N-14/A

<R>As filed with the Securities and Exchange Commission on August 11, 2000</R>

Securities Act File No. 333-40436
Investment Company Act File No. 811-2405

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

<R>

[X]	Pre-Effective Amendment No. 1</R>
[   ]	Post-Effective Amendment No.      (Check appropriate box or boxes)

<R>

Merrill Lynch Balanced Capital Fund, Inc.
(Exact Name of Registrant as Specified in its Charter)

</R>

(609) 282-2800
(Area Code and Telephone Number)

800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)

<R>Terry K. Glenn
Merrill Lynch Balanced Capital Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)</R>

Copies to:
Frank P. Bruno, Esq. BROWN & WOOD LLP One World Trade Center New York, New York 10048-0557	<R>Michael J. Hennewinkel, Esq. MERRILL LYNCH INVESTMENT MANAGERS 800 Scudders Mill Road Plainsboro, New Jersey 08536 </R>

     Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933.

     Title of Securities Being Registered: Common Stock, Par Value $.10 per share.

     No filing fee is required because of reliance on Section 24(f) under the Investment Company Act of 1940, as amended.

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

MERRILL LYNCH CONVERTIBLE FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 13, 2000

TO THE STOCKHOLDERS OF
     MERRILL LYNCH CONVERTIBLE FUND, INC.:

<R>     NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Meeting”) of Merrill Lynch Convertible Fund, Inc. (“Convertible Fund”) will be held at the offices of Merrill Lynch Investment Managers, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on September 13, 2000 at 9:00 a.m., Eastern time, for the following purposes:

     (1) To approve or disapprove an Agreement and Plan of Reorganization (the “Agreement and Plan of Reorganization”) providing for the acquisition of substantially all of the assets of Convertible Fund by Merrill Lynch Balanced Capital Fund, Inc. (“Balanced Capital Fund”), and the assumption of substantially all of the liabilities of Convertible Fund by Balanced Capital Fund, in exchange solely for an equal aggregate value of newly-issued shares of Balanced Capital Fund. The Agreement and Plan of Reorganization also provides for distribution of such shares of Balanced Capital Fund to stockholders of Convertible Fund in liquidation of Convertible Fund. A vote in favor of this proposal will constitute a vote in favor of the liquidation and dissolution of Convertible Fund and the termination of its registration under the Investment Company Act of 1940, as amended; and</R>

     (2) To transact such other business as properly may come before the Meeting or any adjournment thereof.

     The Board of Directors of Convertible Fund has fixed the close of business on July 17, 2000 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Meeting or any adjournment thereof.

     A complete list of the stockholders of Convertible Fund entitled to vote at the Meeting will be available and open to the examination of any stockholders of Convertible Fund for any purpose germane to the Meeting during ordinary business hours from and after August 29, 2000 at the offices of Convertible Fund, 800 Scudders Mill Road, Plainsboro, New Jersey.

<R>     You are cordially invited to attend the Meeting. Stockholders who do not expect to attend the Meeting in person are requested to complete, date and sign the enclosed form of proxy and return it promptly in the envelope provided for that purpose. If you have been provided with the opportunity on your proxy card or voting instruction form to provide voting instructions via telephone or the internet, please take advantage of these prompt and efficient voting options. The enclosed proxy is being solicited on behalf of the Board of Directors of Convertible Fund.

     If you have any questions regarding the enclosed proxy material or need assistance in voting your shares, please contact our proxy solicitor, Shareholder Communications Corporation, at 1-800-649-9896.</R>

By Order of the Board of Directors,

IRA P. SHAPIRO
Secretary

<R>

Plainsboro, New Jersey
Dated: August 14, 2000</R>

<R>

JOINT PROXY STATEMENT AND PROSPECTUS

MERRILL LYNCH CONVERTIBLE FUND, INC.
MERRILL LYNCH BALANCED CAPITAL FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800</R>

SPECIAL MEETING OF STOCKHOLDERS OF
MERRILL LYNCH CONVERTIBLE FUND, INC.

<R>September 13, 2000

     This Proxy Statement and Prospectus is being sent to you because you are a stockholder of Merrill Lynch Convertible Fund, Inc. (“Convertible Fund”), a Maryland corporation. Convertible Fund has called a Special Meeting of its stockholders to approve the acquisition of substantially all of its assets and the assumption of substantially all of its liabilities by Merrill Lynch Balanced Capital Fund, Inc. (“Balanced Capital Fund” and together with Convertible Fund, the “Funds”) in exchange for shares of Balanced Capital Fund. After the completion of these transactions, Convertible Fund will terminate its registration under the Investment Company Act of 1940, as amended, and will dissolve in accordance with the laws of the State of Maryland.

     Both Convertible Fund and Balanced Capital Fund are open-end management investment companies with similar, though not identical, investment objectives. Balanced Capital Fund seeks the highest total investment return through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. Convertible Fund seeks high total return from a combination of capital appreciation and investment income. Convertible Fund seeks to achieve its objective by investing primarily in a portfolio of convertible debt securities, convertible preferred stocks and synthetic convertible securities.

     The current prospectus relating to Balanced Capital Fund, dated July 3, 2000 (the “Balanced Capital Fund Prospectus”), accompanies this Proxy Statement and Prospectus and is incorporated herein by reference. The Annual Report to Stockholders of Balanced Capital Fund for the year ended March 31, 2000 also accompanies this Proxy Statement and Prospectus.</R>

     The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Proxy Statement and Prospectus. Any representation to the contrary is a criminal offense.

