PROSPECTUS
November 26, 1997
Merrill Lynch Fundamental Growth Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
------------------------
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with long-term growth of capital. The Fund will
seek to achieve its investment objective by investing in a diversified portfolio
of equity securities placing particular emphasis on companies that have
exhibited above-average growth rates in earnings. There can be no assurance that
the Fund's investment objective will be realized. For more information on the
Fund's investment objective and policies, please see "Investment Objective and
Policies" on page 10.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1, and
for participants in certain fee-based programs the minimum initial purchase is
$500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "Transfer Agent") are not subject to the
processing fee. See "Purchase of Shares" on page 17 and "Redemption of Shares"
on page 27.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated November 26, 1997 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission (the "Commission") and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information about the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
Class A(a) Class B(b) Class C Class D
---------- ---------- ------- -------
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price)............. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments............................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............... None(d) 4.0% during the first 1.0% for one None(d)
year, decreasing 1.0% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee.................................. None None None None
Annual Fund Operating Expenses (as a percentage of
average net assets):
Investment Advisory Fees(g)................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance Fees.................... None 0.25% 0.25% 0.25%
Distribution Fees........................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees............................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)............ 0.19% 0.22% 0.23% 0.19%
Other..................................... 0.14% 0.14% 0.13% 0.14%
-------- ----- ----- ------
Total Other Expenses.................. 0.34% 0.37% 0.37% 0.34%
-------- ----- ----- ------
Total Fund Operating Expenses................. 0.99% 2.02% 2.02% 1.24%
======== ===== ===== ======
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 20 and "Shareholder
Services--Fee-Based Programs"--page 31.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares"--page 22.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 20.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 31.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page 15.
(h) See "Purchase of Shares--Distribution Plans"--page 25.
(i) See "Management of the Fund--Transfer Agency Services"--page 17.
2
Example:
Cumulative Expenses Paid for the Period of:
--------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period:
Class A............................................ $62 $82 $104 $167
Class B............................................ $61 $83 $109 $215*
Class C............................................ $31 $63 $109 $235
Class D............................................ $64 $90 $117 $195
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................ $62 $82 $104 $167
Class B............................................ $21 $63 $109 $215*
Class C............................................ $21 $63 $109 $235
Class D............................................ $64 $90 $117 $195
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The example should not be considered a representation of
past or future expenses or annual rates of return, and actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
example. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. (the "Manager" or "MLAM") or its affiliate, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM that use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
3
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on the
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges 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 will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System that the investor believes
is most beneficial under his or her particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
=================================================================================================================
Account
Maintenance Distribution
Clas Sales Charge(1) Fee Fee Conversion Feature
- ------------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
- ------------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a
rate of 4.0% during the first B shares convert to D shares
year, decreasing 1.0% annually to automatically after
0.0%(4) 0.25% 0.75% approximately eight years(5)
- ---------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
======================================================================================================================
(Footnotes on following page)
4
(Footnotes for preceding page)
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares of the Fund. Other eligible investors include certain retirement
plans and participants in certain fee-based programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries",
when used herein with respect to ML & Co., includes the Manager, FAM
and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge of 5.25%, is reduced for
purchases of $25,000 and over and waived for purchases by certain
retirement plans and participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with redemptions to fund participation in certain fee-based programs.
Sales charges also are reduced under a right of accumulation that takes
into account the investor's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares-- Initial Sales Charge
Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for
5
Federal income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares, and the
conversion and holding periods for certain retirement plans are
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases may be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his or her
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Class A, Class B, Class C and Class D share
holdings will count toward a right of accumulation that may qualify the investor
for reduced initial sales charges on new initial sales charge purchases. In
addition, the ongoing Class B and Class C account maintenance and distribution
fees will cause Class B and Class C shares to have higher expense ratios, pay
lower dividends and have lower total returns
6
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all of their assets invested initially and they are
uncertain as to the length of time they intend to hold their assets in
MLAM-advised mutual funds. Although Class C shareholders are subject to a
shorter CDSC period at a lower rate, they forgo the Class B conversion feature,
making their investment subject to account maintenance and distribution fees for
an indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of Shares --
Limitations on the Payment of Deferred Sales Charges."
7
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The financial highlights should be read
in conjunction with the financial statements for the fiscal year ended August
31, 1997, and the independent auditors' report thereon which are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
Class A++ Class B++
---------------------------------- ------------------------------------
For the Year
Ended For the Period For the Year Ended For the Period
August 31, Oct. 21, 1994+ August 31, Oct. 21, 1994+
----------------- to Aug. 31, ------------------- to Aug. 31,
1997 1996 1995 1997 1996 1995
------- ------- -------------- -------- -------- --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period.................. $ 13.60 $ 11.66 $ 9.99 $ 13.14 $ 11.40 $ 9.85
------- ------- -------- -------- -------- -------
Investment income (loss)--net...................... .07 .07 -- (.09) (.07) (.09)
Realized and unrealized gain on investments--net... 4.95 2.13 1.98 4.79 2.07 1.95
------- ------- -------- -------- -------- -------
Total from investment operations...................... 5.02 2.20 1.98 4.70 2.00 1.86
------- ------- -------- -------- -------- -------
Less distributions from realized gain on
investments--net..................................... (1.25) (.26) (.31) (1.15) (.26) (.31)
------- ------- -------- -------- -------- -------
Net asset value, end of period........................ $ 17.37 $ 13.60 $ 11.66 $ 16.69 $ 13.14 $ 11.40
======= ======= ======== ======== ======== =======
Total Investment Return:**
Based on net asset value per share.................... 39.24% 19.02% 20.55%# 37.95% 17.68% 19.60%#
======= ======= ======== ======== ======== =======
Ratios to Average Net Assets:
Expenses.............................................. .99% 1.12% 1.46%* 2.02% 2.16% 2.48%*
======= ======= ======== ======== ======== =======
Investment income (loss)--net......................... .47% .51% .02%* (.59)% (.54)% (.95)%*
======= ======= ======== ======== ======== =======
Supplemental Data:
Net assets, end of period (in thousands).............. $62,049 $47,048 $ 21,288 $216,636 $116,641 $63,748
======= ======= ======== ======== ======== =======
Portfolio turnover.................................... 94.38% 82.10% 80.41% 94.38% 82.10% 80.41%
======= ======= ======== ======== ======== =======
Average commission rate paid##........................ $ .0628 $ .0623 -- $ .0628 $ .0623 --
======= ======= ======== ======== ======== =======
- ---------------
+ Commencement of Operations.
++ Based on average number of shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
8
FINANCIAL HIGHLIGHTS (continued)
Class C++
------------------------------------------------------
For the Year Ended For the Period
August 31, Dec. 24, 1992+
------------------------------------- to Aug. 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....... $ 13.14 $ 11.40 $ 9.96 $ 9.86 $ 10.00
------- ------- ------- ------- -------
Investment income (loss)--net........... (.09) (.07) (.09) (.05) (.05)
Realized and unrealized gain on
investments--net...................... 4.79 2.07 1.84 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations........... 4.70 2.00 1.75 .10 (.14)
------- ------- ------- ------- -------
Less distributions from realized gain on
investments--net.......................... (1.12) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period............. $ 16.72 $ 13.14 $ 11.40 $ 9.96 $ 9.86
======= ======= ======= ======= =======
Total Investment Return:**
Based on net asset value per share......... 37.90% 17.68% 18.28% 1.01% (1.40)%#
======= ======= ======= ======= =======
Ratios to Average Net Assets:
Expenses................................... 2.02% 2.15% 2.44% 2.35% 2.79%*
======= ======= ======= ======= =======
Investment income (loss)--net.............. (.58)% (.57)% (.88)% (.52)% (.83)%*
======= ======= ======= ======= =======
Supplemental Data:
Net assets, end of period (in thousands)... $74,732 $54,052 $44,220 $47,263 $45,736
======= ======= ======= ======= =======
Portfolio turnover......................... 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid##............. $ .0628 $ .0623 -- -- --
======= ======= ======= ======= =======
Class D++
-----------------------------------------------------
For the Year Ended For the Period
August 31, Dec. 24, 1992+
------------------------------------ to Aug. 31,
1997 1996 1995 1994 1993
------- ------- ------- ------ --------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....... $ 13.54 $ 11.64 $ 10.09 $ 9.91 $10.00
------- ------- ------- ------ ------
Investment income (loss)--net........... .03 .03 (.01) .03 --
Realized and unrealized gain on
investments--net...................... 4.93 2.13 1.87 .15 (.09)
------- ------- ------- ------ ------
Total from investment operations........... 4.96 2.16 1.86 .18 (.09)
------- ------- ------- ------ ------
Less distributions from realized gain on
investments--net.......................... (1.23) (.26) (.31) -- --
------- ------- ------- ------ ------
Net asset value, end of period............. $ 17.27 $ 13.54 $ 11.64 $10.09 $ 9.91
======= ======= ======= ====== ======
Total Investment Return:**
Based on net asset value per share......... 38.90% 18.70% 19.15% 1.82% (.90)%#
======= ======= ======= ====== ======
Ratios to Average Net Assets:
Expenses................................... 1.24% 1.37% 1.65% 1.58% 2.03%*
======= ======= ======= ====== ======
Investment income (loss)--net.............. .17% .24% (.10)% .31% (.04)%*
======= ======= ======= ====== ======
Supplemental Data:
Net assets, end of period (in thousands)... $53,101 $22,892 $13,231 $8,623 $6,930
======= ======= ======= ====== ======
Portfolio turnover......................... 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ====== ======
Average commission rate paid##............. $ .0628 $ .0623 -- -- --
======= ======= ======= ====== ======
- ---------------
+ Commencement of Operations.
++ Based on average number of shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
9
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital. The Fund will seek to achieve its investment objective by investing in
a diversified portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in earnings. There can
be no assurance that the investment objective of the Fund will be realized. The
investment objective of the Fund 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.
The Fund will give particular emphasis to companies which possess
above-average growth rates in earnings, resulting from a variety of factors
including, but not limited to, above-average growth rates in sales, profit
margin improvement, proprietary or niche products or services, leading market
shares, and underlying strong industry growth. Management of the Fund believes
that companies which possess above-average earnings growth frequently provide
the prospect of above-average stock market returns, although such companies tend
to have higher relative stock market valuations. Emphasis also will be given to
companies having medium to large stock market capitalizations ($500 million or
more). Investment in companies with lower market capitalizations, especially
those under $1 billion, may involve special risks including limited product
lines, market or financial resources or a limited management group. In addition,
many smaller company stocks trade less frequently and in smaller volume, and may
be subject to more abrupt or erratic price movements or more sensitive to market
fluctuations, than stocks of larger companies.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock and rights to subscribe for
common stock, and the Fund will maintain at least 65% of its total assets
invested in equity securities except during defensive periods. The Fund reserves
the right as a defensive measure and to provide for redemptions to hold other
types of securities, including non-convertible preferred stocks and debt
securities rated investment grade by a nationally recognized statistical rating
organization, Government and money market securities, including repurchase
agreements, or cash, in such proportions as, in the opinion of management,
prevailing market or economic conditions warrant.
