------------------
Merrill Lynch Growth Fund* C (19.83)% 3.10% 6.95%+
S&P 500** (9.10)% 18.31% 20.47%++
------------------------------------------------------------------------
Merrill Lynch Growth Fund* D (22.76)% 2.80% 6.86%+
S&P 500** (9.10)% 18.31% 20.47%++
------------------------------------------------------------------------
* Includes sales charge.
** The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past
performance is not predictive of future performance.
# The performance does not reflect the effect of the conversion of Class B
shares to Class D shares after approximately eight years.
+ Inception date is October 21, 1994.
++ Since October 21, 1994.
MERRILL LYNCH GROWTH FUND
5
Table of Contents
Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which the Fund may
charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing
the Fund.
Distribution Fees -- fees used to support the Fund's marketing and
distribution efforts, such as compensating Financial Consultants and other
financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers and other financial intermediaries for account maintenance activities.
FEES AND EXPENSES
- ------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
Shareholder Fees (fees paid directly from
your investment)(a): Class A Class B(b) Class C Class D
Maximum Sales Charge (Load) imposed on purchases (as a percentage of
offering price) 5.25%(c) None None 5.25%(c)
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
Maximum Sales Charge (Load) imposed on Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets):
Management Fee(e)(h) 0.65% 0.65% 0.65% 0.65%
Distribution and/or Service (12b-1) Fees(f) None 1.00% 1.00% 0.25%
Other Expenses (including transfer agency fees)(g) 0.26% 0.28% 0.30% 0.26%
Total Annual Fund Operating Expenses(h) 0.91% 1.93% 1.95% 1.16%
(a) In addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or redeems shares.
See "How to Buy, Sell, Transfer and Exchange Shares."
(b) Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be
subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load). (d)You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one year.
(e) The Fund pays the Investment Adviser a fee at the annual rate of 0.65% of the average daily net assets of the Fund. The
Investment Adviser has voluntarily agreed to reduce its fee as Fund assets grow. The reduced fee is equal to 0.65% of
the Fund's first $1 billion of net assets; 0.625% of net assets from $1 billion to $1.5 billion; and 0.60% of net assets
above $1.5 billion, but not exceeding $10 billion; and 0.575% of average daily net assets exceeding $10 billion. For the
fiscal year ended October 31, 2000, the Investment Adviser received a fee equal to 0.62% of the Fund's average daily net
assets. The table shows the full fee without any waiver since the Investment Adviser may stop waiving fees at any time.
(f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used elsewhere in
this prospectus and in all other Fund materials.
(g) The Fund pays the Transfer Agent $11.00 for each Class A and D shareholder account and $14.00 for each Class B and C
shareholder account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund pays a 0.10% fee for certain
accounts that participate in the Merrill Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the
month the account is closed and ends at the end of the calendar year. For the fiscal year ended October 31, 2000, the
Fund paid the Transfer Agent fees totaling $6,983,015.
MERRILL LYNCH GROWTH FUND
6
Table of Contents
(footnotes continued from previous page)
As of January 1, 2001, the Fund has entered into an agreement with State
Street Bank and Trust Company pursuant to which State Street provides
accounting services to the Fund. The Fund will pay the cost of these
services. In addition, the Fund will reimburse the Investment Adviser for
the cost of certain additional accounting services.
(h) During the fiscal year ended October 31, 2000, the Investment Adviser
waived management fees totaling 0.03% for Class A shares, 0.03% for Class
B shares, 0.03% for Class C shares and 0.03% for Class D shares. After
taking into account these waivers, the Fund's total expense ratio was
0.88% for Class A shares, 1.90% for Class B shares, 1.92% for Class C
shares and 1.13% for Class D shares. The Investment Adviser may
discontinue or reduce the fee waiver arrangement at any time without
notice.
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
---
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------
Class A $613 $800 $1,002 $1,586
Class B $596 $806 $1,042 $2,059*
Class C $298 $612 $1,052 $2,275
Class D $637 $874 $1,130 $1,860
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------
Class A $613 $800 $1,002 $1,586
Class B $196 $606 $1,042 $2,059*
Class C $198 $612 $1,052 $2,275
Class D $637 $874 $1,130 $1,860
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table above.
MERRILL LYNCH GROWTH FUND
7
Table of Contents
Details About the Fund
ABOUT THE PORTFOLIO MANAGER
Stephen I. Silverman has been the portfolio manager and Senior Vice President
of the Fund since February 1999. He has been a First Vice President of Merrill
Lynch Investment Managers since 1997 and a Vice President and Senior Portfolio
Manager since 1983.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Investment Managers.
HOW THE FUND INVESTS
- ------------------------------------------------------------------------------
The Fund's main goal is growth of capital. The Fund also seeks income, but its
investments emphasize growth of capital more than income. The Fund tries to
achieve its goals by investing primarily in equity securities. In selecting
securities, Fund management emphasizes stocks of companies that Fund
management believes have the potential to achieve above average growth rates
in earnings, revenues, cash flow or EBITDA.
The Fund will generally invest at least 65% of its total assets in equity
securities. Equity securities consist of:
o Common Stock
o Preferred Stock
o Securities convertible into Common Stock
o Derivatives, such as futures, forwards and options, the value of which
is based on a common stock or group of common stocks
The Fund will focus on investments in common stock of large and mid-size
companies having stock market capitalizations of $2 billion or more.
The Fund employs a fundamental "bottom up" investment style. This means that
the Fund seeks to identify individual companies with attractive business
attributes and does not place substantial weight on other security selection
techniques, such as sector allocation or technical market analysis.
The Fund looks for stocks that its management believes have the potential to
achieve above average growth in earnings, revenues, cash flow or EBITDA. A
company may achieve growth from:
o introducing promising new products, exploiting new technologies or
developing new distribution channels
o achieving strong growth in sales of existing products through
improved pricing or increasing sales volume
o developing operating efficiencies
o increasing market share
Fund management will seek to invest in companies that:
o have the potential to achieve above-average growth
o are well-managed
o achieve attractive returns on capital
MERRILL LYNCH GROWTH FUND
8
Table of Contents
Earnings -- a company's profits, which is generally its revenues less its
expenses.
Revenues -- the amount of cash received by a company from sales of
products and services.
Cash flow -- the amount of cash generated by a company, which is generally
equal to its earnings plus non-cash expenses such as depreciation.
Futures -- exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Forwards -- private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based on
the change in value of certain assets or an index) at a specified time.
Options --exchange-traded or private contracts involving the right of a holder
to deliver (a "put") or receive (a "call") certain assets (or a money payment
based on the change in value of certain assets or an index) from another party
at a specified price within a specified time period.
Market capitalization -- the number of a company's outstanding shares,
multiplied by a share's current market value. Market capitalization is a
measure of a company's size.
Fund management will not place significant weight on a company's current
valuation based on statistical characteristics such as price to earnings
ratio, price to book value ratio or dividend yield.
Fund management believes that companies that have the potential to achieve
above-average growth in earnings, revenues, cash flow or EBITDA frequently
provide the opportunity for above-average market gains over time. On the other
hand, such companies frequently have higher stock market valuations. As a
result, their shares may be more vulnerable to price declines from unexpected
adverse developments or market corrections.
The Fund invests mainly in U.S. companies, but may invest up to 40% of its
total assets in securities of foreign companies. The Fund may invest in
securities from any country. Foreign investing involves special risks,
including foreign currency risk and the possibility of substantial volatility
due to adverse political, economic or other developments. Foreign securities
may also be less liquid and harder to value than U.S. securities. These risks
are greater for investments in emerging markets.
The Fund may invest in securities denominated in currencies other than the
U.S. dollar. The Fund's return on investments denominated in foreign
currencies will be affected by changes in currency exchange rates. The Fund
may engage in currency transactions to seek to hedge against the risk of loss
from changes in currency exchange rates, but Fund management cannot guarantee
that it will be able to enter into such transactions or that such transactions
will be effective. The Fund is not required to hedge currency risk, and Fund
management may choose not to do so.
In addition to the Fund's principal strategies described above, the Fund may
also employ the following investment strategies:
The Fund may use derivatives, such as futures, forwards and options.
Derivatives are financial instruments whose value is derived from another
security, a commodity (such as gold or oil) or an index such as the S&P 500.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges, and may also use options on securities to seek increased return. The
Fund may also invest to a lesser extent in junk bonds, when issued securities,
delayed delivery securities, forward commitments, restricted and illiquid
securities and standby commitment agreements.
MERRILL LYNCH GROWTH FUND
9
Table of Contents
Details About the Fund
Under normal market conditions, the Fund may invest up to 35% of its assets in
debt securities. The Fund will normally invest a portion of its assets in
short term debt securities, such as commercial paper. The Fund invests in
short term debt securities when Fund management is unable to find enough
attractive long term investments, to reduce exposure to equities when
management believes it is advisable to do so or to meet redemptions.
Investments in short term debt securities can be sold easily and have limited
risk of loss but earn only limited returns. As a temporary measure for
defensive purposes, the Fund may invest more heavily in short term debt
securities, without limitation. During such periods, the Fund's investments in
equity securities will be limited and the Fund may not be able to achieve its
investment objective of growth of capital.
The Fund has no stated minimum holding period for investments and will buy or
sell securities whenever Fund management sees an appropriate opportunity. The
Fund does not consider potential tax consequences to Fund shareholders when it
sells securities. Because the Fund has the flexibility to take advantage of
short term investment opportunities, it may experience relatively high
portfolio turnover during certain periods. High turnover increases the Fund's
brokerage expenses and may affect shareholders' taxes by possibly increasing
short term capital gains or losses.
This prospectus describes the Fund's principal investment strategies and
related risks. The Fund may use many different investment strategies and it
has certain investment restrictions, all of which are explained in the Fund's
Statement of Additional Information.
INVESTMENT RISKS
- -------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing
in the Fund. As with any fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
The Fund's principal risks are as follows:
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value,
MERRILL LYNCH GROWTH FUND
10
Table of Contents
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the securities that Fund
management selects will underperform other funds with similar investment
objectives and investment strategies. Because the Fund invests in a smaller
number of issuers and economic sectors than some other funds, the Fund's stock
selection risk is increased.
Foreign Market Risk -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because securities traded on foreign markets have often
(though not always) performed differently than securities in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. In
particular, investment in foreign securities involves the following risks,
which are generally greater for investments in emerging markets.
o The economies of certain foreign markets often do not compare favorably
with the economy of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain of these economies may rely
heavily on particular industries or foreign capital and may be more
vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers and other protectionist
or retaliatory measures.
o Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of
punitive taxes.
o The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices.
They could also impair the Fund's ability to purchase or sell foreign
securities or transfer its assets or income back into the United States,
or otherwise adversely affect the Fund's operations.
o Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on
MERRILL LYNCH GROWTH FUND
11
Table of Contents
Details About the Fund
foreign government securities, difficulties in enforcing favorable legal
judgments in foreign courts and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or
other foreign countries.
o Because there are generally fewer investors on foreign exchanges and a
smaller number of shares traded each day, it may be difficult for the
Fund to buy and sell securities on those exchanges. In addition, prices
of foreign securities may go up and down more than prices of securities
traded in the United States.
o Foreign markets may have different clearance and settlement procedures.
In certain markets, settlements may be unable to keep pace with the
volume of securities transactions. If this occurs, settlement may be
delayed and the Fund's assets may be uninvested and not earning returns.
The Fund may miss investment opportunities or be unable to sell an
investment because of these delays.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be
recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight over their operations. Also, the
laws of certain countries may put limits on the Fund's ability to recover its
assets if a foreign bank, depository or issuer of a security, or any of their
agents, goes bankrupt. In addition, it is often more expensive for the Fund to
buy, sell and hold securities in certain foreign markets than in the United
States. The increased expense of investing in foreign markets reduces the
amount the Fund can earn on its investments and typically results in a higher
operating expense ratio for the Fund than investment companies invested only
in the United States.
European Economic and Monetary Union (EMU) -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU established a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government
and corporate bonds) have been redenominated in the euro and are traded and
make dividend and other payments only in euros. Like
MERRILL LYNCH GROWTH FUND
12
Table of Contents
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected if the
transition to euro, or EMU as a whole, does not proceed as planned or if a
participating country withdraws from EMU.
Non-Diversification Risk -- The Fund is a non-diversified fund. If the Fund
invests in securities of a smaller number of issuers, the Fund's risk is
increased because developments affecting an individual issuer have a greater
impact on the Fund's performance.
The Fund also may be subject to the following risks:
Borrowing and Leverage -- The Fund may borrow for temporary emergency
purposes, including to meet redemptions. Borrowing may exaggerate changes in
the net asset value of Fund shares and in the yield on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund's return. Certain securities that the Fund buys
may create leverage including, for example, when issued securities, forward
commitments and options.
Derivatives -- The Fund may use derivative instruments, including futures,
forwards and options. Derivatives allow the Fund to increase or decrease its
risk exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed
the amount originally invested.
Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
MERRILL LYNCH GROWTH FUND
13
Table of Contents
Details About the Fund
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges, and may also use options on securities to seek increased return.
Hedging is a strategy in which the Fund uses a derivative to offset the risk
that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that
changes in the value of the derivative will not match those of the holdings
being hedged as expected by the Fund, in which case any losses on the holdings
being hedged may not be reduced. There can be no assurance that the Fund's
hedging strategy will reduce risk or that hedging transactions will be either
available or cost effective. The Fund is not required to use hedging and may
choose not to do so.
Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like that of a regular debt security; that is, if
market interest rates rise, the value of a convertible usually falls. Since it
is convertible into common stock, the convertible also has the same types of
market and issuer risk as the underlying common stock.
Illiquid securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities it may be unable to quickly resell them or may be
able to sell them only at a price below current value.
STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
If you would like further information about the Fund, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH GROWTH FUND
14
Table of Contents
Your Account
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- -------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited
to your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge reduction or waiver.
Certain financial intermediaries may charge additional fees in connection with
transactions in Fund shares.
The Investment Adviser, the Distributor or their affiliates may make payments
out of their own resources to selected securities dealers and other financial
intermediaries for providing services intended to result in the sale of Fund
shares or for shareholder servicing activities.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and
account maintenance fee of 0.25%. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees increase the cost of
your investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch.
MERRILL LYNCH GROWTH FUND
15
Table of Contents
Your Account
The table below summarizes key features of the Merrill Lynch Select
Pricing(SM) System.