<R>     This Proxy Statement and Prospectus sets forth concisely the information about Balanced Capital Fund that a stockholder of Convertible Fund should know before considering this reorganization transaction and should be retained for future reference. Convertible Fund has authorized the solicitation of proxies in connection with the Reorganization solely on the basis of this Proxy Statement and Prospectus and the accompanying documents.

     A statement of additional information relating to this reorganization transaction (the “Statement of Additional Information”) is on file with the Securities and Exchange Commission (the “Commission”). It is available from Balanced Capital Fund without charge, upon oral request by calling 1-800-456-4587, ext. 123 or upon written request by writing Balanced Capital Fund at its principal executive offices. The Statement of Additional Information, dated August 14, 2000 is incorporated by reference into this Proxy Statement and Prospectus. The Commission maintains a web site (http://www.sec.gov) that contains the Statement of Additional Information, other material incorporated herein by reference and other information regarding the Funds.

     The address of the principal executive offices of both Convertible Fund and Balanced Capital Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.</R>

<R>The date of this Proxy Statement and Prospectus is August 14, 2000.</R>

TABLE OF CONTENTS

<R>
	Page
INTRODUCTION		3
SUMMARY		3
The Reorganization		3
Pro Forma Fee Tables		5
RISK FACTORS AND SPECIAL CONSIDERATIONS		13
COMPARISON OF THE FUNDS		17
Financial Highlights		17
Investment Objectives		23
Investment Policies		23
Other Investment Policies		25
Information Regarding Options, Futures and Foreign Exchange Transactions		27
Investment Restrictions		27
Management		27
Purchase of Shares		28
Redemption of Shares		28
Performance		29
Stockholder Rights		29
Dividends		30
Automatic Dividend Reinvestment Plan		30
Tax Information		30
Portfolio Transactions		30
Portfolio Turnover		30
Additional Information		30
THE REORGANIZATION		31
General		31
Procedure		32
Terms of the Agreement and Plan		32
Potential Benefits to Stockholders as a Result of the Reorganization		33
Tax Consequences of the Reorganization		34
Capitalization		34
INFORMATION CONCERNING THE SPECIAL MEETING		35
Date, Time and Place of Meeting		35
Solicitation, Revocation and Use of Proxies		35
Record Date and Outstanding Shares		35
Security Ownership of Certain Beneficial Owners and Management of Convertible Fund       and Balanced Capital Fund		35
Voting Rights and Required Vote		36
ADDITIONAL INFORMATION		36
LEGAL PROCEEDINGS		37
LEGAL OPINIONS		37
EXPERTS		37
STOCKHOLDER PROPOSALS		37
AGREEMENT AND PLAN OF REORGANIZATION		I-1
STATEMENT OF ADDITIONAL INFORMATION		1

</R>

 

2

INTRODUCTION

<R>     This Proxy Statement and Prospectus is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of Convertible Fund for use at a special meeting of stockholders of Convertible Fund (the “Meeting”) to be held at the offices of Merrill Lynch Investment Managers (“MLIM”), 800 Scudders Mill Road, Plainsboro, New Jersey on September 13, 2000, at 9:00 a.m., Eastern time. The mailing address for Convertible Fund is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy Statement and Prospectus is August 15, 2000.

     Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation to the Secretary of Convertible Fund at the address indicated above or by voting in person at the Meeting. All properly executed proxies received prior to the Meeting will be voted at the Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, properly executed proxies will be voted “FOR” the proposal to approve the Agreement and Plan of Reorganization between Balanced Capital Fund and Convertible Fund (the “Agreement and Plan”).

     Stockholders of Convertible Fund will be entitled to receive the same class of shares of Balanced Capital Fund (i.e., Class A, Class B, Class C or Class D) (the “Corresponding Shares”) as they held in Convertible Fund immediately prior to the Reorganization. The same distribution fees, account maintenance fees and sales charges (including contingent deferred sales charges (“CDSCs”)), if any, shall apply to Corresponding Shares as applied to shares of Convertible Fund immediately prior to the Reorganization. The aggregate net asset value of the Corresponding Shares of Balanced Capital Fund to be issued to the stockholders of Convertible Fund will equal the aggregate net asset value of the outstanding shares of Convertible Fund as set forth in the Agreement and Plan. Convertible Fund and Balanced Capital Fund sometimes are referred to herein collectively as the “Funds” and individually as a “Fund,” as the context requires. The fund resulting from the Reorganization is sometimes referred to herein as the “Combined Fund.”

     Approval of the Agreement and Plan will require the affirmative vote of a majority of the outstanding shares of Convertible Fund. Stockholders will vote as a single class on the proposal to approve the Agreement and Plan. See “Information Concerning the Special Meeting.”</R>

     The Board of Directors of Convertible Fund knows of no business other than that discussed above which will be presented for consideration at the Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment.

<R>     This Proxy Statement and Prospectus serves as a prospectus of Balanced Capital Fund under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the issuance of shares of Balanced Capital Fund to Convertible Fund pursuant to the terms of the Agreement and Plan.</R>

SUMMARY

     The following is a summary of certain information contained elsewhere in this Proxy Statement and Prospectus (including documents incorporated by reference) and is qualified in its entirety by reference to the more complete information contained in this Proxy Statement and Prospectus and in the Agreement and Plan, attached hereto as Exhibit I.