The Fund may invest up to 10% of its total assets in equity securities of
foreign issuers with the foregoing characteristics. (Purchases of American
Depositary Receipts ("ADRs"), however, will not be subject to this restriction.)
Investments in securities of foreign entities and securities denominated in
foreign currencies entail risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions. In addition, foreign
entities may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States entities. In
addition, certain foreign investments may be subject to foreign withholding
taxes. Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, sometimes resulting in delays in
settlement which could have an adverse effect on the Fund, including on its
performance. Costs associated with transactions in foreign securities are
generally higher than with transactions in United States securities.
The Fund may invest in the securities of foreign issuers in the form of
ADRs, European Depositary Receipts ("EDRs") or other securities convertible into
securities of foreign issuers. These securities may not
10
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by an American bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets.
Other Investment Policies and Practices
The Fund is authorized to use certain strategies involving options and
futures. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
Options on Securities and Securities Indices
The Fund may invest on individual securities, baskets of securities or
particular measurements of value or rate (an "index"), such as an index of the
price of treasury securities or an index representative of short-term interest
rates.
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially replicated by 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 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.
The Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which substantially
replicates the performance of 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.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
11
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially replicated by 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 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 to earn income, through the receipt of option premiums. 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.
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 to 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 to earn income, through the receipt of option premiums. 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
as 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").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options and Futures" 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 option on a
securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
Portfolio Transactions. In executing portfolio transactions, the Fund
seeks to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread),
12
size of order, difficulty of execution, operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Fund generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available. The Fund contemplates
that, consistent with its policy of obtaining the best net results, it will
place orders for transactions with a number of brokers and dealers, including
Merrill Lynch, an affiliate of the Manager. Subject to obtaining the best price
and execution, brokers who provide supplemental investment research to the Fund
may receive orders for transactions by the Fund. Information so received will be
in addition to, and not in lieu of, services required to be performed by the
Manager and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund--Management and Advisory Arrangements". In addition, consistent with the
Conduct Rules of the NASD, the Manager may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of the
Fund will be sold by Merrill Lynch.
Portfolio Turnover. While the Fund generally does not expect to engage in
trading for short-term gains, it will effect portfolio transactions without
regard to holding period if, in its management's judgment, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. Higher portfolio turnover involves tax consequences for investors
and correspondingly greater transaction costs in the form of the dealer spreads
and brokerage commissions, which are borne directly by the Fund.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. Pursuant to that restriction, the Fund may not invest in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including repurchase
agreements maturing in more than seven days, if, regarding all such securities,
more than 15% of its net assets, taken at market value, would be invested in
such securities. Although not a fundamental policy, the Fund will include
over-the-counter ("OTC") options and the securities underlying such options (to
the extent provided under "Portfolio Strategies Involving Options and
Futures--Restrictions on OTC Options" in the Appendix herein) in calculating the
amount of its total assets subject to the limitation on illiquid securities. The
Fund will not change or modify this policy prior to the change or modification
by the Commission staff of its positions regarding OTC options.
However, the Fund may purchase, without regard to the above limitation,
securities that are not registered under the Securities Act of 1933, as amended
(the "Securities Act") but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors, or the Manager pursuant to guidelines adopted by
the Board, continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors, however,
will retain oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the other party
13
agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate insulated from
market fluctuations during such period. Such agreements usually cover short
periods, such as under one week. As a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. The Fund may suffer time delays and incur costs or possible losses in
connection with disposition of the underlying securities in the event of the
failure of the repurchase agreement counterparty. Repurchase agreements maturing
in more than seven days are deemed illiquid by the Commission and are therefore
subject to the Fund's investment restriction limiting investments in securities
that are not readily marketable to 15% of the Fund's net assets.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
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. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act. During the period of this loan, the Fund receives
the income on the loaned securities and receives compensation for entering into
the loan and thereby increases its yield. In the event that the borrower
defaults on its obligation to return borrowed securities, because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities on a delayed delivery basis or a when-issued basis
at fixed purchase terms. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future. The
purchase will be recorded on the date the Fund enters into the commitment and
the value of the obligation will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or high
grade, liquid debt securities having a market value at all times at least equal
to the amount of the forward commitment.
Investment Restrictions
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies that are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may
be changed by the Board of Directors without shareholder approval. As a
non-fundamental restriction, the Fund may not borrow amounts in excess of 20% of
its total assets, taken at market value, and then only from banks as a temporary
measure
14
for extraordinary or emergency purposes such as the redemption of Fund shares.
As a non-fundamental policy, the Fund will not invest in securities which cannot
readily be resold because of legal or contractual restrictions or which are not
otherwise readily marketable, including repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities, more than 15% of its total assets taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of six individuals, five of
whom are non-affiliated persons of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate FAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.
JOE GRILLS--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; Member of the Investment Advisory Committees of the State
of New York Common Retirement Fund and the Howard Hughes Medical Institute;
Director, Duke Management Company, LaSalle Street Fund and Kimco Realty
Corporation.
WALTER MINTZ--Special Limited Partner of Cumberland Associates (investment
partnership).
ROBERT S. SALOMON, JR.--Principal of STI Management (investment adviser).
MELVIN R. SEIDEN--Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
STEPHEN B. SWENSRUD--Chairman of Fernwood Associates (financial
consultants).
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
Management and Advisory Arrangements
The Manager, which is owned and controlled by ML & Co., a financial
services holding company, acts as the manager to the Fund and provides the Fund
with management and investment advisory services. The Manager, or an affiliate
of the Manager, FAM, acts as the investment adviser to more than 140 other
15
registered investment companies. The Manager or FAM also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of October 31, 1997, the Manager and FAM had a total of approximately $271.9
billion in investment company and other portfolio assets under management.
The agreement with the Manager (the "Management Agreement") provides that,
subject to the direction of the Board of Directors of the Fund, the Manager is
responsible for the actual management of the Fund's portfolio and for the review
of the Fund's holdings in light of its own research analysis and analyses from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Manager, subject to review by the
Board of Directors.
The Manager provides the portfolio managers for the Fund, who considers
analyses from various sources, makes the necessary decisions, and places
transactions accordingly. The Manager is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Management Agreement. The Manager has access to the
total securities research and economic facilities of Merrill Lynch.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. For the fiscal year ended August 31, 1997,
the management fee paid by the Fund to the Manager aggregated $1,986,602 (based
on average net assets of approximately $306.5 million).
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares, and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services. For the
fiscal year ended August 31, 1997, the Fund paid the Manager $66,072 for such
accounting services. For the fiscal year ended August 31, 1997, the ratio of
total expenses to average net assets was .99%, 2.02%, 2.02% and 1.24% for Class
A, Class B, Class C and Class D shares, respectively.
Lawrence R. Fuller is primarily responsible for the day-to-day management
of the Fund's portfolio. Mr. Fuller is a Senior Vice President of the Fund since
1997 and has been a First Vice President of the Manager since 1997 and a Vice
President of the Manager or its predecessors since 1992. From 1984 to 1992, Mr.
Fuller served as a Senior Vice President and Director of Benefit Capital
Management.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
16
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act that incorporates the Code of Ethics
of the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
Transfer Agency Services
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $11.00 per Class A or Class D account and
up to $14.00 per Class B or Class C account, and is entitled to reimbursement
for certain transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly
closed account charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended August 31,
1997, the Fund paid the Transfer Agent $661,020 pursuant to the Transfer Agency
Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except that for retirement plans the minimum initial purchase is $100 and the
minimum subsequent purchase is $1, and for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
17
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing(SM)
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange ("NYSE")
(generally, 4:00 p.m., New York time), which includes orders received after the
close of business on the previous day, the applicable offering price will be
based on the net asset value determined as of 15 minutes after the close of
business on the NYSE on the day the order is placed with the Distributor,
provided the order is received by the Distributor prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Fund. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a sale of shares to such customers. Purchases made directly
through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class 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 will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D
18
Distribution Plan). See "Distribution Plans" below. Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs with respect to Class B and Class C shares in that the sales
charges and distribution fees applicable to each class provide for the financing
of the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, that are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System.
=====================================================================================================================
Account
Maintenance Distribution
Clas Sales Charge(1) Fee Fee Conversion Feature
- -----------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge(2)(3) No No No
- -----------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a rate of
4.0% during the first year, decreasing B shares convert to D
1.0% annually to 0.0%(4) 0.25% 0.75% shares
automatically after
approximately eight
years(5)
- -----------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -----------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales charge(3) 0.25% No No
======================================================================================================================
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
19
Initial Sales Charge Alternatives--Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
Sales Load as Discount to
Sales Load as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase Offering Price Invested the 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.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A share purchases by certain retirement plan
investors and participants in connection with certain fee-based programs. If
the sales charge is waived in connection with a purchase of $1,000,000 or
more, such purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection with
certain fee-based programs. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. 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.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
For the fiscal year ended August 31, 1997, the Fund sold 5,300,860 Class A
shares for aggregate net proceeds to the Fund of $80,749,430. The gross sales
charges for the sale of Class A shares of the Fund for that year were $8,133, of
which $671 and $7,462 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class A shares purchased
subject to a front-end charge waiver. During the fiscal year ended August 31,
1997, the Fund sold 2,051,457 Class D shares for aggregate net proceeds of
$31,598,761. The gross sales charges for the sale of Class D shares of the Fund
for the year were $276,456, of which $19,739 and $256,717 were received by the
Distributor and Merrill Lynch, respectively. During such year, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
Class D shares purchased subject to front-end sales charge waiver.
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 of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored
20
retirement or savings plans, including eligible 401(k) plans, may purchase Class
A shares of the Fund at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
MLAM or any of its affiliates. Class A shares 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 branch has $3 million
or more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and purchases
made in connection with certain fee-based programs. In addition, Class A shares
will be offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met (for
closed-end funds that commenced operations prior to October 21, 1994). For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of the
Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and D sales charges also may
be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc., and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
21
Deferred Sales Charge Alternatives--Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the 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. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge--Class B Shares. Class B shares that are
redeemed within four years after purchase may be subject to a CDSC at rates set
forth below charged as a percentage of the dollar amount subject thereto. The
CDSC will be assessed on an amount equal to the lesser of the proceeds of
redemption or
22
the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
Class B CDSC
As a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to Charge
------------------- -----------------
0-1................................................... 4.00%
1-2................................................... 3.00
2-3................................................... 2.00
3-4................................................... 1.00
4 and thereafter...................................... 0.00
For the fiscal year ended August 31, 1997, the Distributor received CDSCs
of $315,318 with respect to redemption of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The CDSC will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another will be assumed to be made in the same
order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase) for shares purchased on or
after October 21, 1994.
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The
CDSC also is waived for any Class B shares that are purchased by eligible 401(k)
or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares that are purchased within qualifying Employee Access(SM)
Accounts. Additional information concerning the
23
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services--Fee-Based Programs."
Contingent Deferred Sales Charge--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. The Class C CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based Programs."
For the fiscal year ended August 31, 1997, the Distributor received CDSCs of
$7,765 with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year
24
Conversion Period, or vice versa, the Conversion Period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each
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 and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor
$1,553,165 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $155.7
million), 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
25
August 31, 1997, the Fund paid the Distributor $626,234 pursuant to the Class C
Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $62.8 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 August 31, 1997, the Fund paid the Distributor $90,258 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $36.2 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the Distributor on-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of August 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.