Class A Class B Class C Class D
- ---------------------------------------------------------------------------------------------------------------------------------
Availability Limited to certain Generally available Generally available Generally available through
investors including: through Merrill Lynch. through Merrill Lynch. Merrill Lynch. Limited
o Current Class A Limited availability Limited availability availability through selected
shareholders through selected through selected securities dealers and other
o Certain Retirement securities dealers and securities dealers financial intermediaries.
Plans other financial and other financial
o Participants in certain intermediaries. intermediaries.
Merrill Lynch sponsored
programs
o Certain affiliates of
Merrill Lynch, selected
securities dealers and
other financial
intermediaries.
Initial Yes. Payable at time of No. Entire purchase price No. Entire purchase Yes. Payable at time of
Sales purchase. Lower sales is invested in shares of price is invested in purchase. Lower sales
Charge? charges available for the Fund. shares of the Fund. charges available for larger
larger investments. investments.
Deferred No. (May be charged Yes. Payable if Yes. Payable if you No. (May be charged
Sales for purchases over you redeem within redeem within one for purchases over
Charge? $1 million that are four years of purchase. year of purchase. $1 million that are
redeemed within one redeemed within one year.)
year.)
Account No. 0.25% Account 0.25% Account 0.25% Account Maintenance Fee.
Maintenance Maintenance Fee. Maintenance Fee. No Distribution Fee.
and 0.75% Distribution Fee. 0.75% Distribution Fee.
Distribution
Fees?
Conversion to No. Yes, automatically after No. No.
Class D approximately eight years.
shares?
MERRILL LYNCH GROWTH FUND
16
Table of Contents
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the
Merrill Lynch mutual funds that offer Select PricingSM options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select PricingSM System
funds that you agree to buy within a 13-month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- ----------------------------------------------------------------------------------------------
Less than $25,000 5.25% 5.54% 5.00%
$25,000 but less than $50,000 4.75% 4.99% 4.50%
$50,000 but less than $100,000 4.00% 4.17% 3.75%
$100,000 but less than $250,000 3.00% 3.09% 2.75%
$250,000 but less than $1,000,000 2.00% 2.04% 1.80%
$1,000,000 and over** 0.00% 0.00% 0.00%
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. In that case, the Investment Adviser
compensates the selling dealer or other financial intermediary from its own
funds. However, if you redeem your shares within one year after purchase,
you may be charged a deferred sales charge. This charge is 1.00% of the
lesser of the original cost of the shares being redeemed or your redemption
proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain
employer-sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent
o Merrill Lynch Blueprint SM Program participants
o TMA SM Managed Trusts
o Certain Merrill Lynch investment or central asset accounts
o Certain employer-sponsored retirement or savings plans
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances
MERRILL LYNCH GROWTH FUND
17
Table of Contents
Your Account
o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees
o Certain fee-based programs of Merrill Lynch and other financial
intermediaries that have agreements with the Distributor or its
affiliates
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
As a result of the implementation of the Merrill Lynch Select Pricing SM
System, Class A shares of the Fund outstanding prior to October 21, 1994 were
redesignated as Class D shares. The Class A shares offered here differ from the
Class A shares offered prior to October 21, 1994 in many respects, including
eligible investors, sales charges and exchange privileges.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while
Class A shares are not.
If you redeem Class A or D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount
of your redemption proceeds. To exercise the privilege, contact your Merrill
Lynch Financial Consultant, selected securities dealer or other financial
intermediary, or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay distribution fees
of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch.
MERRILL LYNCH GROWTH FUND
18
Table of Contents
Financial Consultant, selected securities dealer or other financial
intermediary who assists you in purchasing Fund shares.
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
Years Since Purchase Sales Charge*
----------------------------------------------------------
0 - 1 4.00%
1 - 2 3.00%
2 - 3 2.00%
3 - 4 1.00%
4 and thereafter 0.00%
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Merrill Lynch funds have identical deferred sales charge schedules.
If you exchange your shares for shares of another fund, the higher charge
will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other retirement plan
if you are over 59 1/2 years old
o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts, group plans participating in the Merrill Lynch
Blueprint SM Program and certain retirement plan rollovers
o Redemption in connection with participation in certain fee-based
programs of Merrill Lynch or other financial intermediaries that have
agreements with the Distributor or its affiliates
o Withdrawals resulting from shareholder death or disability as long as
the waiver request is made within one year of death or disability or, if
later, reasonably promptly following completion of probate, or in
connection with involuntary termination of an account in which Fund
shares are held
MERRILL LYNCH GROWTH FUND
19
Table of Contents
Your Account
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up
to 10% per year of your Class B account value at the time the plan is
established
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment
of dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The
conversion of Class B to Class D shares is not a taxable event for Federal
income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund
typically convert approximately ten years after purchase compared to
approximately eight years for equity funds. If you acquire your Class B shares
in an exchange from another fund with a shorter conversion schedule, the
Fund's eight year conversion schedule will apply. If you exchange your Class B
shares in the Fund for Class B shares of a fund with a longer conversion
schedule, the other fund's conversion schedule will apply. The length of time
that you hold both the original and exchanged Class B shares in both funds
will count toward the conversion schedule. The conversion schedule may be
modified in certain other cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be
charged a deferred sales charge of 1.00%. The charge will apply to the lesser
of the original cost of the shares being redeemed or the proceeds of your
redemption. You will not be charged a deferred sales charge when you redeem
shares that you acquire through reinvestment of Fund dividends. The deferred
sales charge relative to Class C shares may be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
MERRILL LYNCH GROWTH FUND
20
Table of Contents
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- -------------------------------------------------------------------------------
The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch, a selected securities dealer, broker,
investment adviser, service provider or other financial intermediary. You may
also buy shares through the Transfer Agent. To learn more about buying,
selling, transferring or exchanging shares through the Transfer Agent, call
1-800-MER-FUND. Because the selection of a mutual fund involves many
considerations, your Merrill Lynch Financial Consultant may help you with this
decision.
Because of the high costs of maintaining smaller shareholder accounts, the
Fund may redeem the shares in your account (without charging any deferred
sales charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will
then have 60 days to make an additional investment to bring the value of your
account to at least $500 before the Fund takes any action. This involuntary
redemption does not apply to retirement plans or Uniform Gifts or Transfers to
Minors Act accounts.
MERRILL LYNCH GROWTH FUND
21
Table of Contents
Your Account
If You Want To Your Choices Information Important for You to Know
Buy Shares First, select the share class appropriate for you Refer to the Merrill Lynch Select Pricing table
on page 16. Be sure to read this prospectus
carefully.
Next, determine the amount of your investment The minimum initial investment for the Fund is
$1,000 for all accounts except:
o $250 for certain Merrill Lynch fee-based
programs
o $100 for retirement plans
(The minimums for initial investments may be
waived under certain circumstances.)
Have your Merrill Lynch Financial Consultant, The price of your shares is based on the next
selected securities dealer or other financial calculation of net asset value after your order
intermediary submit your purchase order is placed. Any purchase orders placed prior to
the close of business on the New York Stock
Exchange (generally, 4:00 p.m. Eastern time)
will be priced at the net asset value
determined that day. Certain financial
intermediaries, however, may require submission
of orders prior to that time. Purchase orders
placed after that time will be priced at the
net asset value determined on the next business
day. The Fund may reject any order to buy
shares and may suspend the sale of shares at
any time. Selected securities dealers or other
financial intermediaries, including Merrill
Lynch, may charge a processing fee to confirm a
purchase. Merrill Lynch currently charges a fee
of $5.35.
Or contact the Transfer Agent To purchase shares directly, call the Transfer
Agent at 1-800-MER-FUND and request a purchase
application. Mail the completed purchase
application to the Transfer Agent at the address
on the inside back cover of this prospectus.
Add to Your Investment Purchase additional shares The minimum investment for additional purchases
is generally $50 except that retirement plans
have a minimum additional purchase of $1 and
certain programs, such as automatic investment
plans, may have higher minimums. (The minimums
for additional purchases may be waived under
certain circumstances.)
All dividends are automatically reinvested
Acquire additional shares through the without a sales charge.
automatic dividend reinvestment plan
Participate in the automatic investment plan You may invest a specific amount on a periodic
basis through certain Merrill Lynch investment
or central asset accounts.
Transfer Shares to Another Transfer to a participating securities dealer or
Securities Dealer or Other other financial intermediary You may transfer your Fund shares only to
Financial Intermediary another securities dealer that has entered into
an agreement with Merrill Lynch. Certain
shareholder services may not be available for
the transferred shares. You may only purchase
additional shares of funds previously owned
before the transfer. All future trading of
these assets must be coordinated by the
receiving firm.
MERRILL LYNCH GROWTH FUND
22
Table of Contents
If You Want To Your Choices Information Important for You to Know
Transfer Shares to Another Transfer to a non-participating securities You must either:
Securities Dealer or Other dealer or other financial intermediary o Transfer your shares to an account with the
Financial Intermediary Transfer Agent; or
(continued) o Sell your shares, paying any applicable
Sell Your Shares deferred sales charge.
Have your Merrill Lynch Financial Consultant, The price of your shares is based on the next
selected securities dealer or other financial calculation of net asset value after your order
intermediary submit your sales order is placed. For your redemption request to be
priced at the net asset value on the day of your
request, you must submit your request to your
dealer or other financial intermediary prior to
that day's close of business on the New York
Stock Exchange (generally 4:00 p.m. Eastern
time). Certain financial intermediaries,
however, may require submission of orders prior
to that time. Any redemption request placed
after that time will be priced at the net asset
value at the close of business on the next
business day.
Securities dealers or other financial
intermediaries, including Merrill Lynch, may
charge a fee to process a redemption of shares.
Merrill Lynch currently charges a fee of $5.35.
No processing fee is charged if you redeem
shares directly through the Transfer Agent.
The Fund may reject an order to sell shares
under certain circumstances.
Sell through the Transfer Agent You may sell shares held at the Transfer Agent
by writing to the Transfer Agent at the address
on the inside back cover of this prospectus. All
shareholders on the account must sign the
letter. A signature guarantee will generally be
required but may be waived in certain limited
circumstances. You can obtain a signature
guarantee from a bank, securities dealer,
securities broker, credit union, savings
association, national securities exchange or
registered securities association. A notary
public seal will not be acceptable. If you hold
stock certificates, return the certificates with
the letter. The Transfer Agent will normally
mail redemption proceeds within seven days
following receipt of a properly completed
request. If you make a redemption request before
the Fund has collected payment for the purchase
of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay will
usually not exceed ten days.
You may also sell shares held at the Transfer
Agent by telephone request if the amount being
sold is less than $50,000 and if certain other
conditions are met. Contact the Transfer Agent
at 1-800-MER-FUND for details.
MERRILL LYNCH GROWTH FUND
23
Table of Contents
Your Account
If You Want To Your Choices Information Important for You to Know
Sell Shares Systematically Participate in the Fund's Systematic You can choose to receive systematic payments
Withdrawal Plan from your Fund account either by check or
through direct deposit to your bank account on a
monthly or quarterly basis. If you hold your
Fund shares in a Merrill Lynch CMA(R), CBA(R) or
Retirement Account you can arrange for
systematic redemptions of a fixed dollar amount
on a monthly, bi-monthly, quarterly, semi-annual
or annual basis, subject to certain conditions.
Under either method you must have dividends
automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be
more than 10% per year of the value of your
shares at the time your plan is established. The
deferred sales charge is waived for systematic
redemptions. Ask your Merrill Lynch Financial
Consultant or other financial intermediary for
details.
Exchange Your Shares Select the fund into which you want to You can exchange your shares of the Fund for
exchange. Be sure to read that fund's shares of many other Merrill Lynch mutual funds
prospectus You must have held the shares used in the
exchange for at least 15 calendar days before
you can exchange to another fund.
Each class of Fund shares is generally
exchangeable for shares of the same class of
another fund. If you own Class A shares and wish
to exchange into a fund in which you have no
Class A shares, (and are not eligible to buy
Class A shares) you will exchange into Class D
shares.
Some of the Merrill Lynch mutual funds impose a
different initial or deferred sales charge
schedule. If you exchange Class A or D shares
for shares of a fund with a higher initial sales
charge than you originally paid, you will be
charged the difference at the time of exchange.
If you exchange Class B shares for shares of a
fund with a different deferred sales charge
schedule, the higher schedule will apply. The
time you hold Class B or C shares in both funds
will count when determining your holding period
for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares
for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund.
Class B or C shares of the Fund will be
exchanged for Class B shares of Summit.
To exercise the exchange privilege, contact your
Merrill Lynch Financial Consultant or other
financial intermediary or call the Transfer
Agent at 1-800-MER-FUND.
Although there is currently no limit on the
number of exchanges that you can make, the
exchange privilege may be modified or terminated
at any time in the future.
MERRILL LYNCH GROWTH FUND
24
Table of Contents
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
Short-term or excessive trading into and out of the Fund may harm performance
by disrupting portfolio management strategies and by increasing expenses.
Accordingly, the Fund may reject any purchase orders, including exchanges,
particularly from market timers or investors who, in Fund management's opinion,
have a pattern of short-term or excessive trading or whose trading has been or
may be disruptive to the Fund. For these purposes, Fund management may consider
an investor's trading history in the Fund or other Merrill Lynch funds, and
accounts under common ownership or control.
HOW SHARES ARE PRICED
- -------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open as of the close of business on the Exchange, based on prices
at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern
time. The net asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed. Foreign
securities owned by the Fund may trade on weekends or other days when the Fund
does not price its shares. As a result, the Fund's net asset value may change
on days when you will not be able to purchase or redeem the Fund's shares.
The Fund may accept orders from certain authorized financial intermediaries or
their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value
next computed by the Fund after such acceptance. If the payment for a purchase
order is not made by a designated later time, the order will be canceled and
the financial intermediary could be held liable for any losses.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also, dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
MERRILL LYNCH GROWTH FUND
25
Table of Contents
Your Account
PARTICIPATION IN FEE-BASED PROGRAMS
- -------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class A shares at net
asset value, including by exchanges from other share classes. Sales charges on
the shares being exchanged may be reduced or waived under certain
circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant, selected securities dealer or other financial
intermediary.