<R>     In this Proxy Statement and Prospectus, the term “Reorganization” refers collectively to (i) the acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of Convertible Fund by Balanced Capital Fund in exchange for the Corresponding Shares and the subsequent distribution of Corresponding Shares to the stockholders of Convertible Fund; and (ii) the subsequent deregistration and dissolution of Convertible Fund.</R>

The Reorganization

<R>     At a meeting of the Board of Directors of Convertible Fund held on June 21, 2000, the Board of Directors approved a proposal that Balanced Capital Fund acquire substantially all of the assets, and assume substantially all of the liabilities, of Convertible Fund in exchange solely for shares of Balanced Capital Fund to be distributed to the stockholders of Convertible Fund.</R>

 

3

<R>     Based upon their evaluation of all relevant information, the Directors of Convertible Fund have determined that the Reorganization will potentially benefit the stockholders of Convertible Fund. Specifically, the Directors considered that after the Reorganization, Convertible Fund stockholders will remain invested in an open-end fund with a substantially larger net asset value. As part of a larger fund (as of March 31, 2000 the net assets of Balanced Capital Fund were approximately $7.37 billion) Convertible Fund stockholders are likely to benefit from reduced overall operating expenses per share on a pro forma basis as a result of certain economies of scale expected after the Reorganization. In addition, the present Convertible Fund stockholders, as stockholders of Balanced Capital Fund, will be subject to a lower management fee of 0.40% of the Fund’s average daily net assets rather than the current 0.60% applicable to Convertible Fund. See “Summary — Pro Forma Fee Tables” and “The Reorganization — Potential Benefits to Stockholders as a Result of the Reorganization.”</R>

     The Board of Directors of Convertible Fund, including all of the Directors who are not “interested persons,” as defined in the Investment Company Act, has determined that the Reorganization is in the best interests of Convertible Fund and that the interests of existing Convertible Fund stockholders will not be diluted as a result of effecting the Reorganization.

<R>     If all of the requisite approvals are obtained, it is anticipated that the Reorganization will occur as soon as practicable after such approval, provided that Convertible Fund and Balanced Capital Fund have obtained prior to that time either (a) a favorable private letter ruling from the Internal Revenue Service (the “IRS”) or (b) an opinion of counsel concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan. The Agreement and Plan may be terminated, and the Reorganization abandoned, whether before or after approval by the stockholders of Convertible Fund, at any time prior to the Exchange Date (as defined below), (i) by mutual consent of the Board of Directors of Convertible Fund and the Board of Directors of Balanced Capital Fund; (ii) by the Board of Directors of Convertible Fund if any condition to Convertible Fund’s obligations has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of Balanced Capital Fund if any condition to Balanced Capital Fund’s obligations has not been fulfilled or waived by such Board.</R>

 

4

Pro Forma Fee Tables

     The tables below provide information about the fees and expenses attributable to shares of each Fund and, assuming the Reorganization takes place, the estimated annualized fees and expenses attributable to shares of the Combined Fund.

<R>

Fee Table for Class A and Class B Stockholders of Convertible Fund,
Balanced Capital Fund and the Pro Forma Combined Fund* as of March 31, 2000 (unaudited)

Class A Shares

Class B Shares (b)

Actual

Actual

Convertible Fund

Balanced Capital Fund

Pro Forma Combined Fund*

Convertible Fund

Balanced Capital Fund

Pro Forma Combined Fund*

Shareholder Fees (fees paid directly from shareholder’s investment(a):

Maximum Sales Charge (Load) Imposed       on Purchases (as a percentage of       offering price)

5.25%

(c)

5.25%

(c)

5.25%

(c)

None

None

None

Maximum Deferred Sales Charge (Load)       (as a percentage of original purchase       price or redemption proceeds,       whichever is lower)

None

(d)

None

(d)

None

(d)

4.00%

(c)

4.00%

(c)

4.00%

(c)

Maximum Sales Charge (Load) Imposed       on Dividend Reinvestments

None

None

None

None

None

None

Redemption Fee

None

None

None

None

None

None

Exchange Fee

None

None

None

None

None

None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):

Management Fee

0.60%

0.40%

0.40%

0.60%

0.40%

0.40%

Distribution and/or Service (12b-1)       Fees(e)

None

None

None

1.00%

1.00%

1.00%

Other Expenses (including transfer       agency fees)(f)

0.79%

0.22%

0.22%

0.79%

0.22%

0.22%

Total Annual Fund Operating Expenses

1.39%

0.62%

0.62%

2.39%

1.62%

1.62%

</R>

Footnotes appear on next page

 

5

<R>

Fee Table for Class C and Class D Stockholders of Convertible Fund,
Balanced Capital Fund and the Pro Forma Combined Fund* as of March 31, 2000 (unaudited)

Class C Shares

Class D Shares

Actual

Actual

Convertible Fund

Balanced Capital Fund

Pro Forma Combined Fund*

Convertible Fund

Balanced Capital Fund

Pro Forma Combined Fund*

Shareholder Fees (fees paid directly from shareholder’s investment(a):

Maximum Sales Charge (Load) Imposed       on Purchases (as a percentage of       offering price)

None

None

None

5.25%

(c)

5.25%

(c)

5.25%

(c)

Maximum Deferred Sales Charge (Load)       (as a percentage of original purchase       price or redemption proceeds,       whichever is lower)

1.00%

(c)

1.00%

(c)

1.00%

(c)

None

(d)