With respect to Class B shares, as of August 31, 1997, direct cash
revenues, for the period since commencement of operations, exceeded direct cash
expenses by $2,335,650 (1.08% of Class B net assets at that date). With respect
to Class C shares, as of August 31, 1996, direct cash revenues, for the period
since commencement of operations, exceeded direct cash expenses by $1,228,710
(1.65% of Class C net assets at that date).
With respect to Class B shares, for the period from commencement of
operations to December 31, 1996, fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch, exceeded fully allocated accrual revenues by
$1,162,000 (.81% of Class B net assets at that date). With respect to Class C
shares, for the period from commencement of operations to December 31, 1996,
fully allocated accrual revenues incurred by the Distributor and Merrill Lynch,
exceeded fully allocated accrual expenses by $114,000 (.19% of Class C net
assets at that date).
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 Fund's distribution
fee and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSCs). 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.
26
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 payments in excess of the amount payable under the NASD formula
will not be made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares."
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption, except for any contingent deferred sales charge which may be
applicable. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Fund.
The redemption request requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as his (their) name(s) appear(s) on
the Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such term is defined in Rule 17Ad-15
under the Securities Exchange
27
Act of 1934, as amended (the "Exchange Act"), the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances, the
Transfer Agent may require additional documents such as, but not limited to,
trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States 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 has been collected for the purchase of such shares. Normally, this delay
will not exceed 10 days.
Repurchase
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the day received, and such request is
received by the Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE 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 in the case of Class B shares. Securities firms that do not have selected
dealer agreements with the Distributor may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares. Repurchases made directly through the Fund's 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 affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem shares
as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
Reinstatement Privilege--Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares 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
28
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors. Included in the
Fund's shareholder services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders may make additions to their Investment Account any time
by mailing a check directly to the Transfer Agent. Shareholders may also
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened, automatically, without charge, at the
Transfer Agent. Shareholders considering transferring their Class A or Class D
shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred account such as an IRA from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable contingent deferred sales charge) 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.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a
29
shareholder may exercise the exchange privilege. The exchange privilege may be
modified or terminated in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
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 MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in the account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the
30
net asset value per share next determined on the ex-dividend date of such
dividend or distribution. A shareholder may at any time, by written notification
to Merrill Lynch if the shareholder's account is maintained with Merrill Lynch
or by written notification or by telephone call (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent, elect
to have subsequent dividends or capital gains distributions, or both dividends
and capital gains distributions, paid in cash, rather than reinvested, in which
event payment will be mailed or directly deposited on or about the payment date.
The Fund is not responsible for any failure of delivery to the shareholder's
address of record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks. Cash payments can also be directly deposited
to the shareholder's bank account. No CDSC will be imposed on redemption of
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions.
Systematic Withdrawal Plans. A shareholder may elect to receive systematic
withdrawal payments from his or her Investment Account in the form of payments
by check or through automatic payment by direct deposit to his bank account on
either a monthly or quarterly basis. A shareholder whose shares are held within
a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or
CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares of
such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed pursuant
to a systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Contingent Deferred Sales
Charges--Class B Shares" and "--Contingent Deferred Sales Charges--Class C
Shares." Where the systematic withdrawal plan is applied to Class B Shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by
pre-arranged charges of $50 or more to his or her regular bank account.
Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain
related accounts in amounts of $100 or more ($1 for retirement plans) through
the CMA(R) or CBA(R) Automated Investment Program.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified
31
periods within such Program may be subject to a fee based upon the current value
of such shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in such
Program's client agreement and from the Transfer Agent at (800) MER-FUND
(637-3863).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. With respect to such transactions, the Manager
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Manager generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.
The Fund has no obligation to deal with any broker in the execution of
transactions for its portfolio securities. The Fund has been informed by Merrill
Lynch that it will in no way, at any time, attempt to influence or control the
placing by the Manager or by the Fund of orders for brokerage transactions.
Brokers and dealers, including Merrill Lynch, which provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Supplemental investment research received by the Manager may also be used
in connection with other management accounts of the Manager and its affiliates.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement. The
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies that
broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified periods in advertisements or information furnished to present
or prospective shareholders. Average annual total return is computed separately
for Class A, Class B, Class C and Class D shares in accordance with a formula
specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the
32
specified period in the case of Class B and Class C shares. Dividends paid by
the Fund with respect all shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance fees, distribution charges and
any incremental transfer agency costs relating to each class of shares will be
borne exclusively by that class. The Fund will include performance data for all
classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to 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, and actual, annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to
reduced sales charges in the case of Class A and Class D shares or waiver of the
CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans), the performance data may take into account the reduced, and
not the maximum, sales charges or may not take into account the contingent
deferred sales charge and therefore may reflect greater total return since, due
to the reduced sales charges or waiver of the contingent deferred sales charge,
a lower amount of expenses may be deducted. See "Purchase of Shares". The Fund's
total return may be expressed either as a percentage or as a dollar amount in
order to illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., or to data contained in publications such as Money Magazine,
U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine or
other industry publications. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period. The Fund may also compare historical
performance of U.S. equity securities to the performance over the same period of
time of other financial instruments issued by domestic issuers in its
advertising literature. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature.
33
ADDITIONAL INFORMATION
Dividends and Distributions
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid at
least annually. All net realized capital gains, if any, are distributed to the
Fund's shareholders at least annually. See "Additional
Information--Determination of Net Asset Value" below. Dividends and
distributions may be reinvested automatically in shares of the Fund, at net
asset value without a sales charge. Shareholders may elect in writing to receive
any such dividends or distributions, or both, in cash. See "Shareholder
Services--Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information as to how to elect either dividend reinvestment or cash
payments. Dividends and distributions are taxable to shareholders as described
below whether they are reinvested in shares of the Fund or received in cash.
From time to time, the Fund may declare a special distribution at or about the
end of the calendar year in order to comply with Federal tax requirements that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Determination of Net Asset Value" below.
Gains or losses attributable to foreign currency gains or losses from
certain of the Fund's investments may increase or decrease the amount of the
Fund's income available for distribution to shareholders. If such losses exceed
other income during a taxable year, (a) the Fund would not be able to make any
ordinary income dividend distributions, and (b) all or a portion of
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary income dividend,
reducing each shareholder's tax basis in Fund shares for Federal income tax
purposes. For a more detailed discussion of the Federal tax considerations
relevant to foreign currency transactions, see "Taxes" below.
Determination of Net Asset Value
The net asset value of the shares of all classes of the Fund is determined
once daily 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The net asset value is
computed by dividing the market value of the securities held by the Fund plus
any cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time. Expenses, including the management fees
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily. The Fund employs Merrill Lynch
Securities Pricing(SM) Service ("MLSPS") an affiliate of the Manager, to provide
certain securities prices for the Fund. During the fiscal year ended August 31,
1997, the Fund did not pay MLSPS a fee for such service.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to the Class D shares; moreover, the
34
per share net asset value of Class D shares generally will be higher than the
per share net asset value of Class B and Class C shares, reflecting the daily
expense accruals of the distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares. It is expected, however, that the
per share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which securities are traded, as
of the close of business on the day the securities are being valued, or, lacking
any sales, at the last available bid price. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary market.
Securities traded in the OTC market are valued at the last available bid price
in the OTC market prior to the time of valuation. 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. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Board of Directors of the Fund.
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends, as
well as the amount of capital gain dividends in the different categories of
capital gain referred to above.
35
A portion of the Fund's ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. If the Fund pays a dividend in January which was declared
in the previous October, November or December to shareholders of record on a
specified date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
36
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
Organization of the Fund
The Fund was incorporated under Maryland law on April 30, 1992. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
fee relating to such shares and Class B and Class C shares bear certain expenses
related to the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Fund has received an
order from the Commission permitting the issuance and sale of multiple classes
of common stock. The Directors of the Fund may classify and reclassify the
shares of the Fund into additional classes of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act
37
does not require shareholders to elect Directors. Also, the by-laws of the Fund
require that a special meeting of shareholders be held upon the written request
of at least 10% of the outstanding shares of the Fund entitled to vote at such
meeting, if they comply with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Shares have the conversion rights described in
this Prospectus. Each share of common stock is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, expenses related to the distribution
of the Class B, Class C, and Class D shares bear certain additional expenses.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
38
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(SM) Program. You may request a Merrill Lynch Blueprint(SM)
Program application by calling toll free (800) 637-3766.
- --------------------------------------------------------------------------------
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares
[ ] Class D shares
of Merrill Lynch Fundamental Growth Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address......................................................
............................................................. Name and Address
of Employer..................................
(Zip Code)
Occupation ...................................................
.............................................................
Signature of Owner
Occupation .......................................... .............................................................
..................................................... .............................................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
Select [ ] Reinvest Select [ ] Reinvest
One: [ ] Cash One: [ ] Cash
--------------------------------- ---------------------------------
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: [ ] Check
or [ ] Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Fundamental Growth Fund, Inc. Authorization Form.
Specify type of account (check one) [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
39
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART
1)--(Continued)
- --------------------------------------------------------------------------------
3. Social Security Number or Taxpayer Identification Number
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
Instruction: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to underreporting and if
you have not received a notice from the IRS that backup withholding has been
terminated. The undersigned authorizes the furnishing of this certification to
other Merrill Lynch sponsored mutual funds.
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. Letter of Intention--Class A and D shares only (See terms and conditions in
the Statement of Additional Information)
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Fundamental Growth Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ]
$250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Fundamental Growth
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Fundamental Growth Fund, Inc. held as security.
By.......................................................... ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name (2) Name....................................................
...................................................
Account Number Account Number..............................................
............................................
- --------------------------------------------------------------------------------
5. For Dealer Only
- --- Branch Office, Address, Stamp.
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Fundamental Growth Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to
notify the Distributor of any purchases or sales made under a Letter of
Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee
the Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
40
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal Plan or the
Automatic Investment Plans only.
- --------------------------------------------------------------------------------
1. Account Registration
------------------------------------
Name of Owner...............................................
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...................................
Address.....................................................
............................................................ Account Number.............................
(if existing account)
- --------------------------------------------------------------------------------
2. Systematic Withdrawal Plan (See terms and conditions in the Statement of
Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in
Merrill Lynch Fundamental Growth Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) [ ] Monthly on the 24th day of each
month, or [ ] Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding business day will
be utilized. Begin systematic withdrawal on ................(month), or as soon
as possible thereafter.
Specify the amount of the withdrawal you would like paid to you (check one): [ ]
$...... of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in the
account.
Specify withdrawal method: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(b) I hereby authorize payment by direct deposit to my bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I provide
written notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one): [ ] checking [ ] savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked "VOID" or
a deposit slip from your savings account shall accompany this application.
- ---------------
* Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the Systematic Withdrawal Plan
is made.
41
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.--AUTHORIZATION FORM (PART
2)--(Continued)
- --------------------------------------------------------------------------------
3. Application for Automatic Investment Plan
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares [ ] Class D shares
of Merrill Lynch Fundamental Growth Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Fundamental Growth Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
.................................. or as soon as possible thereafter.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .................... State ........ Zip Code...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc., I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this application.