DIVIDENDS AND TAXES
- -------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any
net realized long term capital gains. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
MERRILL LYNCH GROWTH FUND
26
Table of Contents
Dividends -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.
requirements. If you would like to receive dividends in cash, contact your
Merrill Lynch Financial Consultant, selected securities dealer or other
financial intermediary or the Transfer Agent. Although this cannot be predicted
with certainty, the Fund anticipates that the majority of its dividends, if
any, will consist of capital gains. Capital gains may be taxable to you at
different rates, depending, in part, on how long the Fund has held the assets
sold.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, you generally will be treated as having sold your shares and any
gain on the transaction may be subject to tax. Capital gains derived by
individuals are generally taxed at different rates than ordinary income
dividends.
If you are neither a lawful permanent resident nor a citizen of the United
States or if you are a foreign entity, the Fund's ordinary income dividends
(which include distributions of net short term capital gains) will generally be
subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
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. By law, the
Fund must withhold 31% of your dividends and redemption proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal income
tax law of an investment in the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in the Fund under all applicable tax laws.
MERRILL LYNCH GROWTH FUND
27
Table of Contents
Management of the Fund
MERRILL LYNCH INVESTMENT MANAGERS
- ------------------------------------------------------------------------------
Merrill Lynch Investment Managers, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Trustees. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management, U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of
0.65% of the average daily net assets of the Fund. The Investment Adviser has
voluntarily agreed to reduce its fee as Fund assets grow. The reduced fee is
equal to 0.65% of the Fund's first $1 billion of net assets; 0.625% of net
assets from $1 billion to $1.5 billion; and 0.60% of net assets above $1.5
billion but not exceeding $10 billion; and 0.575% of average daily net assets
exceeding $10 billion. The Investment Adviser may discontinue or reduce this
waiver of fees at any time without notice. For the fiscal year ended October
31, 2000, the Investment Adviser received a fee equal to 0.62% of the Fund's
average daily net assets.
Merrill Lynch Investment Managers was organized as an investment adviser in
1976 and offers investment advisory services to more than 50 registered
investment companies. Merrill Lynch Investment Managers and its affiliates,
including Fund Asset Management had approximately $557 billion in investment
company and other portfolio assets under management as of December 2000.
OTHER INFORMATION
- ------------------------------------------------------------------------------
In November, 2000, a putative class action lawsuit was filed in Federal Court
in the Middle District of Florida on behalf of Florida investors against the
Fund, the Investment Adviser, certain present and former individual trustees of
the Fund and Merrill Lynch, Pierce, Fenner & Smith, Incorporated seeking
damages. The plaintiffs, who are trustees of and participants in certain 401(k)
profit sharing plans, purport to assert claims against the defendants on their
own behalf and on behalf of the plans, the plans' participants and all
similarly situated shareholders of the Fund who invested in Florida. The
alleged class consists of "all persons and entities who purchased or sold the
Growth Fund in Florida through Merrill Lynch, or any related entity . . . at
any time from November 1, 1997, up through
MERRILL LYNCH GROWTH FUND
28
Table of Contents
and including April 30, 1999." The lawsuit involves two claims based on the
Florida Securities and Investor Protection Act and the Florida Deceptive and
Unfair Trade Practices Act, respectively. The substance of both claims is that
the Fund and the other defendants misrepresented and omitted material facts
regarding the "true nature of the Fund and its holdings." The defendants,
including the Fund, have filed a motion to dismiss the plaintiff's complaint
for lack of subject matter jurisdiction. There has been no decision yet with
respect to this motion. The Fund and the other defendants believe that the
lawsuit is without merit and intend to defend vigorously against the claims.
MERRILL LYNCH GROWTH FUND
29
Table of Contents
Management of the Fund
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Fund's annual report to shareholders, which is
available upon request and without charge.
Class A+
---------------------------------------------------------------------------------------
For the Year Ended October 31,
---------------------------------------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
Net asset value,
beginning of year $23.18 $22.71 $33.13 $26.87 $23.13
Investment income
(loss)-- net (.11) (.01) .46 .53 .31
Realized and unrealized gain
(loss) on investments and foreign
currency transactions -- net 3.18 .69 (8.47) 7.98 5.63
Total from investment operations 3.07 .68 (8.01) 8.51 5.94
Less dividends and distributions:
Investment income -- net -- -- (.48) (.44) (.35)
In excess of investment
income -- net -- (.21) -- -- --
Realized gain on investments --
net -- -- (1.70) (1.81) (1.85)
In excess of realized gain on
investments -- net -- -- (.23) -- --
Total dividends and distributions -- (.21) (2.41) (2.25) (2.20)
Net asset value, end of year $26.25 $23.18 $22.71 $33.13 $26.87
Total Investment Return:*
Based on net asset value per share 13.24% 3.09% (25.83)% 34.03% 28.15%
Ratios to Average Net Assets:
Expenses, net of reimbursement .88% .96% .81% .77% .80%
Expenses .91% .99% .85% .81% .84%
Investment income (loss)-- net (.38)% (.03)% 1.72% 1.84% 1.28%
Supplemental Data:
Net assets, end of year (in
thousands) $701,997 $774,287 $1,111,166 $1,769,296 $1,056,870
Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
[Additional columns below]
[Continued from above table, first column(s) repeated]
Class B+
---------------------------------------------------------------------------------------
For the Year Ended October 31,
---------------------------------------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
Net asset value,
beginning of year $21.21 $20.88 $30.63 $25.03 $21.60
Investment income
(loss)-- net (.35) (.19) .17 .22 .06
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net 2.91 .61 (7.80) 7.39 5.26
Total from investment
operations 2.56 .42 (7.63) 7.61 5.32
Less dividends and
distributions:
Investment income -- net -- -- (.19) (.20) (.04)
In excess of investment
income -- net -- (.09) -- -- --
Realized gain on
investments -- net -- -- (1.70) (1.81) (1.85)
In excess of realized gain on
investments -- net -- -- (.23) -- --
Total dividends and
distributions -- (.09) (2.12) (2.01) (1.89)
Net asset value, end of year $23.77 $21.21 $20.88 $30.63 $25.03
Total Investment Return:*
Based on net asset value per
share 12.07% 2.06% (26.57)% 32.62% 26.84%
Ratios to Average Net
Assets:
Expenses, net of
reimbursement 1.90% 1.99% 1.83% 1.79% 1.82%
Expenses 1.93% 2.02% 1.87% 1.83% 1.85%
Investment income (loss)--
net (1.40)% (.98)% .70% .82% .26%
Supplemental Data:
Net assets, end of year (in
thousands) $1,052,705 $1,247,547 $2,544,979 $4,687,523 $2,916,507
Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
MERRILL LYNCH GROWTH FUND
30
Table of Contents
FINANCIAL HIGHLIGHTS (concluded)
Class C+
---------------------------------------------------------------------------------------
For the Year Ended October 31,
---------------------------------------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
Net asset value,
beginning of year $21.05 $20.72 $30.43 $24.89 $21.59
Investment income
(loss) -- net (.36) (.18) .17 .22 .06
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 2.91 .59 (7.75) 7.34 5.23
Total from investment operations 2.55 .41 (7.58) 7.56 5.29
Less dividends and distributions:
Investment income -- net -- -- (.20) (.21) (.14)
In excess of investment income --
net -- (.08) -- -- --
Realized gain on investments -- net -- -- (1.70) (1.81) (1.85)
In excess of realized gain on
investments -- net -- -- (.23) -- --
Total dividends and distributions -- (.08) (2.13) (2.02) (1.99)
Net asset value, end of year $23.60 $21.05 $20.72 $30.43 $24.89
Total Investment Return:*
Based on net asset value per share 12.11% 2.04% (26.60)% 32.63% 26.84%
Ratios to Average Net Assets:
Expenses, net of reimbursement 1.92% 2.02% 1.84% 1.80% 1.84%
Expenses 1.95% 2.05% 1.88% 1.84% 1.87%
Investment income (loss) -- net (1.42)% (.96)% .68% .81% .25%
Supplemental Data:
Net assets, end of year (in
thousands) $93,549 $106,797 $239,445 $427,377 $187,221
Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
[Additional columns below]
[Continued from above table, first column(s) repeated]
Class D+
---------------------------------------------------------------------------------------
For the Year Ended October 31,
---------------------------------------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
Net asset value,
beginning of year $23.07 $22.63 $33.01 $26.79 $23.06
Investment income
(loss) -- net (.17) (.06) .39 .46 .24
Realized and unrealized gain
(loss) on investments and
foreign currency transactions --
net 3.17 .68 (8.43) 7.95 5.63
Total from investment
operations 3.00 .62 (8.04) 8.41 5.87
Less dividends and distributions:
Investment income -- net -- -- (.41) (.38) (.29)
In excess of investment
income -- net -- (.18) -- -- --
Realized gain on investments --
net -- -- (1.70) (1.81) (1.85)
In excess of realized gain on
investments -- net -- -- (.23) -- --
Total dividends and distributions -- (.18) (2.34) (2.19) (2.14)
Net asset value, end of year $26.07 $23.07 $22.63 $33.01 $26.79
Total Investment Return:*
Based on net asset value per
share 13.00% 2.82% (26.00)% 33.67% 27.83%
Ratios to Average Net Assets:
Expenses, net of reimbursement 1.13% 1.21% 1.06% 1.02% 1.05%
Expenses 1.16% 1.24% 1.10% 1.06% 1.08%
Investment income (loss) -- net (.63)% (.26)% 1.47% 1.59% 1.03%
Supplemental Data:
Net assets, end of year (in
thousands) $732,495 $744,151 $1,082,627 $1,642,665 $932,811
Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
* Total investment returns exclude the effects of sales charges.
+ Based on average shares outstanding.
MERRILL LYNCH GROWTH FUND
31
Table of Contents
[CHART OMITTED]
MERRILL LYNCH GROWTH FUND
Table of Contents
For More Information
Shareholder Reports
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during its last fiscal year. You may obtain these reports at no cost by
calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain
other mailings, regardless of the number of Fund accounts you have. To
receive separate shareholder reports for each account, call your Merrill
Lynch Financial Consultant or write to the Transfer Agent at its mailing
address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Consultant or other
financial intermediary or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further
information about the Fund and is incorporated by reference (legally
considered to be part of this prospectus). You may request a free copy
by writing the Fund at Financial Data Services, Inc., P.O. Box 45289,
Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated on the inside back cover of this prospectus, if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the Public
Reference Room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by electronic request at the following E-mail address: publicinfo@sec.gov,
or by writing the Public Reference Section of the SEC, Washington, D.C.
20549-0102.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from the
information contained in this prospectus.
Investment Company Act file #811-4934
Code #10479-0201
(C) Merrill Lynch Investment Managers, L.P.
Merrill Lynch Growth Fund
February 16, 2001
Merrill Lynch
Investment Managers
Table of Contents
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Growth Fund
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
-----------------------------
The investment objective of Merrill Lynch Growth Fund (the "Fund") is to
seek growth of capital and, secondarily, income. In other words, it tries to
choose investments that will increase in value. The Fund may also select
certain investments based on their ability to produce current income. However,
the Fund's investments emphasize growth of capital more than current income.
There can be no assurance that the investment objective of the Fund will be
realized. For more information on the Fund's investment objective and policies,
see "Investment Objective and Policies."
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 "Purchase of Shares."
-----------------------------
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
February 16, 2001 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling 1-800-MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
2000 annual report to shareholders. You may request a copy of the annual report
at no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern
time on any business day.
-----------------------------
Merrill Lynch Investment Managers -- Investment Adviser
FAM Distributors, Inc. -- Distributor
-----------------------------
The date of this Statement of Additional Information is February 16, 2001.
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Other Investment Policies, Practices and Risk Factors 3
Convertible Securities 3
Non-Diversification Risk 4
Foreign Investment Risks 4
Securities of Smaller Companies 6
Derivatives 6
When Issued Securities, Delayed Delivery Securities and Forward
Commitments 11
Borrowing and Leverage 12
Standby Commitment Agreements 12
Junk Bonds 13
Investment Restrictions 15
Portfolio Turnover 17
Management of the Fund 17
Trustees and Officers 17
Compensation of Trustees 19
Management and Advisory Arrangements 19
Code of Ethics 21
Purchase of Shares 21
Initial Sales Charge Alternatives-- Class A and Class D Shares 22
Reduced Initial Sales Charges 24
Deferred Sales Charge Alternatives-- Class B and Class C Shares 27
Closed-End Fund Reinvestment Options 30
Distribution Plans 30
Limitations on the Payment of Deferred Sales Charges 32
Redemption of Shares 33
Redemption 33
Repurchase 34
Reinstatement Privilege-- Class A and Class D Shares 35
Pricing of Shares 35
Determination of Net Asset Value 35
Computation of Offering Price Per Share 36
Portfolio Transactions and Brokerage 37
Shareholder Services 39
Investment Account 39
Exchange Privilege 40
Fee-Based Programs 42
Retirement and Education Savings Plans 42
Automatic Investment Plans 43
Automatic Dividend Reinvestment Plan 43
Systematic Withdrawal Plan 43
Dividends and Taxes 44
Dividends 44
Taxes 45
Tax Treatment of Options and Futures Transactions 46
Special Rules for Certain Foreign Currency Transactions 47
Performance Data 47
General Information 49
Description of Shares 49
Independent Auditors 50
Custodian 50
Transfer Agent 50
Legal Counsel 50
Reports to Shareholders 50
Shareholder Inquiries 50
Additional Information 50
Financial Statements 51
Appendix-Rating of Fixed Income Securities A-1
Table of Contents
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek growth of capital and,
secondarily, income. In other words, it tries to choose investments that will
increase in value. The Fund may also select certain investments based on their
ability to produce current income. However, the Fund's investments emphasize
growth of capital more than current income. There can be no assurance that the
investment objective of the Fund will be realized. The investment objective of
the Fund as set forth in the first sentence of this paragraph is a fundamental
policy of the Fund, which may not be changed without a vote of a majority of
its outstanding shares as defined below. Reference is made to "How the Fund
Invests" and "Investment Risks" in the Prospectus.