None

(d)

None

(d)

Maximum Sales Charge (Load) Imposed       on Dividend Reinvestments

None

None

None

None

None

None

Redemption Fee

None

None

None

None

None

None

Exchange Fee

None

None

None

None

None

None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):

Management Fee

0.60%

0.40%

0.40%

0.60%

0.40%

0.40%

Distribution and/or Service (12b-1)       Fees(e)

1.00%

1.00%

1.00%

0.25%

0.25%

0.25%

Other Expenses (including transfer       agency fees)(f)

0.79%

0.22%

0.22%

0.79%

0.22%

0.22%

Total Annual Fund Operating Expenses

2.39%

1.62%

1.62%

1.64%

0.87%

0.87%

* The expenses for the Combined Fund represent the estimated annualized expenses assuming Balanced Capital Fund had acquired the assets and assumed the liabilities of Convertible Fund as of March 31, 2000.</R>

(a) In addition, Merrill Lynch, Pierce, Fenner & Smith, Incorporated (“Merrill Lynch”) may charge clients a processing fee (currently $5.35) when a client buys or sells shares.

(b) Class B shares convert to Class D shares automatically approximately eight years after initial purchase and will no longer be subject to distribution fees.

(c) Some investors may qualify for reductions in the sales charge (load).

(d) A stockholder may pay a deferred sales charge if such stockholder purchases $1 million or more and redeems within one year.

(e) The Funds call the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the Prospectuses of the Funds and all other Fund materials. If a stockholder holds Class B or Class C shares for a long time, it may cost that stockholder more in distribution (12b-1) fees than the maximum sales charge that such stockholder would have paid if he or she had bought one of the other classes.<R>

(f) The Funds pay the Transfer Agent $11.00 for each Class A and Class D stockholder account and $14.00 for each Class B and Class C stockholder account and reimburse the Transfer Agent’s out-of-pocket expenses. The Funds pay a 0.10% fee for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor program. The Funds also pay a $0.20 monthly closed account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the month the account is closed and ends at the end of the calendar year. For the fiscal year ended March 31, 2000, Balanced Capital Fund paid the Transfer Agent fees totaling $14,499,620, for the fiscal year ended August 31, 1999, Convertible Fund paid the Transfer Agent fees totaling $132,699. MLIM provides accounting services to Convertible Fund at cost. For the fiscal year ended August 31, 1999, Convertible Fund reimbursed MLIM $88,559 for these services.</R>

 

6

Examples:

<R>     These examples assume that you invest $10,000 in the relevant Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:</R>

EXPENSES IF YOU DID REDEEM YOUR SHARES:

<R>	1 Year	3 Years	5 Years	10 Years
Class A
Convertible Fund	$659	$    942	$1,246	$2,106
Balanced Capital Fund	$585	$    713	$   853	$1,259
Combined Fund†	$585	$    713	$   853	$1,259
Class B
Convertible Fund	$642	$    945	$1,275	$2,540	*
Balanced Capital Fund	$565	$    711	$   881	$1,721	*
Combined Fund†	$565	$    711	$   881	$1,721	*
Class C
Convertible Fund	$342	$    745	$1,275	$2,726
Balanced Capital Fund	$265	$    511	$   881	$1,922
Combined Fund†	$265	$    511	$   881	$1,922
Class D
Convertible Fund	$683	$1,015	$1,370	$2,367
Balanced Capital Fund	$609	$    788	$   982	$1,541
Combined Fund†	$609	$    788	$   982	$1,541
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
	1 Year	3 Years	5 Years	10 Years
Class A
Convertible Fund	$659	$    942	$1,246	$2,106
Balanced Capital Fund	$585	$    713	$   853	$1,259
Combined Fund†	$585	$    713	$   853	$1,259
Class B
Convertible Fund	$242	$    745	$1,275	$2,540	*
Balanced Capital Fund	$165	$    511	$   881	$1,721	*
Combined Fund†	$165	$    511	$   881	$1,721	*
Class C
Convertible Fund	$242	$    745	$1,275	$2,726
Balanced Capital Fund	$165	$    511	$   881	$1,922
Combined Fund†	$165	$    511	$   881	$1,922
Class D
Convertible Fund	$683	$1,015	$1,370	$2,367
Balanced Capital Fund	$609	$    788	$   982	$1,541
Combined Fund†	$609	$    788	$   982	$1,541

</R>

† Assuming the Reorganization had taken place on March 31, 2000.

* Assumes conversion of Class B shares to Class D shares approximately eight years after initial purchase.

 

7

<R>

     The foregoing Pro Forma Fee Tables and Examples are intended to assist investors in understanding the costs and expenses that a Convertible Fund or Balanced Capital Fund stockholder bears directly or indirectly as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The Examples set forth above assume reinvestment of all dividends and utilize a 5% annual rate of return as mandated by Commission regulations. The Examples 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 Examples. See “Summary,” “The Reorganization—Potential Benefits to Stockholders as a Result of the Reorganization” and “Comparison of the Funds—Management,” ”—Purchase of Shares” and ”—Redemption of Shares.”</R>

Convertible Fund Convertible Fund was incorporated under the laws of the State of Maryland on May 24, 1985 as “Convertible Holdings, Inc.” a dual purpose closed-end investment company. On September 1, 1997, pursuant to a vote of its stockholders, Convertible Fund converted to a non-diversified open-end investment company.

<R>

As of March 31, 2000, Convertible Fund had net assets of approximately $50.5 million.