42
APPENDIX
The Fund is authorized to use certain strategies involving options and
futures. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments".
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 the seller, but generally
do not require the parties to post margin and are subject to greater risk of
counterparty default. See "Additional Risk Factors of OTC Transactions" below.
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 a commodity 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.
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 commodity
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" under regulations of the
Commodity Futures Trading Commission.
A-1
Risk Factors in Options and Futures
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments 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.
The Fund intends to enter into transactions involving Strategic Instruments
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." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Strategic Instrument 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 Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., futures transactions,
sales of put options) and other types of transactions in which the Fund may
engage (e.g., delayed delivery transactions, discussed below) may expose the
Fund to potential losses which exceed the amount originally invested by the Fund
in such instruments. 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
Strategic Instruments
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. 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 quotation from only
one dealer is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a predetermined
price then the Fund will treat as illiquid such amount of the underlying
securities as
A-2
is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e. current market value of the underlying security minus the
option's exercise price).
Because Strategic Instruments 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 counterpart in the Fund is at risk that its
counterpart will become bankrupt or otherwise fail to honer its obligations by
engaging in transactions in Strategic Instruments traded in OTC markets only
with financial institutions which have substantial capital or which have
provided the Fund with a third-party guaranty or other credit enhancement.
Additional Limitations on the Use of Strategic Instruments
The Fund may not use any Strategic Instrument to gain exposure to an asset
or type or class of assets that it would be prohibited by its investment
restrictions from purchasing directly.
A-3
[This page intentionally left blank]
Manager
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Ernst & Young LLP
202 Carnegie Center
Princeton, New Jersey 08543-5321
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the fund, the Manager or the Distributor. This Prospectus does not constitute
an offering in any state in which such offering may not lawfully be made.
---------------------
TABLE OF CONTENTS
Page
----
Fee Table........................................ 2
Merrill Lynch Select Pricing(SM) System.......... 3
Financial Highlights............................. 8
Investment Objective and Policies................ 10
Other Investment Policies and Practices........ 11
Options on Securities and Securities Indices... 11
Investment Restrictions........................ 14
Management of the Fund........................... 15
Board of Directors............................. 15
Management and Advisory Arrangements........... 15
Code of Ethics................................. 17
Transfer Agency Services....................... 17
Purchase of Shares............................... 17
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 20
Deferred Sales Charge Alternatives--
Class B and Class C Shares................... 22
Distribution Plans............................. 25
Limitations on the Payment of Deferred Sales
Charges...................................... 26
Redemption of Shares............................. 27
Redemption..................................... 27
Repurchase..................................... 28
Reinstatement Privilege--
Class A and Class D Shares................... 28
Shareholder Services............................. 29
Fee-Based Programs............................. 31
Portfolio Transactions and Brokerage............. 32
Performance Data................................. 32
Additional Information........................... 34
Dividends and Distributions.................... 34
Determination of Net Asset Value............... 34
Taxes.......................................... 35
Organization of the Fund....................... 37
Shareholder Inquiries.......................... 38
Shareholder Reports............................ 38
Authorization Form............................... 39
Appendix......................................... A-1
Code # 16463-1197
[LOGO]
Merrill Lynch
Fundamental
Growth Fund, Inc.
Prospectus
November 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
[LOGO]
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Fundamental Growth Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
------------------------
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with long term growth of capital. The Fund will
seek to achieve its investment objective by investing in a diversified portfolio
of equity securities placing particular emphasis on companies that have
exhibited above-average growth rates in earnings.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing System permits
an investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
------------------------
The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November
26, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
Merrill Lynch Asset Management--Manager
Merrill Lynch Funds Distributor, Inc.--Distributor
------------------------
The date of this Statement of Additional Information is November 26, 1997
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of
capital. The Fund will seek to achieve its investment objective by investing in
a diversified portfolio of equity securities placing particular emphasis on
companies that have exhibited above-average growth rates in earnings. There can
be no assurance that the investment objective of the Fund will be realized. The
investment objective of the Fund 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.
The Fund will give particular emphasis to companies that have exhibited
above-average growth rates in earnings, resulting from a variety of factors
including--but not limited to--above-average growth rates in sales, profit
margin improvement, proprietary or niche products or services, leading market
shares, and underlying strong industry growth. Management of the Fund believes
that companies which possess above-average earnings growth frequently provide
the prospect of above-average stock market returns, although such companies tend
to have higher relative stock market valuations. Emphasis also will be given to
companies having medium to large stock market capitalizations ($500 million or
more).
The Fund may invest up to 10% of its total assets in equity securities of
foreign issuers with the foregoing characteristics. (Purchases of American
Depositary Receipts ("ADRs"), however, are not subject to this restriction.)
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since the Fund may invest in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
unrealized appreciation or depreciation of investments insofar as the United
States investors are concerned. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. Foreign
financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The ability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result
2
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Costs associated
with transactions in foreign securities are generally higher than with
transactions in United States securities. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.
The Fund may invest in the securities of foreign issuers in the form of
ADRs, European Depositary Receipts ("EDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets. The
Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not
obligated to disclose material information in the United States and, therefore,
there may not be a correlation between such information and the market value of
such ADRs.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock and rights to subscribe for
common stock. The Fund will maintain at least 65% of its total assets invested
in equity securities except during defensive periods. The Fund reserves the
right as a defensive measure and to provide for redemptions to hold other types
of securities, including non-convertible preferred stocks and debt securities,
Government and money market securities, including repurchase agreements, or
cash, in such proportions as, in the opinion of management, prevailing market or
economic conditions warrant.
Portfolio Strategies Involving Options and Futures
Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The Fund may seek to hedge its portfolio against adverse movements in
the equity markets, interest rates and exchange rates between currencies. The
Fund has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and stock futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions, foreign currency options and futures
and related options on such futures. Each of such portfolio strategies is
described in the Prospectus. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will only engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities where movements on the equity markets, interest rates or
currency exchange rates occur. The following is further information relating to
portfolio strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option price. In addition, the Fund's ability to sell the underlying security
will be limited while the
3
option is in effect unless the Fund effects a closing purchase transaction. A
closing purchase transaction cancels out the Fund's position as the writer of an
option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
particular hedge against the price of the underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of the
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write put options if the aggregate value of the obligations
underlying the put options shall exceed 50% of the Fund's net assets.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges. An options position may be closed only
on an exchange which provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to effect
closing transactions in particular options, with the result, in the case of a
covered call option, that the Fund will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation (the "Clearing Corporation") may not, at all
times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter ("OTC") options transactions
("OTC options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Commission has taken the position
that OTC options and the assets used as cover for written OTC options are
illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price,
4
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund may
purchase either exchange-traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin", are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940 (the "Investment Company Act") in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Fund from issuing a "senior security"
other than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the
Investment Company Act.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements in the prices of the securities
and currencies which are the subject of the hedge. If the prices of the options
and futures move more or less than the prices of the hedged securities or
currencies, the Fund will experience a
5
gain or loss which will not be completely offset by movements in the prices of
the securities and currencies which are the subject of the hedge. The successful
use of options, futures and currency transactions also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is theoretically
unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and positions limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
Other Investment Policies and Practices
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, on entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. Such
agreements usually cover short periods, such as under a week. 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 a default by the seller, the Fund
ordinarily will retain ownership of the securities underlying the repurchase
agreement, and instead of a contractually fixed rate of return, the rate of
return to the Fund shall be dependent upon intervening fluctuations of the
market value of such securities and the accrued interest on the securities. In
such event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller
6
to perform. The Fund may suffer time delays and incur costs or possible losses
in connection with the disposition of the securities underlying a repurchase
agreement in the event of the counterparty's default. From time to time the Fund
also may invest in securities pursuant to purchase and sale contracts. While
purchase and sale contracts are similar to repurchase agreements, purchase and
sale contracts are structured so as to be in substance more like a purchase and
sale of the underlying security than is the case with repurchase agreements.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities on a delayed delivery basis or a when-issued basis
at fixed purchase terms. These transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place in the future. The
purchase will be recorded on the date the Fund enters into the commitment and
the value of the obligation will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the obligation on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be
established with its custodian consisting of cash, cash equivalents or high
grade, liquid debt securities having a market value at all times at least equal
to the amount of the forward commitment.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. However, the Fund may purchase, without regard to that
limitation, securities that are not registered under the Securities Act of 1933
(the "Securities Act") but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors, or the Manager pursuant to guidelines adopted by
the Board, continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid. The Board of Directors, however,
will retain oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Investment Restrictions. In addition to the investment restrictions set
forth in the Prospectus, the Fund has adopted a number of fundamental and
non-fundamental investment policies and restrictions. The fundamental policies
and restrictions 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 means the lesser of (i) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares). Unless otherwise provided, all references
to the assets of the Fund below are in terms of current market value. The Fund
may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
7
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Notwithstanding fundamental investment restriction (7) above, the Fund
currently does not intend to borrow amounts in excess of 33 1/3% of its total
assets, taken at market value, and then only from banks as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings are
outstanding.
Under the non-fundamental investment restrictions, 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 its 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 which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
have otherwise determined to be liquid pursuant to applicable law.
8
d. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares.
Lending of Portfolio Securities. Subject to investment restriction (5)
above, the Fund may from time to time lend securities from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States 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. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans will be terminable at any time. The Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
voting rights, subscription rights and rights to dividends, interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with the
Fund for services in arranging such loans. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return the
securities involved in such transactions.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to a
permissive order or otherwise in compliance with the provisions of the
Investment Company Act and the rules and regulations thereunder. Included among
such restricted transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
MANAGEMENT OF THE FUND
Directors and Officers
Information about the Directors and executive officers 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 executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65)--President and Director (1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessor) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
JOE GRILLS (62)--Director (2)--P.O. Box 98, Rapidan, Virginia 22733. Member
of the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; member of CIEBA's Executive Committee
since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committees of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute; Director, Duke Management Company since 1993;
Director, La Salle Street Fund since 1995; Director, Kimco Realty Corporation
since January 1997.
WALTER MINTZ (68)--Director (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
9
ROBERT S. SALOMON, JR. (61)--Director (2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman and
CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
MELVIN R. SEIDEN (67)--Director (2)--780 Third Avenue, Suite 2502, New
York, New York 10017. Director of Silbanc Properties, Ltd. (real estate,
investments and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD (64)--Director (2)--24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Associates (financial
consultants) since 1975.
TERRY K. GLENN (57)--Executive Vice President (1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (64)--Senior Vice President (1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
LAWRENCE R. FULLER (56)--Senior Vice President (1)--First Vice President of
the Manager since 1997 and Vice President of the Manager since 1992; Senior Vice
President and Director of Benefit Capital Management from 1984 to 1992.
GERALD M. RICHARD (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Servicers since 1993; Treasurer of the Distributor since 1984 and
Vice President since 1981.
DONALD C. BURKE (37)--Vice President (1)(2)--First Vice President of FAM
since 1997; Vice President of FAM from 1990 to 1997; Director of Taxation of FAM
since 1990.