The Fund is classified as an open-end, non-diversified management
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act") and, accordingly, is not subject to the
diversification requirements of the Investment Company Act. This policy is
fundamental and may be changed only by shareholder vote. Accordingly, the Fund
may invest more than 5% of the value of its assets in the obligations of a
single issuer and may acquire more than 10% of the voting securities of a
single issuer. However, the Fund remains subject to the diversification
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), in order to qualify as a regulated investment company (a "RIC")
for U.S. federal income tax purposes. In order to qualify as a RIC under the
Code, the Fund must comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of the Fund's total assets are invested in
the securities of a single issuer, or any two or more issuers which are
controlled by the Fund and engaged in the same, similar or related businesses,
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 are invested in the securities
of a single issuer, and the Fund does not own more than 10% of the outstanding
voting securities of a single issuer. Investment in the securities of the U.S.
Government, its agencies and instrumentalities are not included within the
definition of "issuer" for purposes of the diversification requirements of the
Code, while foreign government securities are included within such definition.
Although operating as a non-diversified fund increases the flexibility
with which Merrill Lynch Investment Managers, L.P. ("MLIM" or the "Investment
Adviser") manages the Fund's assets, to the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund may be more susceptible than would be a more widely
diversified fund to any single economic, political or regulatory occurrence or
to changes in an issuer's financial condition or in the market's assessment of
the issuers.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company that evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form,
are designed for use in the United States securities markets and EDRs, which
are issued in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the U.S. and Europe and are designed for use
throughout the world.
The Fund generally will invest without regard to tax considerations
applicable to distributions to shareholders and therefore its shares may appeal
particularly to investors for whom current tax liability is not a major
consideration such as employee benefit plans and individual retirement accounts
("IRAs"). Because the Fund is designed for investors for whom current tax
liability is not a consideration, the Fund has the flexibility to take
advantage of short term investment opportunities when determined appropriate by
the Investment Adviser.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks, preferred stock and
other instruments the return on which is linked to the
2
Table of Contents
performance of a common stock or a basket or index of common stocks ("equity
securities"). The Fund may invest up to 5% of its total assets in debt
securities rated below investment grade by a nationally recognized rating
agency (e.g., rated below Baa by Moody's Investors Services, Inc. ("Moody's")
or BBB by Standard & Poor's Ratings Group ("S&P")) or in unrated debt
securities that, in the judgment of the Investment Adviser, possess similar
credit characteristics as debt securities rated investment grade or debt
securities rated below investment grade (commonly known as "junk bonds"). The
Fund will not invest in debt securities rated in the lowest rating categories
(Ca or lower for Moody's and CC or lower for S&P) unless the Investment Adviser
believes that the financial condition of the issuer or the protection afforded
the particular securities is stronger than would otherwise be indicated by such
low ratings. For a description of ratings of debt securities, see the Appendix.
The Fund will at all times, except during temporary defensive periods, or
during extraordinary periods to meet redemptions, maintain at least 65% of its
total assets invested in equity securities. The Fund may also invest up to 35%
of its total assets under normal circumstances and in excess of 35% of its
total assets during temporary defensive periods, or during extraordinary
periods to meet redemptions, in other types of securities, including debt
securities, short term U.S. Government securities, money market securities, and
repurchase agreements, and cash or cash equivalents, in such proportions as, in
the opinion of the Investment Adviser, prevailing market or economic conditions
warrant.
Inasmuch as the Fund is authorized to invest in bonds and other
fixed-income securities, it is important to note that the portion of the Fund's
net asset value attributable to such securities may fall when interest rates
rise and may rise when interest rates fall. In general, fixed-income securities
with longer maturities will be subject to greater volatility resulting from
interest rate fluctuations than will fixed-income securities with shorter
maturities.
Other Investment Policies, Practices and Risk Factors
Convertible Securities
Convertible securities entitle the holder to receive interest payments
paid on corporate debt securities or the dividend preference on a preferred
stock until such time as the convertible security matures or is redeemed or
until the holder elects to exercise the conversion privilege.
The characteristics of convertible securities make them appropriate
investments for an investment company seeking growth of capital and income.
These characteristics include the potential for capital appreciation as the
value of the underlying common stock increases, the relatively high yield
received from dividend or interest payments as compared to common stock
dividends and decreased risks of decline in value relative to the underlying
common stock due to their fixed-income nature. As a result of the conversion
feature, however, the interest rate or dividend preference on a convertible
security is generally less than would be the case if the securities were issued
in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security relative to its credit quality and
the potential capital appreciation that is offered by the underlying common
stock, among other things.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible
securities held by the Fund is denominated in U.S. dollars, the underlying
equity securities may be quoted in the currency of the country where the issuer
is domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. As described
below, the Fund is authorized to enter into foreign currency hedging
transactions in which it may seek to reduce the effect of such fluctuations.
3
Table of Contents
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
underlying common stock the conversion value is substantially below the
investment value of the convertible security, the price of the convertible
security is governed principally by its investment value.
To the extent the conversion value of a convertible security increases to
a point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security. The yield and conversion premium
of convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security under certain
circumstances.
Non-Diversification Risk
The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act with respect to the proportion of its assets that it may
invest in securities of a single issuer. 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, and the Fund may be more susceptible to any single
economic or regulatory occurrence than a diversified company.
Foreign Investment Risks
Foreign Market Risk. Since the Fund may invest up to 40% of its total
assets in foreign securities, it offers the potential for more diversification
than an investment only in the United States. This is because securities traded
on foreign markets have often (though not always) performed differently than
securities in the United States. However, such investments involve special
risks not present in U.S. investments that can increase the chances that the
Fund will lose money. In particular, the Fund is subject to the risk that
because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may make it difficult for the Fund to buy
and sell securities on those exchanges. In addition, prices of foreign
securities may go up and down more than prices of securities traded in the
United States.
Foreign Economy Risk. The economies of certain foreign markets often do
not compare favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources,
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
4
Table of Contents
other protectionist or retaliatory measures. Investments in foreign markets
may also be adversely affected by governmental actions such as the imposition
of capital controls, nationalization of companies or industries, expropriation
of assets, or the imposition of punitive taxes. In addition, the governments
of certain countries may prohibit or impose substantial restrictions on
foreign investing in their capital markets or in certain industries. Any of
these actions could severely affect security prices, impair the Fund's ability
to purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
Currency Risk and Exchange Risk. Securities in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates affect the value of the Fund's portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk, generally known as
"currency risk," means that a strong U.S. dollar will reduce returns for U.S.
investors while a weak U.S. dollar will increase those returns.
European Economic and Monetary Union. For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") set out a framework for the European
Economic and Monetary Union ("EMU") among the countries that comprise the
European Union ("EU"). EMU established a single common European currency (the
"euro") that was introduced on January 1, 1999 and is expected to replace the
existing national currencies of all EMU participants by July 1, 2002. Certain
securities issued in participating EU countries (beginning with government and
corporate bonds) have been redenominated in the euro, and are listed, traded,
and make dividend and other payments only in euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or completely unwound. Because any participating country may opt
out of EMU within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which could diminish EMU's credibility
and influence. Any of these occurrences could have adverse effects on the
markets of both participating and non-participating countries, including sharp
appreciation or depreciation of the participants' national currencies and a
significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of
EMU. Also, withdrawal from EMU by an initial participant could cause disruption
of the financial markets as securities redenominated in euros are transferred
back into that country's national currency, particularly if the withdrawing
country is a major economic power. Such developments could have an adverse
impact on the Fund's investments in Europe generally or in specific countries
participating in EMU. Gains or losses from euro conversions may be taxable to
Fund shareholders under foreign or, in certain limited circumstances, U.S. tax
laws.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some foreign countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a company's securities based
on non-public information about that company. Accounting standards in
5
Table of Contents
other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher
in foreign countries than they are in the United States. This reduces the
amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
settlement procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically
generated by the settlement of U.S. investments. Communications between the
United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates. Settlements in
certain foreign countries at times have not kept pace with the number of
securities transactions; these problems may make it difficult for the Fund to
carry out transactions. If the Fund cannot settle or is delayed in settling a
purchase of securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned thereon for some
period. If the Fund cannot settle or is delayed in settling a sale of
securities, it may lose money if the value of the security then declines or, if
it has contracted to sell the security to another party, the Fund could be
liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes.
Securities of Smaller Companies
The Fund may invest in securities of smaller capitalization issuers. The
securities of smaller companies may be subject to more abrupt or erratic market
movements than larger, more established companies or the market average in
general. These companies may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group.
While smaller companies may offer greater opportunities for capital
appreciation than large cap issuers, investments in smaller companies may
involve greater risks and thus may be considered speculative.
Small companies are generally little known to most individual investors
although some may be dominant in their respective industries. Management of the
Fund believes that relatively small companies will continue to have the
opportunity to develop into significant business enterprises. The Fund may
invest in securities of small issuers in the relatively early stages of
business development which have a new technology, a unique or proprietary
product or service or a favorable market position. Such companies may not be
counted upon to develop into major industrial companies, but management
believes that eventual recognition of their special value characteristics by
the investment community may provide above-average long-term growth.
Derivatives
The Fund may use instruments referred to as Derivatives. Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil), a currency, or an index (a measure of value or
rates, such as the Standard & Poor's 500 Index or the prime lending rate).
Derivatives
6
Table of Contents
allow the Fund to increase or decrease the level of risk to which the Fund is
exposed more quickly and efficiently than transactions in other types of
instruments.
Hedging. The Fund may use Derivatives for hedging purposes (other than
options on securities that may be used to seek increased return). Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite
manner to market movements. While hedging can reduce losses, it can also reduce
or eliminate gains if the market moves in a different manner than anticipated
by the Fund or if the cost of the Derivative outweighs the benefit of the
hedge. Hedging also involves the risk that changes in the value of the
Derivative will not match those of the holdings being hedged as expected by the
Fund, in which case any losses on the holdings being hedged may not be reduced.
The Fund may use Derivative instruments and trading strategies including
the following:
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities
held in its portfolio or on securities indices which are correlated with
securities held in its portfolio. When the Fund purchases a put option, in
consideration for an upfront payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund at a
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a put
option may involve correlation risk and may also involve liquidity and credit
risk. The Fund will not purchase put options on securities or securities
indices if, as a result of such purchase, the aggregate cost of all outstanding
options on securities and securities indices held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Purchasing Call Options. The Fund may also purchase call options on
securities it intends to purchase or securities indices, which are correlated
with the types of securities it intends to purchase. When the Fund purchases a
call option, in consideration for the option premium the Fund acquires a right
to purchase from another party specified securities at the exercise price on or
before the expiration date, in the case of an option on securities, or to
receive from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The purchase of a call option may
protect the Fund from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the Fund is
contemplating its purchase, in the case of an option on a security, or
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive, in the case of an option on an index (an
"anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium, the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond
7
Table of Contents
a specified level on or before the expiration date, in the case of an option
on a securities index. The Fund may write call options on securities to earn
income, through the receipt of option premiums; the Fund may write call
options on securities indices for hedging purposes. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding. Writing a call option may involve correlation risk. The
Fund may not write covered call options in underlying securities in an amount
exceeding 15% of its total assets, taken at market value.
Writing Put Options. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay another party an amount based on any
decline in a specified securities index below a specified level on or before
the expiration date, in the case of an option on a securities index. The Fund
may write put options on securities to earn income, through the receipt of
option premiums; the Fund may write put options on securities indices for
hedging purposes. In the event the party to which the Fund has written an
option fails to exercise its rights under the option because the value of the
underlying securities is greater than the exercise price, the Fund will profit
by the amount of the option premium. By writing a put option, however, the Fund
will be obligated to purchase the underlying security at a price that may be
higher than the market value of the security at the time of exercise as long as
the put option is outstanding, in the case of an option on a security, or make
a cash payment reflecting any decline in the index, in the case of an option on
an index. Accordingly, when the Fund writes a put option it is exposed to a
risk of loss in the event the value of the underlying securities falls below
the exercise price, which loss potentially may substantially exceed the amount
of option premium received by the Fund for writing the put option. The Fund
will write a put option on a security or a securities index only if the Fund
would be willing to purchase the security at the exercise price for investment
purposes (in the case of an option on a security) or is writing the put in
connection with trading strategies involving combinations of options -- for
example, the sale and purchase of options with identical expiration dates on
the same security or index but different exercise prices (a technique called a
"spread"). Writing a put option may involve substantial leverage risk.
The Fund is also authorized to sell put or call options in connection with
closing out call options it has previously purchased.
Other than with respect to closing transactions, the Fund will write only
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated costs with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will
also be considered covered if the Fund owns the securities it would be required
to deliver upon exercise of the option (or, in the case of an option on a
securities index, securities which substantially correlate with the performance
of such index) or owns a call option, warrant or convertible instrument which
is immediately exercisable for, or convertible into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and seller, but generally do not require the parties to post margin
and are subject to greater credit risk. OTC options also involve greater
liquidity risk. See "Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives" below.
8
Table of Contents
Futures
The Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts which obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day
thereafter until the futures position is closed, the Fund will pay additional
margin representing any loss experienced as a result of the futures position
the prior day or be entitled to a payment representing any profit experienced
as a result of the futures position the prior day. Futures involve substantial
leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under
regulations of the Commodity Futures Trading Commission.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for purposes
of hedging against the decline in the value of currencies in which its
portfolio holdings are denominated against the U.S. dollar. Such transactions
could 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.
Forward Foreign Exchange Transactions. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date
set at the time of the contract. Spot foreign exchange transactions are similar
but require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a foreign exchange
transaction for purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or selling a
currency in which the Fund has received or anticipates receiving a dividend or
distribution. The Fund may enter into a foreign exchange transaction for
purposes of hedging a portfolio position by selling forward a currency in which
a portfolio position of the Fund is denominated or by purchasing a currency in
which the Fund anticipates acquiring a portfolio position in the near future.
Forward foreign exchange transactions involve substantial currency risk, and
also involve credit and liquidity risk.
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or
options thereon. Currency futures are similar to forward foreign exchange
transactions except that futures are standardized, exchange-traded contracts.
See "Futures" above. Currency futures involve substantial currency risk, and
also involve leverage risk.
9
Table of Contents
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund will not incur potential net
liabilities of more than 20% of its total assets from Currency Instruments. The
Fund will not necessarily attempt to hedge all of its foreign portfolio
positions.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging
against adverse currency movements, transactions in Currency Instruments
involve the risk that anticipated currency movements will not be accurately
predicted and that the Fund's hedging strategies will be ineffective. To the
extent that the Fund hedges against anticipated currency movements which do not
occur, the Fund may realize losses, and decrease its total return, as the
result of its hedging transactions. Furthermore, the Fund will only engage in
hedging activities from time to time and may not be engaging in hedging
activities when movements in currency exchange rates occur.