 

Balanced Capital Fund Balanced Capital Fund was incorporated under the laws of the State of Maryland on July 29, 1987 and is the successor to the Lionel D. Edie Capital Fund, Inc. that was organized in Delaware in September 1973. Balanced Capital Fund changed its name to Merrill Lynch Capital Fund, Inc. in June 1976 and to Merrill Lynch Balanced Capital Fund, Inc. in July 2000. Balanced Capital Fund is a diversified, open-end investment company.

As of March 31, 2000, Balanced Capital Fund had net assets of approximately $7.3 billion.

Comparison of the Funds Investment Objective and Policies. The investment objectives of Balanced Capital Fund and Convertible Fund are similar, though not identical. Balanced Capital Fund seeks the highest total investment return through a fully managed investment policy using equity, debt (including money market) and convertible securities. Convertible Fund seeks high total return from a combination of capital appreciation and investment income.

Balanced Capital Fund invests primarily in equities and debt securities (including short term securities). The proportion Balanced Capital Fund invests in each category at any given time depends on management’s view of how attractive that category appears relative to the others. However, Balanced Capital Fund may not maintain less than 25% of the value of its assets in fixed income senior securities, including but not limited to debt securities and preferred stock. A majority of Balanced Capital Fund’s assets will be invested in stocks of large companies. Balanced Capital Fund purchases primarily U.S. securities, but can also buy foreign securities (representing up to 25% of its total assets), including securities denominated in foreign currencies. Balanced</R>

 

8

<R> Capital Fund may invest in debt securities of any maturity. Balanced Capital Fund may also invest in high yield or “junk” bonds.

In contrast to Balanced Capital Fund, Convertible Fund invests primarily in a portfolio of convertible securities and synthetic convertible securities. These convertible securities may be either convertible debt securities or convertible preferred stocks and may be issued by both United States and foreign issuers. Under normal market conditions, Convertible Fund invests at least 65% of its total assets in convertible securities and synthetic convertibles. For a more detailed discussion of convertible securities, see “Comparison of the Funds — Investment Policies — Convertible Securities.”

Under normal circumstances, Convertible Fund may invest up to 35% of its assets in other types of securities including common stock, preferred stock, options, warrants, Long-Term Equity Appreciation Participation Securities (“LEAPS”) and nonconvertible debt securities of United States and non-United States issuers. A substantial portion of Convertible Fund’s assets may at times be invested in foreign securities. Convertible Fund may also invest in high yield or “junk” bonds, in certain types of derivative securities and in illiquid securities.

Balanced Capital Fund chooses equity securities using a fundamental, value-oriented investment style. Convertible Fund chooses investments by attempting to identify securities issued by companies Fund management believes are creditworthy and that either have high current yields, a high potential for capital appreciation because the underlying common stock is undervalued, or both.

Both Balanced Capital Fund and Convertible Fund may invest in securities denominated in currencies other than the U.S. dollar, although Convertible Fund may invest a greater percentage of its assets in such securities. In addition, each Fund may engage in various portfolio strategies to hedge its portfolio against movements in the equity markets, interest rates and exchange rates between currencies.

Balanced Capital Fund and Convertible Fund are each subject to a fundamental investment restriction, which provides that the Fund may borrow from banks in amounts up to 33¹/3% of its total assets taken at market value and may borrow an additional 5% of its total assets for temporary purposes. A fundamental investment restriction may not be changed without stockholder approval. As a non-fundamental investment restriction, which may be changed by the Fund’s Board of Directors without stockholder approval, each Fund is further limited and may not borrow money or pledge its assets, except that either Fund may borrow from banks as a temporary measure for extraordinary or emergency purposes or to meet redemptions. For a more detailed discussion of the investment objectives and policies of </R>

 

9

the Funds, see “Comparison of the
Funds—Investment Policies,” “—Other Investment Policies,” “—Information Regarding Options, Futures and Foreign Exchange Transactions”
and “—Investment Restriction.”

<R> Diversification. Convertible Fund is a non-diversified investment company. Balanced Capital Fund is a diversified investment company. Therefore, Convertible Fund may invest more of its assets in fewer companies than Balanced Capital Fund.

Portfolio Management. MLIM serves as the investment adviser for Balanced Capital Fund and as investment manager for Convertible Fund and Merrill Lynch Asset Management U.K. Limited (“MLAM U.K.”) acts as sub-adviser for both Balanced Capital Fund and Convertible Fund. Kurt Schansinger has served as portfolio manager for Balanced Capital Fund since 1997. Daniel A. Luchansky has served as portfolio manager of Convertible Fund since 1995. Mr. Schansinger will serve as the portfolio manager of the Combined Fund.

Advisory Fees. Pursuant to an investment advisory agreement between Balanced Capital Fund and MLIM, Balanced Capital Fund pays MLIM a monthly fee at the annual rate of 0.40% of its average daily net assets. Pursuant to a management agreement between Convertible Fund and MLIM, Convertible Fund pays MLIM a monthly fee at the annual rate of 0.60% of its average daily net assets. After the Reorganization, the Combined Fund will pay an advisory fee at the annual rate of 0.40% of the Combined Fund’s average daily net assets.

Class Structure. Each Fund uses the Merrill Lynch Select Pricing^SM System under which four classes of shares are offered with different sales charge arrangements. The Class A, Class B, Class C and Class D shares issued by Balanced Capital Fund are identical in all respects to the Class A, Class B, Class C and Class D shares issued by Convertible Fund, except that they represent ownership interests in a different investment portfolio.