BARBARA FRASER (53)--Secretary (1)(2)--First Vice President of the Manager
since 1996; Vice President of the Manager from 1994 until 1996.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of one or more investment
companies for which the Manager, or its affiliate FAM, acts as investment
adviser or manager.
At October 31, 1997 the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
The Fund pays each Director non-affiliated with the Manager a fee of $2,000
per year, plus a fee of $500 for each board meeting attended and out-of-pocket
expenses relating to attendance at meetings, and each Audit Committee member an
annual fee of $2,000 plus $500 for each Committee meeting attended. Fees and
expenses paid to the non-affiliated Directors aggregated $40,267 for the fiscal
year ended August 31, 1997.
10
The following table sets forth for the fiscal year ended August 31, 1997
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996 the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate. FAM
("MLAM/FAM-Advised Funds"), to the non-affiliated Directors:
Aggregate
Pension or Compensation
Retirement from Fund and
Benefits Accrued MLAM/FAM-Advised
Compensation as Part of Funds Paid to
Director from the Fund Fund Expense Director(1)
-------- ------------- ---------------- ----------------
Joe Grills..................................... $8,000 None $164,000
Walter Mintz................................... $8,000 None $164,000
Robert S. Salomon, Jr.......................... $8,000 None $187,167
Melvin R. Seiden............................... $8,000 None $164,000
Stephen B. Swensrud............................ $8,000 None $154,250
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Joe
Grills (19 registered investment companies consisting of 47 portfolios),
Walter Mintz (18 registered investment companies consisting of 37
portfolios), Robert S. Salomon, Jr. (18 registered investment companies
consisting of 37 portfolios), Melvin R. Seiden (18 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (21 registered
investment companies consisting of 52 portfolios).
Management and Advisory Arrangements
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate of
0.65% of the average daily net assets of the Fund. For the fiscal years ended
August 31, 1995, 1996 and 1997, the total advisory fees paid by the Fund to the
Manager aggregated $560,426, $1,259,493 and $1,986,602, respectively. For those
years, the Manager made no reimbursement of expenses to the Fund in respect of
the applicable expense limitation provisions.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. The Fund pays
all other expenses incurred in its operation, including, among other things,
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor), charges
of the custodian, any sub-custodian and transfer agent, expenses of redemption
of shares, Commission fees, expenses of registering the shares under Federal,
state or foreign laws, fees and expenses of unaffiliated Directors, accounting
and pricing costs (including the daily calculation of net
11
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Fund. Accounting services are provided to the Fund by the Manager and the
Fund reimburses the Manager for its costs in connection with such services on a
semiannual basis. For the Fund's fiscal years ended August 31, 1995, 1996 and
1997 the amounts of such reimbursement were $72,042, $57,139, and $66,072,
respectively. The Distributor will pay certain promotional expenses of the Fund
incurred in connection with the offering of its shares. 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."
ML & Co. and Princeton Services are "controlling persons" of the Manager as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s
parent), a subsidiary of ML International Holdings, a subsidiary of Merrill
Lynch International, Inc., a subsidiary of ML & Co.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement and the Sub-Advisory Agreement will remain in effect
from year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contracts are not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
Alternative Sales Arrangements
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
12
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
Initial Sales Charge Alternatives--Class A and Class D Shares
The gross sales charges for the sale of Class A shares for the fiscal year
ended August 31, 1997 were $8,133, of which the Distributor received $671 and
Merrill Lynch received $7,462 as a selected dealer of such shares. The gross
sales charges for the sale of Class A shares for the fiscal year ended August
31, 1996 were $7,458, of which the Distributor received $516 and Merrill Lynch
received $6,942 as a selected dealer of such shares. For the period October 21,
1994 (commencement of operations) to August 31, 1995, the gross sales charges
for the sale of Class A shares were $7,234, of which the Distributor received
$541 and Merrill Lynch received $6,693 as a selected dealer. The gross sales
charges for the sale of Class D shares for the fiscal year ended August 31, 1997
were $276,456, of which the Distributor received $19,739 and Merrill Lynch
received $256,717. The gross sales charges for the sale of Class D shares for
the fiscal year ended August 31, 1996 were $127,154, of which the Distributor
received $9,460 and Merrill Lynch received $117,694 as a selected dealer of such
shares. The gross sales charges for the sale of Class D shares for the fiscal
year ended August 31, 1995 were $98,184, of which the Distributor received
$6,751 and Merrill Lynch received $91,433 as a selected dealer. During such
period, the Distributor received CDSCs of $735 with respect to redemptions
within one year after purchase of Class D shares purchased subject to front-end
sales charge waivers.
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 or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code")) although more than
one beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of the
Fund or shares of other registered investment companies at a discount. The term
"purchase" shall not include purchases by any group of individuals whose sole
organization 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. The term "purchase" also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the
13
quantity discounts discussed above only if the Fund and the Distributor are able
to realize economies of scale in sales effort and sales related expense by means
of the company, employer or plan making the Fund's Prospectus available to
individual investors or employees and forwarding investments by such persons to
the Fund and by any such employer or plan bearing the expense of any payroll
deduction plan.
Closed-End-Fund Investment Option. Class A shares of the Fund and certain
other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by the Manager
or FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date the Merrill Lynch Select Pricing(SM) System commenced operations) and wish
to reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A or Class D shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and who wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A shares. Second, the closed-end fund shares must
either have been acquired in the initial public offering or be shares
representing dividends from shares of common stock acquired in such offering.
Third, the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase of
$250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder 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
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Reduced Initial Sales Charge
Right of Accumulation. The 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 MLAM-advised mutual fund. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of
14
qualification, and acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension,
profit-sharing, or other employee benefit plans may not be combined with other
shares to qualify for the right of accumulation.
Letter of Intention. The reduced sales charges are applicable to a
purchase aggregating $25,000 or more in Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward 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 purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
The Blueprint program 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 per share plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $300.01 to
$5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class D shares of the Fund are
being offered at net asset value per share plus a sales charge of 1/2 of 1% for
corporate or group IRA programs placing orders to purchase their Class A and
Class D investors through Blueprint, however, may differ from those available to
other investors in Class A or Class D shares.
15
Class A and Class D shares are offered at net asset value to Blueprint
participants 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
(as defined below) whose Trustee and/or plan sponsor has entered into the IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
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 employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and controlled by
Merrill Lynch & Co., Inc.), and any trust, pension, profit-sharing or other
benefit plan for such persons may purchase Class A shares of the Fund at net
asset value.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; second, the investor also 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
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("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 notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the
16
redemption of such shares of other mutual funds and that such shares have been
outstanding for a period of no less than six months; and second, such purchase
of Class D shares must be made within 60 days after the redemption and the
proceeds from the redemption must be maintained in the interim in cash or a
money market fund.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse tax consequences
to the Fund that might result from an acquisition of assets having net
unrealized appreciation that is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, that are not restricted as to transfer either
by law or liquidity of market (except that the Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits on acquisition of such securities set forth under
"Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the contingent deferred sales charge
("CDSC") upon redemption, based on similar criteria. Such Class B shares will
convert into Class D shares approximately ten years after the plan purchases the
first share of any MLAM-advised mutual fund. Minimum purchase requirements may
be waived or varied for such plans. Additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other arrangements
is available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
Distribution Plans
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account
17
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the Fund and its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of the
Directors, including a majority of the Independent Directors who have no direct
or indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (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.
18
The following table sets forth information as of August 31, 1997, with
respect to the Class B shares and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and with respect to Class B shares, the Distributor's voluntary maximum.
Data Calculated as of August 31, 1997
Annual
Allowable Amount Distribution
Eligible Aggregate Interest on Maximum Previously Aggregate Fees at Current
Gross Sales Unpaid Amount Paid to Unpaid Net Asset
Sales Charges Balance(1) Payable Distributor(2) Balance Level(3)
-------- --------- ----------- ------- -------------- --------- ---------------
Class B (in thousands)
Under NASD Rule as
Adopted............... $141,201 $8,825 $1,239 $10,064 $3,479 $6,585 $1,627
Under Distributor's
Voluntary Waiver...... $141,201 $8,825 $ 706 $9,531 $3,479 $6,052 $1,627
Class C (in thousands)
Under NASD Rule as
Adopted............... $ 58,172 $3,636 $ 826 $4,462 $1,474 $2,988 $ 559
- ------------------
(1) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1% as permitted under the NASD
Rule.
(2) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A Shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Fund
Advisor (Merrill Lynch 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.
(3) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge payments)
is amortizing the unpaid balance. No assurance can be given that payments of
the distribution fee will reach either the NASD maximum or, with respect to
Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the NYSE
is restricted as determined by the Commission or such Exchange is closed (other
than customary weekend and holiday closings) for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
the Fund.
Deferred Sales Charge--Class B and Class C Shares
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while the new Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of the new Class B shares in
certain instances including in connection with certain post-retirement
withdrawals from an IRA or other retirement plans or on redemptions of Class B
shares following the death or disability of the new Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawals are:
(a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic
19
payments (not less frequently than annually) made for the life (or life
expectancy) or any redemption resulting from the tax-free return of an excess
contribution to an IRA; or (b) any partial or complete redemption following the
death or disability (as defined in the Code) of the new Class B shareholder
(including one who owns the new 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. With respect to Class B shares, for the
fiscal years ended August 31, 1997 and 1996, and for the period October 21, 1994
(commencement of operations) to August 31, 1995, the Distributor received CDSCs
of $315,318, $175,285 and $61,480, respectively, all of which was paid to
Merrill Lynch. With respect to Class C shares, for the fiscal years ended August
31, 1997, 1996 and 1995, the Distributor received CDSCs of $7,765, $10,678 and
$10,532, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint (SM) Program. Class B shares are offered to
certain participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as trade associations and credit unions. Class B shares of
the Fund are offered through Blueprint only to members of certain affinity
groups. The CDSC is waived in connection with purchase orders placed through
Blueprint by members of such affinity groups. 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 Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for making the Fund's portfolio decisions and placing the
Fund's portfolio transactions. The Fund has no obligation to deal with any
broker or group of brokers in the execution of transactions in portfolio
securities. Orders for transactions in portfolio securities are placed for the
Fund with a number of brokers and dealers, including Merrill Lynch. In placing
orders, it is the policy of the Fund to obtain the most favorable net results,
taking into account various factors, including price, commissions, if any, size
of the transaction and difficulty of execution. Where practicable, the Manager
surveys a number of brokers and dealers in connection with proposed portfolio
transactions and selects the broker or dealer which offers the Fund best price
and execution or other services which are of benefit to the Fund. Securities
firms also may receive brokerage commissions on transactions including covered
call options written by the Fund and the sale of underlying securities upon the
exercise of such options. In addition, consistent with the Conduct Rules of the
NASD and policies established by the Fund's Board of Directors, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $554,589, of which $8,520, or 1.54%, was paid to Merrill Lynch
for effecting 2.43% of the aggregate amount of transactions
20
on which the Fund paid brokerage commissions. For the fiscal year ended August
31, 1996, the Fund paid total brokerage commissions of $345,415, of which
$15,900, or 4.6% was paid to Merrill Lynch for effecting 5.28% of the aggregate
dollar amount of transactions in which the Fund paid brokerage commissions. For
the fiscal year ended August 31, 1995, the Fund paid total brokerage commissions
of $199,948, of which $21,850, or 10.93%, was paid to Merrill Lynch for
effecting 12.81% of the aggregate amount of transactions on which the Fund paid
brokerage commissions.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will be
benefitted by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts.