It may not be possible for the Fund to hedge against currency exchange
rate movements, even if correctly anticipated, in the event that (i) the
currency exchange rate movement is so generally anticipated that the Fund is
not able to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing markets) and
it is not possible to engage in effective foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit risk-- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency risk-- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be
completely offset by movements in the value of the hedged instruments.
10
Table of Contents
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain Derivatives traded in OTC markets, including OTC options involve
substantial liquidity risk. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. The Fund will therefore acquire
illiquid OTC instruments (i) if the agreement pursuant to which the instrument
is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Investment Adviser anticipates the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty, the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Derivatives traded in OTC markets only with financial institutions which
have substantial capital or have provided the Fund with a third-party guaranty
or other credit enhancement.
Additional Limitations on the Use of Derivatives
The Fund may not use any Derivative to gain exposure to an asset or class
of assets that it would be prohibited by its investment restrictions from
purchasing directly.
When Issued Securities, Delayed Delivery Securities and Forward Commitments
The Fund may purchase or sell securities that it is entitled to receive on
a when issued basis. The Fund may also purchase or sell securities on a delayed
delivery basis. The Fund may also purchase or sell securities through a forward
commitment. These transactions involve the purchase or sale of securities by
the Fund at an established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what is considered an
advantageous price to the Fund at the time of entering into the transaction.
The Fund has not established any limit on the percentage of its assets that may
be committed in connection with these transactions. When the Fund purchases
securities in these transactions, the Fund segregates liquid securities in an
amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis
will be issued or that a security purchased or sold through a forward
commitment will be delivered. The value of securities in these transactions on
the delivery date may be more or less than the Fund's purchase price. The Fund
may bear the
11
Table of Contents
risk of a decline in the value of the security in these transactions and may
not benefit from an appreciation in the value of the security during the
commitment period.
Borrowing and Leverage
The use of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For example, leveraging
may exaggerate changes in the net asset value of Fund shares and in the yield
on the Fund's portfolio. Although the principal of such borrowings will be
fixed, the Fund's assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses of the Fund that can
exceed the income from the assets purchased with the borrowings. To the extent
the income or capital appreciation derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay on the
borrowings, the Fund's return will be greater than if leverage had not been
used. Conversely, if the income or capital appreciation from the securities
purchased with such borrowed funds is not sufficient to cover the cost of
borrowing, the return to the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may determine to maintain
the Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objective and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require the Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
Standby Commitment Agreements
The Fund may enter into standby commitment agreements. These agreements
commit the Fund, for a stated period of time, to purchase a stated amount of
securities which may be issued and sold to the Fund at the option of the
issuer. The price 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. The Fund will
enter into such agreements for the purpose of investing in the security
underlying the commitment at a price that 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 securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions
on resale that affect their marketability, will not exceed 15% of its net
assets taken at the time of the commitment. The Fund segregates liquid
securities 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
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the
12
Table of Contents
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.
Junk Bonds
Junk bonds are debt securities that are rated below investment grade by
the major rating agencies or are unrated securities that Fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for the Fund. The major risks in
junk bond investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their interest
or principal payment obligations because of an economic downturn, specific
issuer development or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations.
The issuer's ability to pay its debt obligations also may be lessened by
specific issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior in claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer redeems
the junk bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds
than on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, 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 Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
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 bank or primary
dealer or an affiliate thereof 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 insulates the Fund from fluctuations in the market value of the
underlying security during such period. Although, to the extent the repurchase
agreement is not denominated in U.S. dollars, the Fund's return may be affected
by currency fluctuations. The Fund may not invest more than 15% of its net
assets in repurchase agreements maturing in more than seven days (together with
other illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. The Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. 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 shall be dependent upon
intervening fluctuations of the market value of such security and the accrued
interest on the security. 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.
13
Table of Contents
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction (5)
below) to banks, brokers and other financial institutions. In return, the Fund
receives collateral in cash or securities issued or guaranteed by the U.S.
Government, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of such a loan, the Fund typically receives the income on both the
loaned securities and the collateral and thereby increases its yield. In
certain circumstances, the Fund may receive a flat fee for its loans. Such
loans are terminable at any time and the borrower, after notice, is required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with its
loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Fund
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered under the
Securities Act of 1933, as amended ("Securities Act") or that are subject to
trading restrictions under the laws of a foreign jurisdiction ("restricted
securities"). Restricted securities may be sold in private placement
transactions between the issuers and their purchasers and may be neither listed
on an exchange nor traded in other established markets. In many cases,
privately placed securities may not be freely transferable under the laws of
the applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources or they may be dependent on a limited management
group. In making investments in such securities, the Fund may obtain access to
material non public information which may restrict the Fund's ability to
conduct portfolio transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board has determined to treat as liquid Rule 144A
securities that are either freely tradable in their primary markets offshore or
have been determined to be liquid in accordance with the policies and
procedures adopted by the Fund's Board. The Board has adopted guidelines and
delegated to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will continue to
develop, the Board will carefully monitor the Fund's investments in these
securities. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
14
Table of Contents
Suitability. The economic benefit of an investment in the Fund depends
upon many factors beyond the control of the Fund, the Investment Adviser and
its affiliates. The Fund should be considered a vehicle for diversification and
not as a balanced investment program. The suitability for any particular
investor of a purchase of shares in the Fund will depend upon, among other
things, such investor's investment objectives and such investor's ability to
accept the risks associated with investing in equity securities, including the
risk of loss of principal.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). Under the fundamental investment
restrictions 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 total 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 that invest in real estate or interests therein.
(5) Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a loan,
and except further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the
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, to
the extent permitted by applicable law, 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 the
Prospectus and this Statement of Additional Information, as they may be
amended from time to time, in connection with hedging transactions,
short sales, when issued and forward commitment transactions and similar
investment strategies.
(8) Underwrite securities of other issuers except insofar as the
Fund technically may be deemed an underwriter under the Securities Act
in selling portfolio securities.
(9) Purchase or sell commodities or contracts on commodities,
except to the extent that the Fund may do so in accordance with
applicable law and the Prospectus and this 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.
15
Table of Contents
Under the Fund's non-fundamental investment restrictions, which may be
changed by the Board without shareholder approval, the Fund may not:
(a) Purchase securities of other investment companies, except to
the extent permitted by applicable law. As a matter of policy, however,
the Fund will not purchase shares of any registered open-end investment
company or registered unit investment trust, in reliance on Section
12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment
Company Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment
companies as the Fund.
(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box."
(c) Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities that mature
within seven days or securities which the Board of the Fund has
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act and
determined to be liquid by the Fund's Board are not subject to the
limitations set forth in this investment restriction.
(d) Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets taken at market
value (including the amount borrowed), 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 except to honor prior
commitments and to exercise subscription rights.
The staff of 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
transactions, 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
exceed 15% of the net 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 an 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 Board of
Trustees 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 Investment Adviser 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
16
Table of Contents
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. The Fund's investments are limited, however, in
order to allow the Fund to qualify as a "regulated investment company" under
the Code. See "Dividends and Taxes -- Taxes." To qualify, the Fund complies
with certain requirements, including limiting its investments so that at the
close of each quarter of each taxable year, (a) not more than 25% of the Fund's
total assets are invested in the securities of a single issuer, and (b) with
regard to at least 50% of the Fund's total assets, not more than 5% of its
total assets are 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. For purposes of this restriction, the Fund will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Board of Trustees of the Fund to
the extent necessary to comply with changes to the Federal tax requirements. A
fund that 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, and the Fund may be more susceptible to any single economic, political
or regulatory occurrence than a diversified company.
Portfolio Turnover
The Investment Adviser will normally effect portfolio transactions without
regard to the time securities have been held, 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 in general market,
financial or economic conditions. As a result of its investment policies, under
certain market conditions the Fund's portfolio turnover rate may be higher than
that of other investment companies; however, it is extremely difficult to
predict portfolio turnover rates with any degree of accuracy. 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 U.S.
government securities and all other 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. A high portfolio turnover may
result in negative tax consequences, such as an increase in capital gains
dividends. High portfolio turnover may also involve correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are born directly by the Fund. See "Dividends and Taxes." For the fiscal
years ended October 31, 2000, 1999 and 1998, the Fund's portfolio turnover rate
was 66.49%, 101.71% and 24.41%, respectively. The higher rate for 1999 was
attributable to a restructuring of the Fund's portfolio by its new portfolio
manager.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Trustees"). The Trustees are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors or trustees of investment companies by the
Investment Company Act.
Information about the Trustees, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
17
Table of Contents
TERRY K. GLENN (60) -- President and Trustee(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of FAM Distributors, Inc. ("FAMD" or the
"Distributor") since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. ("Princeton Services") since 1988.
JAMES H. BODURTHA (56) -- Trustee(2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (61) -- Trustee(2)(3) -- 2 Washington Square Village,
New York, New York 10012. John M. Olin Professor of Humanities, New York
University since 1993 and Professor thereof since 1980; President, Hudson
Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995;
Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner,
Hypertech LP from 1996 to 1997.
JOSEPH L. MAY (71) -- Trustee(2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Chairman, The May Corporation (personal holding company) from 1972 to
1983; Director, Signal Apparel Co. since 1972 to 1989.
ANDRE F. PEROLD (48) -- Trustee(2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. George Gund Professor of Banking and Finance,
Harvard Business School since 2000; Sylvan C. Coleman Professor of Financial
Management, Harvard Business School from 1993 to 2000 and Professor thereof
from 1989 to 1993; Trustee, The Common Fund, since 1989; Director, Quantec
Limited from 1991 to 1999 and TIBCO from 1994 to 1996; Director, Genbel
Securities Limited and Gensec Bank since 1999; Director, Gensec Asset
Management since 2000; Director, Bulldogresearch.com since 2000; Director,
Stockback.com since 2000.
ROBERTA COOPER RAMO (58) -- Trustee(2)(3) -- P.O. Box 2168, 500 Fourth
Street, N.W., Albuquerque, New Mexico 87103. Shareholder, Modrall, Sperling,
Roehl, Harris & Sisk, P.A. since 1993; President, American Bar Association from
1995 to 1996 and member of the Board of Governors thereof from 1994 to 1997;
Partner, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993;
Director, Coopus, Inc. since 1999; Director, United New Mexico Bank (now Wells
Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now
First Security) from 1975 to 1976.
STEPHEN I. SILVERMAN (50) -- Senior Vice President and Portfolio Manager
of the Fund(1)(2) -- Portfolio Manager of the Fund since 1999 and Senior
Portfolio Manager at MLIM since 1983; First Vice President of MLIM since 1997;
Vice President of MLIM from 1983 to 1997.
DONALD C. BURKE (40) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of FAMD since 1999; First Vice President of Investment Adviser from 1997 to
1999; Vice President of Investment Adviser from 1990 to 1997; Director of
Taxation of Investment Adviser since 1990.
ROBERT C. DOLL (46) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1999; Senior Vice President
of Princeton Services since 1999; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999.
LORI A. MARTIN (38) -- Secretary(1)(2) -- Director (Legal Advisory) of the
Investment Adviser since 2000; Vice President of MLIM from 1998 to 2000;
Attorney in private practice from 1989 to 1998.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of certain
other investment companies for which FAM or MLIM acts as the investment
adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.
18
Table of Contents
As of February 1, 2001, the Trustees and officers of the Fund as a group
(10 persons) owned an aggregate of less than 1% of the outstanding shares of
the Fund. At such date, Mr. Glenn, a Trustee and officer of the Fund, and the
other officers of the Fund owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.
Compensation of Trustees
The Fund pays fees to each non-interested Trustee for service to the Fund.
Each non-interested Trustee receives an aggregate annual retainer of $100,000
for his or her services to multiple investment companies advised by the
Investment Adviser or its affiliate, FAM ("MLIM/FAM advised funds"). The
portion of the annual retainer allocated to each MLIM/FAM advised fund is
determined quarterly based on the relative net assets of each fund. In
addition, each non-interested Trustee receives a fee per board meeting attended
and per in-person Audit and Nominating Committee meeting attended. The annual
per meeting fees paid to non-interested Trustees who attend each regular
quarterly meeting of the Board and of the Audit and Nominating Committee
aggregate $60,000 for all MLIM/FAM advised funds for which the Trustees serve
and are allocated equally among those funds. The Fund also reimburses the
non-interested Trustees for actual out-of-pocket expenses relating to
attendance at meetings. The Audit and Nominating Committee consists of all of
the non-interested Trustees of the Fund.
The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended October 31, 2000 and the aggregate
compensation paid to them from all MLIM/ FAM-advised funds, for the calendar
year ended December 31, 2000.
Total Compensation
From Fund and
Aggregate Pension or Retirement MLIM/FAM Advised
Compensation Benefits Accrued as Funds Paid to
Name of Trustee From Fund Part of Fund Expenses Trustee(1)
- ----------------------------- -------------- ----------------------- --------------------
James H. Bodurtha $20,190 None $133,250
Herbert I. London $20,190 None $133,250
Joseph L. May $20,190 None $133,250
Andre F. Perold $20,190 None $133,250
Roberta Cooper Ramo(2) $ 0 None $169,000
- ---------------
(1) The Trustees serve on the boards of MLIM/ FAM advised funds as follows: Mr.
Bodurtha (31 registered investment companies consisting of 43 portfolios);
Mr. London (31 registered investment companies consisting of 43
portfolios); Mr. May (31 registered investment companies consisting of 43
portfolios); Mr. Perold (31 registered investment companies consisting of
43 portfolios); and Ms. Ramo (31 registered investment companies consisting
of 43 portfolios).
(2) Ms. Ramo was elected Trustee of the Fund on December 21, 2000 and director/
trustee of certain other MLIM/FAM advised funds on December 15, 1999.
Trustees of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares-- Initial Sales Charge Alternatives-- Class A
and Class D Shares-- Reduced Initial Sales Charges-- Purchase Privilege of
Certain Persons."