See “Comparison of the Funds—Purchase of Shares” and “Additional Information—Stockholder Services.”

Overall Expense Ratio. The table below shows the operating expense ratio for each class of shares as of March 31, 2000 for Balanced Capital Fund, Convertible Fund and the Combined Fund on a pro forma basis (including class specific distribution and account maintenance fees).

	Operating Expense Ratio
	Balanced Capital Fund	Convertible Fund	Combined Fund
Class of Shares
A	0.62%	1.39%	0.62%
B	1.62%	2.39%	1.62%
C	1.62%	2.39%	1.62%
D	0.87%	1.64%	0.87%

</R>

See “Summary—Pro Forma Fee Tables.”

 

10

 
<R>

Purchase of Shares. Shares of Balanced Capital Fund are offered continuously for sale to the public in substantially the same manner as shares of Convertible Fund. See “Comparison of the Funds—Purchase of Shares.”

Redemption of Shares. The redemption procedures for shares of Balanced Capital Fund are the same as the redemption procedures for shares of Convertible Fund. For purposes of computing any contingent deferred sales charge (“CDSC”) that may be payable upon disposition of Corresponding Shares of Balanced Capital Fund acquired by Convertible Fund stockholders in the Reorganization, the holding period of Convertible Fund shares outstanding on the date the Reorganization takes place will be “tacked” onto the holding period of the Corresponding Shares of Balanced Capital Fund acquired in the Reorganization. See “Comparison of the Funds—Redemption of Shares.”

Dividends. Convertible Fund’s policies with respect to dividends are substantially the same as those of Balanced Capital Fund. See “Comparison of the Funds—Dividends.”

Net Asset Value. Both Convertible Fund and Balanced Capital Fund determine net asset value of each class of shares once daily as of the close of business on the New York Stock Exchange (the “NYSE”) on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Both Funds compute net asset value per share in the same manner. See “Comparison of the Funds—Additional Information—Net Asset Value.”</R>

Voting Rights. The corresponding voting rights of the holders of shares of common stock of each Fund are substantially the same. See “Comparison of the Funds—Additional Information—Capital Stock.”

<R> Other Significant Considerations. Stockholder services available to Convertible Fund stockholders, such as providing the annual and semi-annual reports, are the same as those available to Balanced Capital Fund stockholders. See “Comparison of the Funds—Additional Information—Stockholder Services.” An automatic dividend reinvestment plan is available to stockholders of each Fund. The plans are identical. See “Comparison of the Funds—Automatic Dividend Reinvestment Plan” and “—Additional Information—Stockholder Services.”

Tax Considerations Convertible Fund and Balanced Capital Fund jointly have requested a private letter ruling from the IRS with respect to the Reorganization to the effect that, among other things, neither Convertible Fund nor Balanced Capital Fund will recognize gain or loss on the transaction, and Convertible Fund stockholders will not recognize gain or loss on the exchange of their shares of Convertible Fund stock for Corresponding Shares of</R>

 

11

<R> Balanced Capital Fund. The consummation of the Reorganization is subject to the receipt of such ruling or receipt of an opinion of counsel to the same effect. The Reorganization will not affect the status of Balanced Capital Fund as a regulated investment company. As of March 31, 2000, Balanced Capital Fund had significant net unrealized capital appreciation. After the Reorganization, Convertible Fund stockholders will share in the net unrealized capital appreciation of Balanced Capital Fund and, to the extent such capital appreciation is realized, will be subject to any tax consequences related to that appreciation. It is anticipated that over time the reduction in expenses experienced by Convertible Fund stockholders as a result of the Reorganization may in whole or in part offset any potential adverse tax liability. In addition, as of March 31, 2000, Convertible Fund had undistributed net realized capital losses which, after the Reorganization, will be used to offset any net realized capital gains of the Combined Fund. After the Reorganization, current Balanced Capital Fund stockholders will benefit from the ability of Balanced Capital Fund to share in a portion of the undistributed net realized capital losses of Convertible Fund, which can be used to offset realized capital gains. However, because of Balanced Capital Fund’s much greater size, the benefit of these losses to each stockholder will be substantially diluted. See “The Reorganization—Tax Consequences of the Reorganization.”</R>

 

12

RISK FACTORS AND SPECIAL CONSIDERATIONS

<R>     Many of the investment risks associated with an investment in Balanced Capital Fund are substantially similar to the investment risks associated with an investment in Convertible Fund. Such risks include investing in (a) securities issued by companies located in foreign markets, including emerging markets, (b) derivative instruments, (c) illiquid securities and (d) “junk” bonds. The primary difference in risk stems from Convertible Fund’s ability to invest in convertible securities and synthetic convertible securities without limitation. As a result of the Reorganization, the risk factors applicable to Convertible Fund will be modified by the ability of Balanced Capital Fund to invest in a wider range of securities. Furthermore, Balanced Capital Fund is diversified while Convertible Fund is non-diversified, which means Balanced Capital Fund is required to invest in a greater number of issuers. The risk factors to which an investment in Balanced Capital Fund and Convertible Fund is subject are set forth below.

     Market and Selection Risk. Market risk is the risk that the stock market in one or more countries in which a Fund invests will go down in value, including the possibility that one or more markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the stock markets or other funds with similar investment objectives and investment strategies.