The Fund also may invest in certain securities traded in the OTC market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Since transactions
in the OTC market usually involve transactions with dealers acting as principal
for their own accounts, affiliated persons of the Fund, including Merrill Lynch,
will not serve as the Fund's dealer in such transactions. However, affiliated
persons of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared to
the fee or commission received by such nonaffiliated brokers in connection with
comparable transactions.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts which they manage
unless the member (i) has obtained prior express authorization from the account
to effect such transactions, (ii) at least annually furnishes the account with
the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities, including Merrill Lynch. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fee paid by the Fund.
After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
21
While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in its management's judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions.
Accordingly, while the Fund anticipates that its annual turnover rate should not
exceed 150% under normal conditions, it is impossible to predict portfolio
turnover rates. For the fiscal years ended August 31, 1996 and 1997, the Fund's
portfolio turnover rate was 82.10% and 94.38%, respectively. Higher portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads and brokerage commissions, which are borne directly by the Fund.
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 all securities whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. The Fund will, however, monitor its trading so as to comply
with certain requirements for qualifying as a RIC under the Code.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of all classes of the Fund is determined once
daily Monday through Friday, as of 15 minutes after the close of business on the
NYSE (generally, 4:00 p.m., New York time) on each day during which such
Exchange is open for trading. The NYSE is not open on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the management
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares, reflecting the daily expense accruals
of the distribution fees and higher transfer agency fees applicable with respect
to the Class B and Class C shares of the 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 or
distributions, which will differ by approximately the amount of the expense
accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. 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
22
options or, in the case of options traded in the OTC market, the last bid price.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Board of Directors of the Fund.
The Fund may, to the extent permitted by its investment restrictions, have
positions in portfolio securities for which market quotations are not readily
available. It may be difficult to determine precisely the fair market value for
such investments and there may be a range of values which are reasonable at any
particular time. Determination of fair value in such instances will be based
upon such factors as are deemed relevant under the circumstances, including the
financial condition and operating results of the issuer, recent third party
transactions (actual or proposed) relating to such securities and, in extreme
cases, the liquidation value of the issuer.
Option Accounting Principles. When the Fund sells an option, an amount
equal to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of such liability will
be subsequently marked-to-market to reflect the current market value of the
option written. If current market value exceeds the premium received there is an
unrealized loss; conversely, if the premium exceeds current market value there
is an unrealized gain. The current market value of a traded option is the last
sale price or, in the absence of a sale, the last offering price. If an option
expires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option will be extinguished. If an option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of sale are increased by the premium originally
received.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place orders for the Fund's shares
through the Merrill Lynch Blueprint(SM) Program. Full details as to each of such
services can be obtained from the Fund, the Distributor or Merrill Lynch.
Investment Account
Each shareholder whose account is maintained with Financial Data Services,
Inc. (the "Transfer Agent") has an Investment Account and will receive
statements, at least quarterly, from the Transfer Agent. These statements will
serve as transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. The statements will also show any other activity in the account
since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. A shareholder may make additions to his
or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of 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 considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares
23
are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for registration as described in the preceding
sentence. Shareholders considering transferring a tax-deferred retirement
account such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
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 as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. Investors
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distribution
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in full and fractional shares of
the Fund. Such reinvestment will be at the net asset value per share (i.e.,
without a sales charge) next determined on the ex-dividend date for such
dividends and distributions. Shareholders may elect in writing to receive either
their income dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the payment
date. Cash payments can also be directly deposited to the shareholder's bank
account.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to
have the dividends and/or capital gains distributions reinvested in shares of
the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, such instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
24
Systematic Withdrawal Plans
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or more
and monthly withdrawals for shareholders with shares having a value of $10,000
or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York City time) on the 24th day of each month or the 24th day of
the last month of each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the shares will be redeemed at the close of business
on the following business day. The check for the withdrawal payment will be
mailed or the direct deposit of the withdrawal payment will be made on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all shares in the Investment Account
are reinvested automatically in the shares of the Fund. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares-Contingent Deferred Sales-Class B Shares" and "--Contingent Deferred
Sales Charge-Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares in
an account to Class D shares, the systematic withdrawal plan will automatically
be applied thereafter to Class D shares. See "Purchase of Shares--Deferred Sales
Charge Alternatives-Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares" in the Prospectus; if an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
25
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment Program.
For more information on the CMA(R)/CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.
Retirement Plans
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100, and the minimum subsequent purchase is $1.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should review specific tax
laws relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in 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 MLAM-advised mutual 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 MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also are exchangeable for shares of certain MLAM-advised
money market funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the
26
shareholder for at least 15 days. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D 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 charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund 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 sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
new Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund")
27
after having held the Fund Class B shares for two and a half years and three
years later decide to redeem the shares of Institutional Fund for cash. At the
time of this redemption, the 2% CDSC that would have been due had the Class B
shares of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If, instead of such redemption, the
shareholder exchanged such shares for Class B shares of a fund that the
shareholder continued to hold for an additional one and a half years, any
subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated at any time in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid at
least annually. All net realized capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired options written by
the Fund and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes. See "Shareholder
Services--Automatic Reinvestment of Dividends and Distributions" in the
Prospectus for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund. Dividends
and distributions are taxable to shareholders as described below whether they
are invested in shares of the Fund or received in cash. The per share dividends
and distributions on Class B and Class C shares will be lower than the per share
dividends and distributions on Class A and Class D shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares; similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value".
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (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.
28
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates. Not
later than 60 days after the close of its taxable year, the Fund will provide
its shareholders with a written notice designating the amounts of any ordinary
income or capital gain dividends, as well as the amount of capital gain
dividends in different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of stock) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
29
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such 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 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 Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and 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
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
30
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
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 United States
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. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund would
not be able to make any ordinary income dividend distributions, and all or a
portion of distributions made before the losses were realized but in the same
taxable year would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of currency fluctuations with respect to its investments.
------------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual
31
total returns are determined separately for Class A, Class B, Class C and Class
D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(ii) the maximum applicable sales charge will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Set forth 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 C Shares
Class A Shares Class B Shares (formerly Class B Shares)
---------------------------- ---------------------------- ----------------------------
Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a Value of a as a Value of a as a Value of a
percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment hypothetical investment hypothetical investment
$1,000 at the end $1,000 at the end $1,000 at the end
investment of the period investment of the period investment of the period
------------ ------------- ------------ ------------- ------------ -------------
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended August 31, 1997....... 31.93% $1,319.30 33.95% $1,339.50 36.90% $1,369.00
Inception (December 24, 1992) to
August 31, 1997..................... 14.83% $1,911.60
Inception (October 21, 1994) to
August 31, 1997..................... 24.99% $1,892.80 25.65% $1,921.40
Annual Total Return
(excluding maximum applicable sales charges)
One Year Ended August 31, 1997....... 39.24% $1,392.40 37.95% $1,379.50 37.90% $1,379.00
One Year Ended August 31, 1996....... 19.02% $1,190.20 17.68% $1,176.80 17.68% $1,176.30
One Year Ended August 31, 1995....... 18.28% $1,182.80
One Year Ended August 31, 1994....... 1.01% $1,010.10
Inception (December 24, 1992) to
August 31, 1993..................... (1.40)% $ 986.00
Inception (October 21, 1994) to
August 31, 1995..................... 20.55% $1,205.50 19.60% $1,196.00
Aggregate Total Return
(including maximum applicable sales charges)
Inception (December 24, 1992) to
August 31, 1997.................... 91.16% $1,911.60
Inception (October 21, 1994) to
August 31, 1997..................... 89.28% $1,892.80 92.14% $1,921.40
Class D Shares
(formerly Class A Shares)
----------------------------
Expressed Redeemable
as a Value of a
percentage hypothetical
based on a $1,000
hypothetical investment
$1,000 at the end
investment of the period
------------ -------------
(including maximum
applicable sales charges)
One Year Ended August 31, 1997....... 31.61% $1,316.10
Inception (December 24, 1992) to
August 31, 1997..................... 14.40% $1,878.20
Inception (October 21, 1994) to
August 31, 1997.....................
(excluding maximum
applicable sales charges)
One Year Ended August 31, 1997....... 38.90% $1,389.00
One Year Ended August 31, 1996....... 18.70% $1,187.00
One Year Ended August 31, 1995....... 19.15% $1,191.50
One Year Ended August 31, 1994....... 1.82% $1,018.20
Inception (December 24, 1992) to
August 31, 1993..................... (0.90)% $ 991.00
Inception (October 21, 1994) to
August 31, 1995.....................
(including maximum
applicable sales charges)
Inception (December 24, 1992) to
August 31, 1997.................... 87.82% $1,878.20
Inception (October 21, 1994) to
August 31, 1997.....................
32
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"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of CDSCs a lower amount of expenses may be deducted.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on April 30, 1992. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to elect Directors. Also, the by-laws of the
Fund require that a special meeting of stockholders be held upon the written
request of at least 10% of the outstanding shares of the Fund entitled to vote
at such meeting, if they comply with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share is entitled to participate
equally in dividends and distributions declared by the Fund and in the net
assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, except that expenses related to the distribution of the
shares within a class will be borne solely by such class. Stock certificates are
issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
Class A (now redesignated Class D) shares of Common Stock and 5,000 Class B (now
redesignated Class C) shares of Common Stock for an aggregate of $100,000. Such
shares were acquired for investment and can only be disposed of by redemption.
The organizational expenses of the Fund (estimated at approximately $104,725)
will be paid by the Fund and amortized over a period not exceeding five years.
The proceeds realized by the Manager (or any subsequent holder) upon redemption
of any of such shares will be reduced by the proportionate amount of the
unamortized organizational expenses which the number of shares redeemed bears to
the number of shares initially purchased.
33
Computation of Offering Price per Share
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets on August 31, 1997 and its
shares outstanding on that date is set forth below.
Class A Class B Class C Class D
------- ------- ------- -------
Net Assets............................... $62,048,468 $216,636,197 $74,732,279 $53,101,345
=========== ============ =========== ===========
Number of Shares Outstanding............. 3,571,596 12,983,781 4,469,488 3,074,187
=========== ============ =========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 17.37 $ 16.69 $ 16.72 $ 17.27
Sales Charge (Class A and Class D shares:
5.25% of offering price (5.54% of net
asset value per share))*............... .96 ** ** .96
----------- ------------ ----------- -----------
Offering Price........................... $ 18.33 $ 16.69 $ 16.72 $ 18.23
=========== ============ =========== ===========
- ---------------
* 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 upon redemption. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
Independent Auditors
Ernst & Young LLP, 202 Carnegie Center, Princeton, New Jersey 08543-5321,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
Custodian
The Chase Manhattan Bank, N.A., Global Securities Services, Chase MetroTech
Center, 18th Floor, Brooklyn, New York 11245, (the "Custodian") acts as the
Custodian of the Fund's assets. Under its contract with the Fund, the Custodian
is authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside the
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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Report to Shareholders
The fiscal year of the Fund ends on August 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing
34
financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year, shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Company has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on November 1, 1997.