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund
with investment advisory and management services. Subject to the supervision of
the Trustees, the Investment Adviser is responsible for the actual management
of the Fund's portfolio and constantly reviews the Fund's holdings in light of
its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Investment Advisory Fee. The Fund has entered into a management agreement
with the Investment Adviser (the "Management Agreement"), pursuant to which the
Investment Adviser receives for its services
19
Table of Contents
to the Fund monthly compensation at the annual rate of 0.65% of the average
daily net assets of the Fund. The Investment Adviser has voluntarily agreed to
waive a portion of its investment advisory fee so that such fee is equal to
0.65% of average daily net assets not exceeding $1 billion; 0.625% of average
daily net assets exceeding $1 billion but not exceeding $1.5 billion; and
0.60% of average daily net assets exceeding $1.5 billion but not exceeding $10
billion, and 0.575% of average daily net assets exceeding $10 billion. The
table below sets forth information about the total investment advisory fees
paid by the Fund to the Investment Adviser and the amount of any fee waiver
for the periods indicated.
Fiscal Year Ended October 31, Investment Advisory Fee Investment Advisory Fee Waived
------------------------------- ------------------------- --------------------------------
2000 $ 19,782,243 $ 943,188
1999 $ 22,175,519 $ 1,082,522
1998 $ 45,929,114 $ 2,909,721
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K." or the "Sub-Adviser") pursuant to which MLAM U.K. provides
investment advisory services to the Investment Adviser with respect to the
Fund. For the fiscal years ended October 31, 2000, 1999 and 1998, the
Investment Adviser paid no fees to MLAM U.K. pursuant to this agreement.
Payment of Fund Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Trustees of the Fund who are
affiliated persons of the Investment Adviser. The Fund pays all other expenses
incurred in the operation of the Fund, including among other things: taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports, prospectuses and statements of additional
information, except to the extent paid by the Distributor; charges of the
custodian and sub-custodian, and the transfer agent; expenses of redemption of
shares; Commission fees; expenses of registering the shares under Federal,
state or foreign laws; fees and expenses of non-interested Trustees; accounting
and pricing costs (including the daily calculations of net asset value);
insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses; and other expenses properly payable by the Fund. For
the fiscal year ended October 31, 2000, the Investment Adviser provided
accounting services to the Fund at its cost. For this period, the Fund
reimbursed the Investment Adviser $254,181 for these services. As of January 1,
2001, accounting services are provided for the Fund by State Street Bank and
Trust Company ("State Street") pursuant to an agreement between State Street
and the Fund. The Fund will pay the cost of these services. In addition, the
Fund will reimburse the Investment Adviser for the cost of certain additional
accounting services. The Distributor will pay certain promotional expenses of
the Fund incurred in connection with the offering of shares of the Fund.
Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a
limited partnership, the partners of which are ML & Co., a financial services
holding company and the parent of Merrill Lynch, and Princeton Services. ML &
Co. and Princeton Services are "controlling persons" of the Investment Adviser
as defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement and Sub-Advisory Agreement will continue in effect
from year to year if approved annually (a) by the Trustees of the Fund or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as defined
in the Investment Company
20
Table of Contents
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 or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), 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 a fee of $11.00 per Class A or Class D account and $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 that 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.
Distribution Expenses. The Fund has entered a distribution agreement with
the Distributor in connection with the continuous offering of each class of
shares of the Fund (the "Distribution Agreement"). The Distribution Agreement
obligates 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 Agreement is subject to the
same renewal requirements and termination provisions as the Management
Agreement described above.
Code of Ethics
The Board of Trustees of the Fund has approved a Code of Ethics under Rule
17j-1 under the Investment Company Act that covers the Fund and the Fund's
Investment Adviser, Sub-Adviser and Distributor (the "Code of Ethics"). The
Code of Ethics significantly restricts the personal investing activities of all
employees of the Investment Adviser, Sub-Adviser and Distributor and, as
described below, imposes additional, more onerous, restrictions on Fund
investment personnel.
The Code of Ethics requires that all employees of the Investment Adviser,
Sub-Adviser and Distributor preclear any personal securities investments (with
limited exceptions such as mutual funds, high-quality short-term securities and
direct obligations of the U.S. Government). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser, Sub-Adviser and
Distributor include a ban on acquiring any securities in a "hot" initial public
offering and investment personnel are prohibited from profiting on short term
trading in securities. In addition, no employee may purchase or sell any
security that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Code of Ethics
provides for trading "blackout periods" which prohibit trading by investment
personnel of the Fund within seven calendar days before or after trading by the
Fund in the same or an equivalent security.
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B,
21
Table of Contents
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 (also known as service 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 contingent deferred sales charges ("CDSCs"), distribution
fees and account maintenance fees that are imposed on Class B and Class C
shares, as well as the account maintenance fees that are imposed on Class D
shares, are imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges do not affect the net asset value
of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that
class. Each class has different exchange privileges. See "Shareholder Services
- -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Investment Adviser or FAM. Funds
advised by the Investment Adviser or FAM that use the Merrill Lynch Select
PricingSM System are referred to herein as "Select Pricing Funds."
The Fund offers its shares at a public offering price equal to the next
determined net asset value per share plus any sales charge applicable to the
class of shares selected by the investor. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers or other financial intermediaries prior to the
close of business on the New York Stock Exchange (the "NYSE") (generally 4:00
p.m., Eastern 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 on the day the order is placed with the
Distributor, provided that the orders are received by the Distributor prior to
30 minutes after the close of business on the NYSE on that day. If the purchase
orders are not received prior to 30 minutes after the close of business on the
NYSE on that day, such orders shall be deemed received on the next business
day. Dealers have the responsibility of submitting purchase orders to the Fund
not later than 30 minutes after the close of business on the NYSE in order to
purchase shares at that day's offering price.
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 Fund or the Distributor. Neither
the Distributor nor the dealers nor other financial intermediaries 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.
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because
22
Table of Contents
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charges, and, in the
case of Class D shares, the account maintenance fee. Although some investors
who previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other Select Pricing Funds, those previously purchased Class
A shares, together with Class B, Class C and Class D share holdings, will
count toward a right of accumulation which may qualify the investor for a
reduced initial sales charge 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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will
be issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares 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 at net asset value provided such plans meet
the required minimum number of eligible employees or required amount of assets
advised by the Investment Adviser or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign banking institutions provided that the
program or bank has $3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML &
Co. and its subsidiaries and their directors and employees and to members of
the Boards of MLIM/FAM-advised funds. Certain persons who acquired shares of
certain MLIM/FAM-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 are met. In addition, Class A shares of the Fund and
certain other Select Pricing Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions 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 Select Pricing Funds.
23
Table of Contents
Class A and Class D Sales Charge Information
Class A Shares
- ---------------------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
October 31, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- ------------ -------------- --------------- ---------------------
2000 $ 14,052 $1,241 $12,811 $176,709
1999 $ 12,109 $1,885 $10,224 $ 70,742
1998 $103,103 $6,709* $96,394 $177,033
- ---------------
* Includes $118 in direct commissions.
Class D Shares
- --------------------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
October 31, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- ----------- -------------- --------------- --------------------
2000 $ 119,434 $ 8,155 $ 111,279 $51,020
1999 $ 175,647 $25,575 $ 150,072 $ 8,476
1998 $1,420,604 $90,709* $1,329,895 $66,156
- ---------------
* Includes $3,985 in direct commissions.
The Distributor may reallow discounts to selected securities dealers and
other financial intermediaries and retain the balance over such discounts. At
times the Distributor may reallow the entire sales charge to such dealers.
Since securities dealers and other financial intermediaries selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
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 to obtain such investments.
Reinvested Dividends. No initial sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of
dividends.
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 any other Select Pricing 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 or
other financial intermediary, 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 Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A
24
Table of Contents
purchase not originally made pursuant to a Letter of Intent may be included
under a subsequent Letter of Intent 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
Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will
be applied only to new purchases. If the total amount of shares does not equal
the amount stated in the Letter of Intent (minimum of $25,000), the investor
will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to at least 5.0% 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 Intent must be at least
5.0% 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 further reduced percentage sales charge that
would be applicable to a single purchase equal to the total dollar value of
the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charge 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 Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund ("Summit") into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intent from the Fund.
Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM 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 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 up to $5,000 at 3.25% plus $3, and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 0.50 of 1% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services, including the exchange privilege, available to
Class A and Class D investors through Blueprint, however, may differ from those
available to other Class A or Class D share investors.
Class A and Class D shares are offered at net asset value to participants
in Blueprint through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized
25
Table of Contents
employers. The initial minimum investment for such accounts is $500, except
that the initial minimum investment for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
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.
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 1-800-237-7777.
Purchase Privilege of Certain Persons. Trustees of the Fund, members of
the Boards of other MLIM/FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLIM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) 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. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the 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; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had been maintained in the interim in cash or
a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and, second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and, second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or
merger or consolidation with a personal holding company or a public or private
investment company.
Purchases Through Certain Financial Intermediaries. Reduced sales charges
may be applicable for purchases of Class A or Class D shares of the Fund
through certain financial advisers, selected securities dealers and other
financial intermediaries that meet and adhere to standards established by the
Investment Adviser from time to time.
26
Table of Contents
Deferred Sales Charge Alternatives -- Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends. It will be assumed
that the redemption is first of shares held for over four years or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the four-year period. 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.
The following table sets forth the Class B CDSC:
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
--------------------------------------------------------------------
0-1 4.0%
1-2 3.0%
2-3 2.0%
3-4 1.0%
4 and thereafter None
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 upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the 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 may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an IRA or other retirement plan or
following the death or disability (as defined in the Code) of a 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 or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also
be waived for any Class B
27
Table of Contents
shares that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption. The Class B CDSC may also
be waived for any Class B shares that are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLIM Private Portfolio Group and held in such account at the
time of redemption. The Class B CDSC may also be waived or its terms may be
modified in connection with certain fee-based programs. The Class B CDSC may
also be waived in connection with involuntary termination of an account in
which Fund shares are held or for withdrawals through the Merrill Lynch
Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs"
and "-- Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, 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. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing 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 1-800-237-7777.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions and benefit plans. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint. Services, including
the exchange privilege, available to Class B investors through Blueprint,
however, may differ from those available to other Class B investors. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of a Blueprint automatic investment
plan. Additional information concerning these Blueprint programs, including any
annual fees or transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of average daily net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset value
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B
shares with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply and the
28
Table of Contents
holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The Conversion Period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be
subject to a 1.00% CDSC charged as a percentage of the dollar amount subject
thereto. 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. 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. It will be
assumed that the redemption is first of shares held for over one year or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the one-year period. 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. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services --
Systematic Withdrawal Plan."
Class B and Class C Sales Charge Information
Class B Shares*
----------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended October 31, by Distributor Merrill Lynch
------------------------ --------------------- ---------------------
2000 $1,619,559 $1,619,559
1999 $5,430,219 $5,430,219
1998 $5,818,896 $5,818,896
* Additional Class B 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.
Class C Shares
----------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended October 31, by Distributor Merrill Lynch
------------------------ -------------------- ----------------------
2000 $ 18,505 $ 18,505
1999 $ 110,221 $ 110,221
1998 $ 247,792 $ 247,792
Merrill Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds. 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 and other
financial intermediaries (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares from a dealer's own funds.
The combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. See "Distribution Plans" below.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the National Association of Securities Dealers, Inc. (the "NASD")
asset-based sales charge rule. See "Limitations on the Payment of Deferred
Sales Charges" below.
29
Table of Contents
Closed-End Fund Reinvestment Options
Class A shares of the Fund ("Eligible Class A Shares") are offered at net
asset value to holders of the common stock of certain closed-end funds advised
by the Investment Adviser or FAM who purchased such closed-end fund shares
prior to October 21, 1994 (the date the Merrill Lynch Select PricingSM System
commenced operations) and wish to reinvest the net proceeds from a sale of such
shares in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, holders of the common stock of closed-end funds who
purchased such shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of those shares may purchase Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund ("Eligible Class D
Shares") at net asset value, 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
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in that Fund's initial public offering or represent 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.
Subject to the conditions set forth below, shares of the Fund are offered
at net asset value to holders of the common stock of certain MLIM/ FAM-advised
continuously offered closed-end funds who wish to reinvest the net proceeds
from a sale of such shares. Upon exercise of this investment option,
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive
Class A shares of the Fund shareholders of Merrill Lynch Senior Floating Rate
Fund II, Inc. will receive Class C 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 of Merrill Lynch Municipal Strategies Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who already own Class A shares of the
Fund may 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 reinvestment option,
a shareholder of one of the above-referenced continuously offered closed-end
funds (an "eligible fund") must sell his or her shares of common stock of the
eligible fund (the "eligible shares") back to the eligible fund in connection
with a tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible fund shareholders who wish to
exercise this reinvestment 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 shares of the Fund on such day. The Class C CDSC may be
waived upon redemption of Class C shares purchased by an investor pursuant to
this closed-end fund reinvestment option. Such waiver is subject to the
requirement that the investor have held the tendered shares for a minimum of
one year and to such other conditions as are set forth in the prospectus for
the related closed-end fund.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class
C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable
to shares of the relevant class in order to compensate the Distributor, Merrill
Lynch, a selected securities dealer or other financial intermediary (pursuant
to a sub-agreement) in connection with account maintenance activities with
respect to Class B, Class C and Class D shares. Each of those classes has
exclusive voting rights with respect to the Distribution Plan adopted with
respect to such class pursuant to which account maintenance and/or
30
Table of Contents
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides 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, Merrill Lynch, a
selected securities dealer or other financial intermediary (pursuant to a
sub-agreement) for providing shareholder and distribution services and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants or other financial intermediaries 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 selected securities dealers and other financial intermediaries
without the assessment of an initial sales charge and at the same time permit
the dealer to compensate its financial consultants, a selected securities
dealer or other financial intermediary in connection with the sale of the Class
B and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Trustees must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination
of non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that each 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 non-interested Trustees
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 Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an easily
accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. 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 Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising,
sales promotion and marketing expenses, corporate overhead and interest
expense. On the direct expense and revenue/cash basis, revenues consist of the
account maintenance fees, distribution fees and CDSCs and the expenses consist
of financial consultant compensation.
As of December 31, 1999, the fully allocated accrual revenues of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual expenses by
approximately $10,091,000 (0.73% of Class B net assets at that date). As of
October 31, 2000, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $150,401,194
(14.26% of Class B net assets at that date). As of December 31, 1999, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded the
fully allocated accrual revenues by approximately $1,459,000 (1.24% of Class C
net assets at that date). As of October 31, 2000, direct cash revenues for the
31
Table of Contents
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $7,658,650 (8.16% of Class C net assets at that date).