     Foreign Market Risk. Since each Fund invests in foreign securities, each offers the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than stocks in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that a Fund will lose money. In particular, each Fund is subject to the risk that because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.

     Foreign Economy Risk. The economies of certain foreign markets often do not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair a Fund’s ability to purchase or sell foreign securities or transfer the Fund’s assets or income back into the United States, or otherwise adversely affect the Fund’s operations. Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts, and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries.

     Currency Risk. Securities in which each Fund invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund’s portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as “currency risk,” means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns. This risk is greater for Convertible Fund since it can invest a greater percentage of its assets in securities denominated in non-U.S. currencies.

     Governmental Supervision and Regulation/Accounting Standards. Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than the United States does. Some countries may not have laws to protect investors the way that the U.S. securities laws do. For example, some countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a</R>

 

13

<R>company’s financial condition. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount a Fund can earn on its investments.

     Certain Risks of Holding Fund Assets Outside the United States. Each Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Funds’ ability to recover their assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than investment companies invested only in the United States.

     Settlement Risk. Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.

     European Economic and Monetary Union (EMU). Certain European countries have entered into EMU in an effort to, among other things, reduce barriers between countries, increase competition among companies, reduce government subsidies in certain industries, and reduce or eliminate currency fluctuations among these countries. EMU established a single common European currency (the “euro”) that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro, and are listed, trade and make dividend and other payments only in euros. Although EMU is generally expected to have a beneficial effect, it could negatively affect the Fund in a number of situations, including as follows:

• If the transition to euro, or EMU as a whole, does not continue to proceed as planned, the Fund’s investments could be adversely affected. For example, sharp currency fluctuations, exchange rate volatility and other disruptions of the markets could occur.

• Withdrawal from EMU by a participating country could also have a negative effect on the Fund’s investments, for example if securities redenominated in euros are transferred back into that country’s national currency.

     Emerging Markets Risk. The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include those in countries defined as emerging or developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier because they develop unevenly and may never fully develop. They are more likely to experience hyperinflation and currency devaluations, which adversely affects returns to U.S. investors. In addition, the securities markets in many of these countries have far lower trading volumes and less liquidity than developed markets. Since these markets are so small, they may be more likely to suffer sharp and frequent price changes or long term price depression because of adverse publicity, investor perceptions, or the actions of a few large investors. In addition, traditional measures of investment value used in the United States, such as price to earnings ratios, may not apply to certain small markets.

     Many emerging markets have histories of political instability and abrupt changes in policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries participate to a significant degree in their economies and securities markets, which may impair investment and economic growth.</R>

 

14

<R>     Borrowing and Leverage Risk. Each Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Borrowing will cost a Fund interest expense and other fees. The cost of borrowing may reduce the Fund’s return. Certain securities that a Fund buys may create leverage, including futures and options.

     Convertibles. Each Fund may invest in convertible securities; however, Convertible Fund will generally invest a much greater percentage of its assets, at least 65%, in such securities. Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like a regular debt security, that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risks as the underlying common stock. Because it invests primarily in thses securities, Convertible Fund is exposed to the risks of convertible securities to a much greater extent than Balanced Capital Fund.

     Junk Bonds. Junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for the Fund. Junk bonds generally are less liquid and experience more price volatility than higher rated debt securities. The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay junk bond holders. Junk bonds may be subject to greater call and redemption risk than higher rated debt securities.

     Illiquid Securities. Each Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If a Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value.

     Restricted Securities. Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that a Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market. Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the security.

     Rule 144A Securities. Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue.

     Derivatives. Each Fund may use derivative instruments including over-the-counter foreign currency options and options on foreign currency futures. Derivatives are financial instruments whose value is derived from another security, a commodity (such as gold or oil) or an index such as Standard & Poor’s 500 Index. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including:

     Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund.

     Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment.

     Leverage risk — the risk associated with certain types of investments or trading strategies that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

     Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth.</R>

 

15

<R>     Each Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risk associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Funds are not required to use hedging and may choose not to do so.

     An investment in Balanced Capital Fund is subject to certain additional risks described below, that are not applicable to an investment in Convertible Fund.

     Securities Lending. Balanced Capital Fund may lend securities to financial institutions which provide government securities as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, Balanced Capital Fund may lose money and there may be a delay in recovering the loaned securities. Balanced Capital Fund could also lose money if it does not recover the securities and the value of the collateral falls. These events could trigger adverse tax consequences to Balanced Capital Fund.

     Mortgage Backed Securities. Balanced Capital Fund may invest in mortgage backed securities. Mortgage backed securities represent the right to receive a portion of principal and/or interest payments made on a pool of residential or commercial mortgage loans. When interest rates fall, borrowers may refinance or otherwise repay principal on their mortgages earlier than scheduled. When this happens, certain types of mortgage backed securities will be paid off more quickly than originally anticipated and Balanced Capital Fund has to invest the proceeds in securities with lower yields. This risk is known as “prepayment risk.” When interest rates rise, certain types of mortgage backed securities will be paid off more slowly than originally anticipated and the value of these securities will fall. The risk is known as extension risk. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage backed securities.

     Small Cap and Emerging Growth Securities. Balanced Capital Fund may invest in small cap and emerging growth securities. Small cap or emerging growth companies may have limited product lines or markets. They may be less financially secure than larger, more established companies. If a product fails, or if management changes, or there are other adverse developments, the Fund’s investment in a small cap or emerging growth company may lose substantial value. Small cap or emerging growth securities generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger cap securities or the stock market as a whole. Investing in small caps and emerging growth securities requires a long term view.