35
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Merrill Lynch Fundamental Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Fundamental Growth Fund, Inc., including the schedule of investments, as
of August 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended and financial highlights for each of the years indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Fundamental Growth Fund, Inc. at August 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the indicated periods, in conformity with generally accepted accounting
principles.
Princeton, New Jersey
October 3, 1997
36
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
Advertising 75,000 Interpublic Group of Companies, Inc. $2,084,537 $3,656,250 0.9%
Banking & Financial 120,000 Banc One Corp. 5,616,201 6,435,000 1.6
160,000 BankAmerica Corp. 11,569,931 10,530,000 2.6
60,000 Citicorp 7,586,413 7,657,500 1.9
100,000 State Street Boston Corp. 4,071,881 4,987,500 1.2
---------- ---------- -----
28,844,426 29,610,000 7.3
Beverages 70,000 The Coca-Cola Co. 3,760,705 4,011,875 1.0
Communications 50,000 + Cisco Systems, Inc. 3,335,625 3,765,625 0.9
Equipment 200,000 + FORE Systems, Inc. 4,973,550 4,075,000 1.0
50,000 Lucent Technologies, Inc. 3,344,460 3,893,750 1.0
175,000 + Newbridge Networks Corp. 6,882,028 7,962,500 2.0
120,000 Northern Telecom Ltd. 9,996,477 11,895,000 2.9
150,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 5,634,178 6,243,750 1.5
---------- ---------- -----
34,166,318 37,835,625 9.3
Computers 275,000 + COMPAQ Computer Corp. 9,796,553 18,012,500 4.4
40,000 Hewlett-Packard Co. 2,192,800 2,452,500 0.6
---------- ---------- -----
11,989,353 20,465,000 5.0
Cosmetics 45,000 The Gillette Co. 2,463,996 3,726,563 0.9
20,000 International Flavors & Fragrances Inc. 973,375 1,022,500 0.3
---------- ---------- -----
3,437,371 4,749,063 1.2
Electrical Equipment 30,000 Emerson Electric Co. 1,226,140 1,640,625 0.4
190,000 General Electric Co. 8,425,463 11,875,000 2.9
40,000 Honeywell, Inc. 2,993,474 2,765,000 0.7
---------- ---------- -----
12,645,077 16,280,625 4.0
Electronics 155,000 Intel Corp. 11,063,643 14,250,313 3.5
Energy 150,000 El Paso Natural Gas Co. 6,910,825 8,437,500 2.1
200,000 Enron Corp. 8,433,697 7,712,500 1.9
---------- ---------- -----
15,344,522 16,150,000 4.0
Entertainment 130,000 + Viacom, Inc. (Class A) 6,082,341 3,835,000 0.9
45,000 The Walt Disney Co. 2,948,388 3,456,563 0.9
---------- ---------- -----
9,030,729 7,291,563 1.8
Financial Services 100,000 American Express Company 8,020,647 7,775,000 1.9
270,000 Federal National Mortgage Association 11,473,014 11,880,000 2.9
200,000 Travelers Group Inc. 11,156,398 12,700,000 3.1
---------- ---------- -----
30,650,059 32,355,000 7.9
Food 30,000 ConAgra Inc. 1,334,300 1,929,375 0.5
30,000 Wrigley (Wm.) Jr. Co. (Class B) 1,890,550 2,175,000 0.5
---------- ---------- -----
3,224,850 4,104,375 1.0
Food Merchandising 110,000 Albertson's, Inc. 4,309,983 3,781,250 0.9
100,000 + Meyer (Fred), Inc. 3,679,211 5,200,000 1.3
---------- ---------- -----
7,989,194 8,981,250 2.2
37
Hotel 20,000 Marriott International, Inc. 994,115 1,331,250 0.3
Household Products 120,000 Colgate-Palmolive Co. 8,092,210 7,530,000 1.9
20,000 Kimberly-Clark Corporation 1,078,644 948,750 0.2
50,000 Procter & Gamble Co. 5,346,649 6,653,125 1.6
---------- ---------- -----
14,517,503 15,131,875 3.7
Information 110,000 First Data Corp. 4,518,508 4,516,875 1.1
Processing
Insurance 10,000 Aetna Inc. 822,491 954,375 0.2
37,500 American International Group, Inc. 2,575,130 3,539,063 0.9
---------- ---------- -----
3,397,621 4,493,438 1.1
Leisure 115,000 Polygram N.V. (NY Registered Shares) 5,983,544 6,059,062 1.5
Medical -- Technology 120,000 + Boston Scientific Corp. 6,801,221 8,460,000 2.1
70,000 Johnson & Johnson 2,915,118 3,968,125 1.0
---------- ---------- -----
9,716,339 12,428,125 3.1
Oil Services 170,000 Baker Hughes, Inc. 6,610,954 7,203,750 1.8
230,000 Diamond Offshore Drilling, Inc. 8,346,270 12,563,750 3.1
165,000 Schlumberger Ltd. 9,351,028 12,570,937 3.1
---------- ---------- -----
24,308,252 32,338,437 8.0
Pharmaceuticals 165,000 Amgen, Inc. 7,109,486 8,167,500 2.0
55,000 Bristol-Myers Squibb Co. 4,234,097 4,180,000 1.0
60,000 Merck & Co., Inc. 4,447,361 5,508,750 1.4
75,000 Pfizer, Inc. 3,180,350 4,153,125 1.0
---------- ---------- -----
18,971,294 22,009,375 5.4
Photography 15,000 Eastman Kodak Co. 953,578 980,625 0.2
Pollution Control 20,000 Waste Management Inc. 591,174 640,000 0.2
Restaurant 25,000 McDonald's Corp. 1,141,245 1,182,812 0.3
Retail Specialty 100,000 CVS Corporation 5,445,625 5,637,500 1.4
155,000 + Staples Inc. 3,910,927 3,623,125 0.9
200,000 Walgreen Co. 4,591,588 5,387,500 1.3
---------- ---------- -----
13,948,140 14,648,125 3.6
Retail Stores 330,000 Wal-Mart Stores, Inc. 10,768,309 11,715,000 2.9
Software -- Computer 130,000 + Baan Company, N.V. (US Registered Shares) 6,990,450 7,816,250 1.9
60,000 + Microsoft Corp. 5,980,753 7,931,250 1.9
200,000 + Oracle Corp. 6,622,281 7,612,500 1.9
130,000 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung) (ADR)(a) 7,936,625 10,010,000 2.5
---------- ---------- -----
27,530,109 33,370,000 8.2
Travel & Lodging 25,000 Carnival Corporation (Class A) 588,075 1,095,312 0.3
Total Stocks 312,158,590 361,681,250 89.0
38
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
Commercial $13,000,000 Falcon Asset Securitization Corp., 5.51% due
Paper* 9/22/1997 $12,954,236 $12,954,236 3.2%
15,968,000 General Motors Acceptance Corp., 5.69% due
9/02/1997 15,960,429 15,960,429 3.9
12,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/17/1997 11,966,880 11,966,880 2.9
---------- ---------- -----
40,881,545 40,881,545 10.0
US Government 7,000,000 Federal National Mortgage Association,
Agency Obligations* 5.44% due 9/26/1997 6,971,440 6,971,440 1.7
Total Short-Term Securities 47,852,985 47,852,985 11.7
Total Investments $360,011,575 409,534,235 100.7
============
Liabilities in Excess of Other Assets (3,015,946) (0.7)
----------- -----
Net Assets $406,518,289 100.0%
============ =====
* Commercial Paper and certain US Government Agency Obligations are traded on
a discount basis; the interest rates shown are the discount rates paid at
the time of purchase by the Fund.
+ on-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
PORTFOLIO INFORMATION
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
COMPAQ Computer Corp. 4.4%
Intel Corp. 3.5
Travelers Group Inc. 3.1
Schlumberger Ltd. 3.1
Diamond Offshore Drilling, Inc. 3.1
Northern Telecom Ltd. 2.9
Federal National Mortgage Association 2.9
General Electric Co. 2.9
Wal-Mart Stores, Inc. 2.9
BankAmerica Corp. 2.6
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Communications Equipment 9.3%
Software -- Computer 8.2
Oil Services 8.0
Financial Services 7.9
Banking & Financial 7.3
Pharmaceuticals 5.4
Computers 5.0
Electrical Equipment 4.0
Energy 4.0
Household Products 3.7
Equity Portfolio Changes for the
Quarter Ended August 31, 1997
Additions
American Express Company
BankAmerica Corporation
CVS Corporation
Deletion
Hasbro, Inc.
39
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
Assets: Investments, at value (identified cost -- $360,011,575) (Note 1a) $409,534,235
Cash 781
Receivables:
Capital shares sold $2,119,66
Dividends 244,320 2,363,984
------------
Deferred organization expenses (Note 1f) 5,077
Prepaid registration fees and other assets (Note 1f) 48,848
------------
Total assets 411,952,925
------------
Liabilities: Payables:
Securities purchased 3,033,408
Capital shares redeemed 1,707,569
Distributor (Note 2) 243,391
Investment adviser (Note 2) 212,074 5,196,442
------------
Accrued expenses and other liabilities 238,194
------------
Total liabilities 5,434,636
------------
Net Assets: Net assets $406,518,289
============
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $357,160
Class B Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 1,298,378
Class C Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 446,949
Class D Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 307,419
Paid-in capital in excess of par 292,295,818
Undistributed realized capital gains on investments -- net 62,289,905
Unrealized appreciation on investments -- net 49,522,660
------------
Net assets $406,518,289
============
Net Asset Value: Class A -- Based on net assets of $62,048,468 and 3,571,596 shares
outstanding $17.37
============
Class B -- Based on net assets of $216,636,197 and 12,983,781 shares
outstanding $16.69
============
Class C -- Based on net assets of $74,732,279 and 4,469,488 shares
outstanding $16.72
============
Class D -- Based on net assets of $53,101,345 and 3,074,187 shares
outstanding $17.27
============
See Notes to Financial Statements.
40
Statement of Operations for the Year Ended August 31, 1997
Investment Income Dividends (net of $20,477 foreign withholding tax) $,244,970
(Notes 1d & 1e): Interest and discount earned 1,126,243
------------
Total income 4,371,213
------------
Expenses: Investment advisory fees (Note 2) 1,986,602
Account maintenance and distribution fees -- Class B (Note 2) 1,553,165
Account maintenance and distribution fees -- Class C (Note 2) 626,234
Transfer agent fees -- Class B (Note 2) 350,288
Transfer agent fees -- Class C (Note 2) 141,910
Registration fees (Note 1f) 110,752
Transfer agent fees -- Class A (Note 2) 99,578
Account maintenance fees -- Class D (Note 2) 90,258
Printing and shareholder reports 86,494
Professional fees 77,441
Transfer agent fees -- Class D (Note 2) 69,244
Accounting services (Note 2) 66,072
Directors' fees and expenses 40,267
Custodian fees 21,471
Amortization of organization expenses (Note 1f) 20,308
Pricing fees 711
Other 16,745
------------
Total expenses 5,357,540
------------
Investment loss -- net (986,327)
------------
Realized & Realized gain from investments -- net 63,286,586
Unrealized Gain on Change in unrealized appreciation on investments -- net 31,560,205
Investments -- Net ------------
(Notes 1b, 1c, 1e, & 3): Net Increase in Net Assets Resulting from Operations $93,860,464
============
See Notes to Financial Statements.