For the fiscal year ended October 31, 2000, the Fund paid the Distributor
$12,729,452 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $1.3
billion), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended October 31, 2000, the Fund paid the
Distributor $1,105,562 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $109.9 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended October 31, 2000,
the Fund paid the Distributor $2,077,024 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $826.3 million), all of which was paid to Merrill Lynch
for providing account maintenance activities in connection with Class D shares.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
2000 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
Data Calculated as of October 31, 2000
(in thousands)
----------------------------------------------------------------------------------------------------
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charge(2) Balance(3) Payable Distributor(4) Balance Level(5)
----------------------------------------------------------------------------------------------------
Class B Shares for the
period March 27, 1987
(commencement of
operations) to
October 31, 2000
Under NASD Rule as
Adopted $5,134,459 $318,433 $139,571 $458,004 $184,781 $273,223 $7,908
Under Distributor's
Voluntary Waiver $5,134,459 $318,433 $ 28,143 $346,576 $184,781 $161,795 $7,908
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to
October 31, 2000
Under NASD Rule as
Adopted $487,843 $30,231 $ 10,110 $40,341 $ 8,624 $ 31,717 $ 704
32
Table of Contents
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit which are not
reflected in Eligible Gross Sales. Shares of Summit can only be purchased
by exchange from another fund (the "redeemed fund"). Upon such an
exchange, the maximum allowable sales charge payment to the redeemed fund
is reduced in accordance with the amount of the redemption. This amount
is then added to the maximum allowable sales charge payment with respect
to Summit. Upon an exchange out of Summit, the remaining balance of this
amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the
fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. See
"Fees and Expenses" in the Prospectus. Of the distribution fee payments
made with respect to Class B shares prior to July 6, 1993 under the
distribution plan in effect at that time, at a 1.0% rate, 0.75% of
average daily net assets has been treated as a distribution fee and 0.25%
of average daily net assets has been deemed to have been a service fee
and not subject to the NASD maximum sales charge rule. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior
to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM ) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. Except for any CDSC 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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
The Fund has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its affiliates and a
syndicate of banks that is intended to provide the Fund with a temporary source
of cash to be used to meet redemption requests from Fund shareholders in
extraordinary emergency circumstances.
Because of the high cost of maintaining smaller shareholder accounts, the
Fund may redeem the shares in a shareholder's account (without charging any
deferred sales charge) if the net asset value of the account falls below $500
due to redemptions the shareholder has made. The shareholder will be notified
that the value of the account is less than $500 before the Fund makes an
involuntary redemption. The shareholder will then have 60 days to make an
additional investment to bring the value of the account to at least $500 before
the Fund takes any action. The involuntary redemption does not apply to
retirement plans or Uniform Gifts or Transfers to Minors Act accounts.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to
33
Table of Contents
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signatures on the redemption request may
require a guarantee by an "eligible guarantor institution" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general, signature
guarantees are waived on redemptions of less than $50,000 as long as the
following requirements are met: (i) all requests require the signature(s) of
all persons whose name(s) shares are recorded on the Transfer Agent's
register, (ii) all checks must be mailed to the stencil address of record on
the Transfer Agent's register and (iii) the stencil address must not have
changed within 30 days. Certain rules may apply regarding certain account
types such as, but not limited to, UGMA/UTMA accounts, Joint Tenancies with
Rights of Survivorship, contra broker transactions, and institutional
accounts. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority.
A shareholder may also redeem shares held with the Transfer Agent by
telephone request. To request a redemption from your account, call the Transfer
Agent at 1-800-MER-FUND. The request must be made by the shareholder of record
and be for an amount less than $50,000. Before telephone requests will be
honored, signature approval from all shareholders of record on the account must
be obtained. The shares being redeemed must have been held for at least 15
days. Telephone redemption requests will not be honored in the following
situations: the accountholder is deceased, the proceeds are to be sent to
someone other than the shareholder of record, funds are to be wired to the
client's bank account, a systematic withdrawal plan is in effect, the request
is by an individual other than the accountholder of record, the account is held
by joint tenants who are divorced, the address on the account has changed
within the last 30 days or share certificates have been issued on the account.
Since this account feature involves a risk of loss from unauthorized or
fraudulent transactions, the Transfer Agent will take certain precautions to
protect your account from fraud. Telephone redemption may be refused if the
caller is unable to provide: the account number, the name and address
registered on the account and the social security number registered on the
account. The Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.
For shareholders redeeming directly with the Transfer Agent, payments will
be mailed within seven days of receipt of a proper notice of redemption. At
various times the Fund may be requested to redeem shares for which it has not
yet received good payment (e.g., cash, Federal funds or certified check drawn
on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a
redemption check until such time as it has assured itself that good payment
(e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been
collected for the purchase of such Fund shares, which will usually not exceed
10 days. In the event that a shareholder account held directly with the
Transfer Agent contains a fractional share balance, such fractional share
balance will be automatically redeemed by the Fund.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
selected securities dealer or other financial intermediary. The Fund normally
will accept orders to repurchase Fund shares by wire or telephone from dealers
for their customers at the net asset value next computed after the order is
placed. Shares will be priced at the net asset value calculated on the day the
request is received, provided that the request for repurchase is submitted to
the selected securities dealer or other financial intermediary prior to the
regular close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) and such request is received by the Fund from such selected
securities dealer or other financial intermediary not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of
34
Table of Contents
submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE, in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). 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, selected
securities dealers or other financial intermediaries may charge customers a
processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase
of shares to such customers. Repurchases made directly through the Transfer
Agent on accounts held at 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. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem Fund shares as set forth 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 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.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of the close of business on the NYSE on
each day the NYSE is open for trading based on prices at the time of closing.
The NYSE generally closes at 4:00 p.m., Eastern time. 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 NYSE is not open for trading 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.
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, rounded to
the nearest cent. Expenses, including the fees payable to the Investment
Adviser and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the expense accrual
differentials between the classes.
35
Table of Contents
Portfolio securities including ADRs, EDRs and GDRs that are traded on
stock exchanges are valued at the last sale price (regular way) on the exchange
on which such securities are traded as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Trustees as the primary market. Long positions in securities traded in the
OTC market are valued at the last available bid price in the OTC market prior
to the time of valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC market prior to
the time of valuation. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent 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 financial futures contracts and related options, are
stated at market value. Obligations with remaining maturities of 60 days or
less are valued at amortized cost unless the Investment Adviser believes that
this method no longer produces fair valuations. Repurchase agreements will be
valued at cost plus accrued interest. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Trustees of the Fund. Such
valuations and procedures will be reviewed periodically by the Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value.
Computation of Offering Price Per Share
An illustration of the computation of 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 on October 31, 2000 is set
forth below.
Class A Class B Class C Class D
-------------- ---------------- ------------- --------------
Net Assets $701,996,556 $1,052,704,873 $93,549,189 $732,495,542
Number of Shares Outstanding 26,737,856 44,282,595 3,964,498 28,100,338
Net Asset Value Per Share (net
assets divided by number of shares
outstanding) $ 26.25 $23.77 $ 23.60 $ 26.07
Sales Charge (for Class A and Class D
shares: 5.25% of offering price;
5.54% of net asset value per share)* 1.45 ** ** 1.44
Offering Price $ 27.70 $ 23.77 $ 23.60 $ 27.51
- ---------------
* 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"
herein.
36
Table of Contents
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities and does not use any particular broker or
dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, the Investment Adviser may select a
broker based upon brokerage or research services provided to the Investment
Adviser and its clients, including the Fund. The Investment Adviser may pay a
higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, such as the Investment Adviser, under certain
circumstances, to cause an account to pay a broker or dealer a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction in recognition of the
value of brokerage and research services provided by the broker or dealer.
Brokerage and research services include (1) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the
performance of accounts; and (3) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement, and
custody). In the case of research services, the Investment Adviser believes
that access to independent investment research is beneficial to its investment
decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation of investments. Examples of research-oriented services for which the
Investment Adviser might utilize Fund commissions include research reports and
other information on the economy, industries, groups of securities, individual
companies, statistical information, political developments, technical market
action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. Except as noted immediately below,
research services furnished by brokers may be used in servicing all client
accounts and not all services may be used in connection with the account that
paid commissions to the broker providing such services. In some cases, research
information received from brokers by mutual fund management personnel or
personnel principally responsible for the Investment Adviser's individually
managed portfolios is not necessarily shared by and between such personnel. Any
investment advisory or other fees paid by the Fund to the Investment Adviser
are not reduced as a result of the Investment Adviser's receipt of research
services.
In some cases the Investment Adviser may receive a service from a broker
that has both a "research" and a "non-research" use. When this occurs, the
Investment Adviser makes a good faith allocation, under all the circumstances,
between the research and non-research uses of the service. The percentage of
the service that is used for research purposes may be paid for with client
commissions, while the Investment Adviser will use its own funds to pay for the
percentage of the service that is used for non-research purposes. In making
this good faith allocation, the Investment Adviser faces a potential conflict
of interest, but the Investment Adviser believes that its allocation procedures
are reasonably designed to ensure that it appropriately allocates the
anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for
clients in a fixed price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling securities,
provide the Investment Adviser with research services. The NASD has adopted
rules expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research "credits"
37
Table of Contents
in these situations at a rate that is higher than that which is available for
typical secondary market transactions. These arrangements may not fall within
the safe harbor of Section 28(e).
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Trustees of the Fund and subject to best execution,
the Investment Adviser may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund; however, whether or not a particular broker or dealer sells shares of the
Fund neither qualifies nor disqualifies such broker or dealer to execute
transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, GDRs or other securities convertible into foreign equity securities.
ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in
over-the-counter markets in the United States or Europe, as the case may be.
ADRs, like other securities traded in the United States, will be subject to
negotiated commission rates.
The Fund's ability and decisions to purchase or sell portfolio securities
of foreign issuers 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.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
Aggregate Brokerage Commissions Paid
Fiscal Year Ended Commissions Paid to Merrill Lynch
------------------------------------------------------------------
2000 $ 3,130,066 $ 388,643
1999 $11,630,069 $1,178,615
1998 $ 5,236,696 $ 147,538
For the fiscal year ended October 31, 2000, brokerage commissions paid to
Merrill Lynch represented 12.42% of the Fund's aggregate brokerage commissions
paid and involved 10.36% of the Fund's dollar amount of transactions involving
payment of commissions during the year.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in 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 the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Fund may serve as its broker in 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.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Board of Trustees of the Fund
that either comply with rules adopted by the Commission or with interpretations
of the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."
38
Table of Contents
Section 11(a) of the Exchange Act generally prohibits members of the
United States national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that 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 Board of Trustees of the Fund has considered the possibility 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 to the Investment Adviser. After considering all factors deemed
relevant, the Board of Trustees made a determination not to seek such
recapture. The Board will reconsider this matter from time to time.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or funds
for which the Investment Adviser or an affiliate acts as manager, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment Adviser or an
affiliate 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor,
Merrill Lynch, a selected securities dealer or other financial intermediary.
Certain of these services are available only to U.S. investors and certain of
these services are not available to investors who place purchase orders for the
Fund's shares through the Merrill Lynch Blueprint(SM) Program.
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 dividends. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will also receive separate confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of dividends. A shareholder with an account held at the Transfer
Agent may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. A shareholder may also maintain
an account through Merrill Lynch, a selected securities dealer or other
financial intermediary. Upon the transfer of shares out of a Merrill Lynch
brokerage account or an account maintained with a selected securities dealer or
other financial intermediary, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch, a selected
securities dealer or other financial intermediary to another securities dealer
or other financial intermediary that has entered into a selected dealer
agreement with Merrill Lynch. Certain shareholder services may not be available
for the transferred shares. After the transfer, the shareholder may purchase
additional shares of funds owned before
39
Table of Contents
the transfer and all future trading of these assets must be coordinated by the
new firm. If a shareholder wishes to transfer his or her shares to a
securities dealer or other financial intermediary that has not entered into a
selected dealer agreement with Merrill Lynch, the shareholder must either (i)
redeem his or her shares, paying any applicable CDSC or (ii) continue to
maintain an Investment Account at the Transfer Agent for those shares. The
shareholder may also request the new securities dealer to maintain the shares
in an account at the Transfer Agent registered in the name of the securities
dealer for the benefit of the shareholder whether the securities dealer has
entered into a selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer or other financial intermediary 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
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with other Select Pricing Funds and Summit, a series of Financial
Institutions Series Trust, which is a Merrill Lynch-sponsored money market fund
specifically designated for exchange by holders of Class A, Class B, Class C
and Class D shares of Select Pricing Funds. 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. Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be 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. Such
treatment may also apply for state and local tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in the account
in which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares"), are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or 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 generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C
shares, respectively, of certain other Select Pricing Funds or for Class B
shares of Summit
40
Table of Contents
("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 CDSC schedule
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of
the fund from which the exchange has been made. For purposes of computing the
CDSC 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 Small Cap Value Fund, Inc. ("Small Cap Value Fund") after having
held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Small Cap
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three-year holding period for the Small Cap Value Fund Class B
shares, the investor will be deemed to have held the Small Cap Value Fund
Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares
are exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class
C shares of Select Pricing Funds and, in the event of such an exchange, the
period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any
CDSC and toward satisfaction of any Conversion Period with respect to Class B
shares. Class B shares of Summit will be subject to a distribution fee at an
annual rate of 0.75% of average daily net assets of such Class B shares. This
exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select
Pricing Funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who
exchanged Select Pricing Fund shares for shares of such other money market
funds and subsequently wish to exchange those money market fund shares for
shares of the Fund will be subject to the CDSC schedule applicable to such Fund
shares, if any. The holding period for the money market fund shares will not
count toward satisfaction of the holding period requirement for reduction of
the CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the holding period for
Class B or Class C shares of the Fund received in exchange for such money
market fund shares will be aggregated with the holding period for the fund
shares originally exchanged for such money market fund shares for purposes of
reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans that participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held. The Fund's
exchange privilege is also modified with respect to purchases of Class A and
Class D shares by non-retirement plan investors under the MFA Program. First,
the initial allocation of assets is made under the MFA Program. Then, any
subsequent exchange under the MFA Program of Class A or Class D shares of a
Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will
41
Table of Contents
not be a charge for any difference between the sales charge previously paid on
the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers or other financial intermediaries. The Fund
reserves the right to require a properly completed exchange application.
Telephone exchange requests are also available in accounts held with the
Transfer Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-800-MER-FUND. The request must be from
the shareholder of record. Before telephone requests will be honored, signature
approval from all shareholders of record must be obtained. The shares being
exchanged must have been held for at least 15 days. Telephone requests for an
exchange will not be honored in the following situations: the account holder is
deceased, the request is by an individual other than the account holder of
record, the account is held by joint tenants who are divorced or the address on
the account has changed within the last 30 days. Telephone exchanges may be
refused if the caller is unable to provide: the account number, the name and
address registered on the account and the social security number registered on
the account. The Fund or the Transfer Agent may temporarily suspend telephone
transactions at any time.
This exchange privilege may be modified or terminated in accordance with
the rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Fee-Based Programs
Certain fee based programs offered by Merrill Lynch and other financial
intermediaries, 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 financial intermediary, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or 1-800-637-3863.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge an initial
establishment fee and an annual custodial fee for each account. There may be
fees associated with investing through these plans. Information with respect to
these plans is available on request from Merrill Lynch.
42
Table of Contents
Capital gains and ordinary income received in each of the plans referred
to above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans and education savings plans.
Investors considering participation in any retirement or education savings 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.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made 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
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(R) or CBA(R) Account may
arrange to have periodic investments made in the Fund in amounts of $100 ($1 or
more for retirement accounts) or more through the CMA(R) or CBA(R) Automatic
Investment Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund determined as of the close of business on the
NYSE on the monthly payment date for such dividends. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends.
Shareholders may, at any time, elect to have subsequent dividends, paid in
cash, rather than reinvested in shares of the Fund or vice versa (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in additional
shares). If the shareholder's account is maintained with the Transfer Agent, he
or she may contact the Transfer Agent in writing or by telephone
(1-800-MER-FUND). For other accounts, the shareholder should contact his or her
Merrill Lynch Financial Consultant, selected securities dealer or other
financial intermediary. Commencing ten days after the receipt by the Transfer
Agent of such notice, those 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 dividend checks.
Cash payments can also be directly deposited to the shareholder's bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having 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 the class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern 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 as of
the close of business on the NYSE on the following business day. The check for
the withdrawal payment will be mailed, or the direct deposit will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends on all shares in the Investment Account are
reinvested automatically in Fund shares. 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.
43
Table of Contents
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." 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 be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill Lynch Financial
Consultant.
Withdrawal payments should not be considered as dividends. 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 that maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic 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) or
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. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or 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) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
Capital gains and ordinary income received in each of the retirement plans
referred to above are exempt from Federal taxation until distributed from the
plan. 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.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net investment
income, if any. Dividends from such net investment income will be paid at least
annually. All net realized capital gains, if any, will be 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 Federal tax requirements that certain percentages of its ordinary
income and capital gains be distributed during the calendar year. If in any
fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. A shareholder may also elect to receive
any such dividends in cash. Dividends are taxable to shareholders, as discussed
below, whether they are reinvested in shares of the Fund or received in cash.
The per share dividends on Class B and Class C
44
Table of Contents
shares will be lower than the per share dividends 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 on Class D shares will be lower than the per share dividends
on Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares-- Determination of Net
Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded 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.
In order to qualify, the Fund must among other things, (i) derive at least
90% of its gross income from dividends, interest, payments with respect to
certain securities loans, gains from the sale of securities, certain gains from
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (ii) distribute at least 90%
of its dividend, interest and certain other taxable income each year; (iii) at
the end of each fiscal quarter maintain at least 50% of the value of its total
assets in cash, government securities, securities of other RICs, and other
securities of issuers which represent, with respect to each issuer, no more
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer; and (iv) at the end of each fiscal quarter
have no more than 25% of its assets invested in the securities (other than
those of the government or other RICs) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades and businesses.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income.
Any net capital gains (i.e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
("capital gains dividends") distributed to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 20%. The maximum capital gains rate for
corporate shareholders currently is the same as the maximum tax rate for
ordinary income.
Not later than 60 days after the close of its taxable year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gain dividends. A portion of the Fund's
ordinary income dividends may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements are met. For
this purpose, the Fund will allocate dividends eligible for the dividends
received deduction between the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to the Class A, Class B, Class C
and Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend or
distribution will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Pursuant to the Fund's investment objective, the Fund may invest in
foreign securities. Foreign taxes may be paid by the Fund as a result of tax
laws of countries in which the Fund may invest. Income tax treaties between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine in advance the effective rate of foreign tax to
which the Fund will be subject, since the amount of Fund assets to be invested
in various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on income
from investments of foreign securities held by the Fund.
45
Table of Contents
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on dividends and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not on file with
the Fund or who, to the Fund's knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalty of perjury
that such number is correct and that such shareholder is not otherwise subject
to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing 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. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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 of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short term capital gain if the shares were held for not more than
12 months and long term capital gain taxable at the maximum of 20% if such
shares were held for more than 12 months. In the case of a corporation, any
such capital gain will be treated as long term capital gain, taxable at the
same rates as ordinary income, if such shares were held for more than 12
months. Any such capital loss will be treated as long term capital loss if such
shares were held for more than 12 months.
Any loss from a sale or exchange of shares held for six months or less,
however, will be treated as long term capital loss to the extent of any long
term capital gains dividends with respect to such shares. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares, and after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset).
Generally, any loss realized on a sale or exchange of shares of the Fund
will be disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
If a shareholder exercises the exchange privilege within 90 days of
acquiring shares of the Fund, then the loss the shareholder can recognize on
the exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund reduces any sales charge the shareholder would have
owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new shares.
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 anticipates that it will make
sufficient timely distributions to avoid imposition of the 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 and Futures Transactions
The Fund may purchase or sell options and futures and foreign currency
options and futures, and related options on such futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a
46
Table of Contents
forward foreign exchange contract, or is a non-equity option or a regulated
futures contract for a non-U.S. currency for which the Fund elects to have
gain or loss treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from transactions in such option and futures
contracts will be 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, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange. Similarly, Code Section 1091,
which deals with "wash sales," may cause the Fund to postpone recognition of
certain losses for tax purposes; and Code Section 1258, which deals with
"conversion transactions," may apply to recharacterize certain capital gains as
ordinary income for tax purposes, and Code Section 1259, which deals with
"constructive sales" of appreciated financial positions (e.g. stock), may treat
the Fund as having recognized income before the time that such income is
economically recognized by the Fund.
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, futures or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional
currency (i.e., unless certain special rules apply, currencies other than the
U.S. dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will be treated as
ordinary income or loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such transactions. In
general, however, Code Section 988 gains or losses will increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income dividends. 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 dividends
and all or a portion of distributions made before the losses were realized but
in the same taxable year would be treated as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares and
resulting in a capital gain for any shareholder who received a distribution
greater than such shareholder's basis in Fund shares (assuming the shares were
held as a capital asset).
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and the Treasury regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gains dividends and gains on the sale or
exchange of shares in the Fund may also be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign 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 formulas specified by the
Commission.
47
Table of Contents
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period as 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 investment of $1,000 or some other
amount, for various periods other than those noted below. Such data will be
computed as described above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (2) the maximum applicable sales charges will
not be included with respect to annual or annualized rates of return
calculations. Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
Class A Shares Class B Shares
----------------- -----------------
Expressed as Expressed as
a percentage a percentage
based on a based on a
hypothetical hypothetical
Period $1,000 investment $1,000 investment
----------------------------------------------------------------------------
Average Annual Total Return
(including maximum applicable
sales charges)
One Year Ended October 31, 2000 7.30% 8.07%
Five Years Ended October 31, 2000 7.10% 7.16%
Ten Years Ended October 31, 2000 14.92% 14.36%
Class C Shares Class D Shares
----------------- -----------------
Expressed as Expressed as
a percentage a percentage
based on a based on a
hypothetical hypothetical
Period $1,000 investment $1,000 investment
---------------------------------------------------------------------------------------
Average Annual Total Return
(including maximum applicable
sales charges)
One Year Ended October 31, 2000 11.11% 7.07%
Five Years Ended October 31, 2000 7.15% 6.84%
Inception (October 21, 1994) to October 31, 2000 10.03% 9.91%
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.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares," the total return data quoted by the Fund in advertisements directed to
such investors may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC, and
48
Table of Contents
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of CDSCs, a lower amount of expenses may be deducted.
On occasion, the Fund may compare its performance to various indices
including the S&P 500 Composite Stock Price Index, the Value Line Composite
Index, the Dow Jones Industrial Average or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA
Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business
Week, Forbes Magazine and Fortune Magazine or other industry publications. When
comparing its performance to a market index, the Fund may refer to various
statistical measures derived from the historic performance of the Fund and the
index, such as standard deviation and beta. In addition, from time to time the
Fund may include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature.
The Fund may provide information designed to help investors understand how
the Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political or
other conditions, descriptive information on general principles of investing
such as asset allocation, diversification and risk tolerance, discussion of the
Fund's portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Fund's performance or portfolio composition to
that of other funds or types of investments, indices relevant to the comparison
being made, or to a hypothetical or model portfolio. The Fund may also quote
various measures of volatility and benchmark correlation in advertising and
other materials, and may compare these measures to those of other funds or
types of investments. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period.
GENERAL INFORMATION
Description of Shares
The Fund, an open-end management investment company, was organized under
Massachusetts law on December 11, 1986 under the name Merrill Lynch Retirement
Equity Fund and is a business entity commonly known as a "Massachusetts
business trust." On March 1, 1991, the name of the Fund was changed to Merrill
Lynch Growth Fund for Investment and Retirement. On June 27, 1996, the name of
the Fund was changed to Merrill Lynch Growth Fund. The Declaration of Trust of
the Fund (the "Declaration") permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest, par value $0.10 per
share, of different classes and to divide or combine the shares of each class
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Fund. At the date of this Statement of
Additional Information, the shares of the Fund are divided into Class A, Class
B, Class C and Class D shares. Under the Declaration, the Trustees have the
authority to issue separate classes of shares that represent interests in the
assets of the Fund and have identical voting, dividend, liquidation and other
rights and the same terms and conditions except that expenses related to the
account maintenance and distribution of the shares of a class may be borne
solely by such class and a class may have exclusive voting rights with respect
to matters relating to the expenses being borne only by such class. The
Trustees of the Fund may classify and reclassify the shares of the Fund into
additional classes of shares at a future date. Upon liquidation of the Fund,
shareholders of each class are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders, except for any expenses
which may be attributable only to one class. Shares have no preemptive rights.
The rights of redemption and conversion rights are described elsewhere herein
and in the Prospectus. Shares are fully paid and non-assessable by the Fund.
The Declaration does not require that the Fund hold an annual meeting of
shareholders. However, the Fund will be required to call special meetings of
shareholders in accordance with the requirements of the Investment Company Act
to seek approval of new management and advisory arrangements, of a material
increase in distribution fees, or of a change in the fundamental policies,
objectives or restrictions of the Fund. The Fund also would be required to hold
a special shareholders' meeting to elect new Trustees at such time as less than
a majority of the Trustees holding office have been elected by shareholders.
The Declaration provides that a shareholders' meeting may be called for any
reason at the request of 10% of the outstanding shares of the Fund or by
majority of the Trustees.
49
Table of Contents
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights with respect to
matters relating to such distribution expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees can,
if they choose to do so, elect all the Trustees of the Fund, in which event the
holders of the remaining shares are unable to elect any person as a Trustee.
Generally, no amendment may be made to the Declaration without the affirmative
vote of not less than a majority of the outstanding shares of the Fund.
Independent Auditors
Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village
Boulevard, Princeton, New Jersey 08540-6400, has been selected as the
independent auditors of the Fund. The selection of independent auditors is
subject to approval by the non-interested Trustees of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
Custodian
State Street Bank and Trust Company (the "Custodian"), One Heritage Drive
P2N, North Quincy, Massachusetts 02171, acts as custodian of the Fund's assets.
Under its contract with the Fund, the Custodian is authorized, among other
things, to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside of the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares" in the Prospectus.
Legal Counsel
Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405 Lexington
Avenue, New York, New York 10174, is counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on October 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.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. 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
50
Table of Contents
the use of such name to any other company, and the Fund has granted ML & Co.,
under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by ML & Co.
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of a class of the Fund's shares as of February 2, 2001:
Name Address Percent of Class
-----------------------------------------------------------------------------------
Merrill Lynch Trust Company P.O. Box 30532 14.86% of Class A
Trustee FBO MLSIP New Brunswick, NJ
Investment Account 08989-0532
Attn: East Region
Merrill Lynch Trust Company P.O. Box 30532 6.07% of Class A
Trustee FBO MLSIP New Brunswick, NJ
Investment Account 08989-0532
Attn: East Region
The Declaration a copy of which, together with all amendments thereto, is
on file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Growth Fund" refers to the Trustees under
the Declaration collectively as Trustees, but not as individuals or personally,
and no Trustee, shareholder, officer, employee or agent of the Fund shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim of said Fund but the
"Trust Property" only shall be liable.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 2000 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any
business day.
51
Table of Contents
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Services, Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
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 therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds whichare rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
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 bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
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 category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that
A-1
Table of Contents
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:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within 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 indicated 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.
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 stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy 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 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 rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A-2
Table of Contents
a An issue 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 protection are, nevertheless,
expected to be maintained at adequate levels.
baa An issue rated "baa" is considered to be medium grade, 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 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 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 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 rated "ca" is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payment.
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 may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Standard & Poor's Ratings Group's ("Standard & Poor's")
Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of
the obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
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.
A-3
Table of Contents
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
Debt rated BB, B, CCC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. 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
payment. 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 presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest or 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 current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments 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 which 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 default. The D rating is assigned on the day an
interest or principal payment is missed. 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
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an expected copy of the escrow agreement or closing documentation
confirming investments and cash flows.
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.
A-4
Table of Contents
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issuers 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 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 This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
A-5
Table of Contents
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
B, preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
CCC issues will likely have some quality and protection 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 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 S&P 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.
A-6
Table of Contents
(This page intentionally left blank.)
Table of Contents
(This page intentionally left blank.)
Table of Contents
Code #10480-0201
Table of Contents