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
Operations: Investment loss -- net $(986,327) $(574,728)
Realized gain on investments -- net 63,286,586 25,808,365
Change in unrealized appreciation on investments -- net 31,560,205 3,022,827
------------ ------------
Net increase in net assets resulting from operations 93,860,464 28,256,464
------------ ------------
Distributions to Realized gain on investments -- net:
Shareholders Class A (4,708,644) (541,580)
(Note 1g): Class B (11,489,976) (1,655,483)
Class C (4,699,934) (1,010,551)
Class D (2,535,797) (323,823)
------------ ------------
Net decrease in net assets resulting from distributions to shareholders (23,434,351) (3,531,437)
------------ ------------
Capital Share Trans- Net increase in net assets derived from capital share transactions 95,459,275 73,421,174
actions (Note 4): ------------ ------------
Net Assets: Total increase in net assets 165,885,388 98,146,201
Beginning of year 240,632,901 142,486,700
------------ ------------
End of year $406,518,289 $240,632,901
============ ============
See Notes to Financial Statements.
41
Financial Highlights
Class A++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
Per Share Net asset value, beginning of period $13.60 $11.66 $9.99
Operating ------- ------- -------
Performance: Investment income -- net .07 .07 --
Realized and unrealized gain on investments -- net 4.95 2.13 1.98
------- ------- -------
Total from investment operations 5.02 2.20 1.98
------- ------- -------
Less distributions from realized gain on investments -- net (1.25) (.26) (.31)
------- ------- -------
Net asset value, end of period $17.37 $13.60 $11.66
======= ======= =======
Total Investment Based on net asset value per share 39.24% 19.02% 20.55%++++
Return:** ======= ======= =======
Ratios to Average Expenses .99% 1.12% 1.46%*
Net Assets: ======= ======= =======
Investment income -- net .47% .51% .02%*
======= ======= =======
Supplemental Net assets, end of period (in thousands) $62,049 $47,048 $21,288
Data: ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======= ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
42
Class B++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995
Per Share Net asset value, beginning of period $13.14 $11.40 $9.85
Operating -------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09)
Realized and unrealized gain on investments -- net 4.79 2.07 1.95
-------- ------- -------
Total from investment operations 4.70 2.00 1.86
-------- ------- -------
Less distributions from realized gain on investments -- net (1.15) (.26) (.31)
-------- ------- -------
Net asset value, end of period $16.69 $13.14 $11.40
======== ======= =======
Total Investment Based on net asset value per share 37.95% 17.68% 19.60%++++
Return** ======== ======= =======
Ratios to Average Expenses 2.02% 2.16% 2.48%*
Net Assets: ======== ======= =======
Investment loss -- net (.59%) (.54%) (.95%)*
======== ======= =======
Supplemental Net assets, end of period (in thousands) $216,636 $116,641 $63,748
Data ======== ======= =======
Portfolio turnover 94.38% 82.10% 80.41%
======== ======= =======
Average commission rate paid+++ $.0628 $.0623 --
======== ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
43
Class C++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
Per Share Net asset value, beginning of period $13.14 $11.40 $9.96 $9.86 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment loss -- net (.09) (.07) (.09) (.05) (.05)
Realized and unrealized gain (loss) on
investments -- net 4.79 2.07 1.84 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.70 2.00 1.75 .10 (.14)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.12) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $16.72 $13.14 $11.40 $9.96 $9.86
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 37.90% 17.68% 18.28% 1.01% (1.40%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 2.02% 2.15% 2.44% 2.35% 2.79%*
Net Assets: ======= ======= ======= ======= =======
Investment loss -- net (.58%) (.57%) (.88%) (.52%) (.83%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $74,732 $54,052 $44,220 $47,263 $45,736
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
44
Class D++
For the
Period
The following per share data and ratios have been derived Dec. 24,
from information provided in the financial statements. 1992+ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
Per Share Net asset value, beginning of period $13.54 $11.64 $10.09 $9.91 $10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income (loss) -- net .03 .03 (.01) .03 --
Realized and unrealized gain (loss) on
investments -- net 4.93 2.13 1.87 .15 (.09)
------- ------- ------- ------- -------
Total from investment operations 4.96 2.16 1.86 .18 (.09)
------- ------- ------- ------- -------
Less distributions from realized gain
on investments -- net (1.23) (.26) (.31) -- --
------- ------- ------- ------- -------
Net asset value, end of period $17.27 $13.54 $11.64 $10.09 $9.91
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 38.90% 18.70% 19.15% 1.82% (.90%)++++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses 1.24% 1.37% 1.65% 1.58% 2.03%*
Net Assets: ======= ======= ======= ======= =======
Investment income (loss) -- net .17% .24% (.10%) .31% (.04%)*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands $53,101 $22,892 $13,231 $8,623 $6,930
Data: ======= ======= ======= ======= =======
Portfolio turnover 94.38% 82.10% 80.41% 112.68% 64.09%
======= ======= ======= ======= =======
Average commission rate paid+++ $.0628 $.0623 -- -- --
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
++++ Aggregate total investment return.
See Notes to Financial Statements.
45
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and
Class D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by
the Fund.
(a) Valuation of investments -- Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale
price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the over-
the-counter market, the last bid price. Short-term securities are
valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's Board
of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract
or if the counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss
on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized.
46
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-dividend
dates. Dividends from foreign securities where the ex-dividend date
may have passed are subsequently recorded when the Fund has determined
the ex-dividend date. Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost
basis.
(f) Deferred organization expenses and prepaid registration fees --
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification -- Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,561,106 have been reclassified between undistributed net realized
capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of
MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of 0.65% of
the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor ongoing account maintenance
and distribution fees. The fees are accrued daily and paid monthly at
annual rates based upon the average daily net assets of the shares as
follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund.
The ongoing account maintenance fee compensates the Distributor and
MLPF&S for providing account maintenance services to Class B, Class C
and Class D shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B and Class C shareholders.
47
For the year ended August 31, 1997, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $671 $7,462
Class D $19,739 $256,717
For the year ended August 31, 1997, MLPF&S received contingent
deferred sales charges of $839,643 and $7,765 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $8,520 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August
31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFDS, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1997 were $343,712,654 and $270,177,640,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $63,285,823 $49,522,660
Short-term investments 763 --
----------- -----------
Total $63,286,586 $49,522,660
=========== ===========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $49,522,119, of which $56,467,628 related to
appreciated securities and $6,945,509 related to depreciated
securities. At August 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $360,012,116.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
were $95,459,275 and $73,421,174 for the years ended August 31, 1997
and August 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 5,300,860 $80,749,430
Shares issued to shareholders
in reinvestment of distributions 318,999 4,411,762
---------- -----------
Total issued 5,619,859 85,161,192
Shares redeemed (5,508,434) (81,532,077)
---------- -----------
Net increase 111,425 $3,629,115
========== ===========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 2,291,835 $29,954,753
Shares issued to shareholders
in reinvestment of distributions 41,134 522,810
---------- -----------
Total issued 2,332,969 30,477,563
Shares redeemed (698,358) (8,998,807)
---------- -----------
Net increase 1,634,611 $21,478,756
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,146,257 $124,318,206
Shares issued to shareholders
in reinvestment of distributions 782,595 10,471,125
---------- -----------
Total issued 8,928,852 134,789,331
Automatic conversion
of shares (23,111) (352,449)
Shares redeemed (4,796,356) (69,880,135)
---------- -----------
Net increase 4,109,385 $64,556,747
========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 5,820,916 $73,664,245
Shares issued to shareholders
in reinvestment of distributions 121,775 1,507,570
---------- -----------
Total issued 5,942,691 75,171,815
Automatic conversion
of shares (14,867) (185,102)
Shares redeemed (2,647,233) (33,330,378)
---------- -----------
Net increase 3,280,591 $41,656,335
========== ===========
48
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,343,912 $20,658,965
Shares issued to share-
holders in reinvestment
of distributions 310,633 4,165,597
---------- -----------
Total issued 1,654,545 24,824,562
Shares redeemed (1,297,675) (19,022,602)
---------- -----------
Net increase 356,870 $5,801,960
========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,167,623 $14,787,083
Shares issued to share-
holders in reinvestment
of distributions 71,863 889,667
---------- -----------
Total issued 1,239,486 15,676,750
Shares redeemed (1,007,151) (12,689,514)
---------- -----------
Net increase 232,335 $2,987,236
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 2,051,457 $31,598,761
Automatic conversion of shares 22,419 352,449
Shares issued to shareholders
in reinvestment of distributions 164,753 2,268,645
---------- -----------
Total issued 2,238,629 34,219,855
Shares redeemed (855,358) (12,748,402)
---------- -----------
Net increase 1,383,271 $21,471,453
========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 953,782 $12,474,082
Automatic conversion of shares 14,515 185,102
Shares issued to shareholders
in reinvestment of distributions 20,994 266,204
---------- -----------
Total issued 989,291 12,925,388
Shares redeemed (434,952) (5,626,541)
---------- -----------
Net increase 554,339 $7,298,847
========== ===========
49
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- ------
TABLE OF CONTENTS
Page
----
Investment Objective and Policies.......... 2
Portfolio Strategies Involving Options
and Futures............................ 3
Other Investment Policies and
Practices.............................. 6
Management of the Fund..................... 9
Directors and Officers................... 9
Management and Advisory Arrangements..... 11
Purchase of Shares......................... 12
Alternative Sales Arrangements........... 12
Initial Sales Charge Alternatives--Class
A and Class D Shares................... 13
Reduced Initial Sales Charge............. 14
Employer-Sponsored Retirement or Savings
Plans and Certain Other Arrangements... 17
Distribution Plans....................... 17
Limitations on the Payment of Deferred
Sales Charges.......................... 18
Redemption of Shares....................... 19
Deferred Sales Charge--Class B and Class
C Shares............................... 19
Portfolio Transactions and Brokerage....... 20
Determination of Net Asset Value........... 22
Shareholder Services....................... 23
Investment Account....................... 23
Automatic Investment Plans............... 24
Automatic Reinvestment of Dividends and
Capital Gains Distribution............. 24
Systematic Withdrawal Plans.............. 25
Retirement Plans......................... 26
Exchange Privilege....................... 26
Dividends, Distributions and Taxes......... 28
Dividends and Distributions.............. 28
Taxes.................................... 28
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................... 30
Special Rules for Certain Foreign
Currency Transactions.................. 31
Performance Data........................... 31
General Information........................ 33
Description of Shares.................... 33
Computation of Offering Price Per
Share.................................. 34
Independent Auditors..................... 34
Custodian................................ 34
Transfer Agent........................... 34
Legal Counsel............................ 34
Report to Shareholders................... 34
Additional Information................... 35
Report of Independent Auditors............. 36
Financial Statements....................... 37
YZa Code #16464-1197
Merrill Lynch
Fundamental
Growth Fund, Inc.
Statement of mlynch compass
Additional
Information
November 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.