     Debt Securities. Balanced Capital Fund may invest in debt securities without limitation while Convertible Fund may only invest up to 35% of its total assets in debt securities. Debt securities, such as bonds, involve credit risk. This is the risk that the borrower will not make timely payments of principal and interest. Junk bonds involve a greater credit risk than other debt securities. The degree of credit risk depends on the issuer’s financial condition and on the terms of the bonds. These securities are also subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than the market price of shorter term securities. Since Balanced Capital Fund may invest in debt securities without limitation, Balanced Capital Fund may be more subject to interest rate risk and credit risk than Convertible Fund.

     Sovereign Debt. The Fund may invest in sovereign debt securities. These securities are issued or guaranteed by foreign government entities. Investments in sovereign debt subject Balanced Capital Fund to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. If a government entity defaults, it may ask for more time in which to pay or for further loans. There may be no bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected.</R>

 

16

COMPARISON OF THE FUNDS

Financial Highlights

<R>     Balanced Capital Fund. The financial information in the table below, has been audited in conjunction with the annual audits of the financial statements of Balanced Capital Fund by Deloitte & Touche LLP, independent auditors.</R>

     The following per share data and ratios have been derived from information provided in the financial statements.

<R>

	Class A
	For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$       35.03		$       37.56		$       31.39		$       30.90		$       27.74
Investment income — net	.94		1.00		1.11		1.25		1.21
Realized and unrealized gain (loss) on     investments and foreign currency     transactions — net	.62		(1.28	)	8.14		2.43		5.41
Total from investment operations	1.56		(.28	)	9.25		3.68		6.62
Less dividends and distributions:
Investment income — net	(.94	)	(1.08	)	(1.11	)	(1.25	)	(1.16	)
Realized gain on investments — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.93	)	(2.25	)	(3.08	)	(3.19	)	(3.46	)
Net asset value, end of year	$       32.66		$       35.03		$       37.56		$       31.39		$       30.90
Total Investment Return:*
Based on net asset value per share	4.58	%	(.68	)%	30.71	%	12.62	%	24.50	%
Ratios to Average Net Assets:
Expenses	.56	%	.57	%	.55	%	.55	%	.56	%
Investment income — net	2.74	%	2.86	%	3.21	%	3.99	%	4.09	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,721,503		$3,631,440		$4,155,677		$3,291,219		$3,225,758
Portfolio turnover	33	%	33	%	38	%	47	%	84	%

	Class B
	For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$      34.25		$      36.68		$      30.72		$      30.30		$      27.28
Investment income — net	.57		.63		.74		.91		.90
Realized and unrealized gain (loss) on     investments   and foreign currency     transactions — net	.60		(1.25	)	7.96		2.39		5.29
Total from investment operations	1.17		(.62	)	8.70		3.30		6.19
Less dividends and distributions:
Investment income — net	(.66	)	(.64	)	(.77	)	(.94	)	(.87	)
Realized gain on investments — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.65	)	(1.81	)	(2.74	)	(2.88	)	(3.17	)
Net asset value, end of year	$       31.77		$       34.25		$       36.68		$       30.72		$       30.30
Total Investment Return:*
Based on net asset value per share	3.48	%	(1.65	)%	29.38	%	11.48	%	23.22	%
Ratios to Average Net Assets:
Expenses	1.58	%	1.59	%	1.57	%	1.57	%	1.58	%
Investment income — net	1.71	%	1.85	%	2.19	%	2.97	%	3.07	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,853,699		$4,866,564		$5,938,708		$4,977,431		$5,025,504
Portfolio turnover	33	%	33	%	38	%	47	%	84	%

* Total investment returns exclude the effects of sales charges.</R>

† Based on average shares outstanding.

 

17

 
<R>

Balanced Capital Fund — Financial Highlights (concluded)

	Class C
	For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$     33.82		$     36.31		$     30.44		$     30.08		$     27.17
Investment income — net	.57		.62		.73		.90		.92
Realized and unrealized gain (loss) on      investments and foreign currency       transactions — net	.59		(1.25	)	7.89		2.36		5.24
Total from investment operations	1.16		(.63	)	8.62		3.26		6.16
Less dividends and distributions:     Investment income — net	(.63	)	(.69	)	(.78	)	(.96	)	(.95	)
Realized gain on investments — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.62	)	(1.86	)	(2.75	)	(2.90	)	(3.25	)
Net asset value, end of year	$     31.36		$     33.82		$     36.31		$     30.44		$     30.08
Total Investment Return:*
Based on net asset value per share	3.50	%	(1.70	)%	29.40	%	11.45	%	23.25	%
Ratios to Average Net Assets:
Expenses	1.59	%	1.59	%	1.58	%	1.58	%	1.59	%
Investment income — net	1.70	%	1.83	%	2.18	%	2.96	%	3.08	%
Supplemental Data:
Net assets, end of year (in thousands)	$ 308,150		$ 491,234		$ 512,783		$ 322,438		$ 259,131
Portfolio turnover	33	%	33	%	38	%	47	%	84	%

	Class D
	For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$       34.97		$       37.49		$       31.34		$    30.86		$    27.72
Investment income — net	.86		.91		1.02		1.17		1.16
Realized and unrealized gain (loss) on      investments and foreign currency      transactions — net
	.60		(1.28	)	8.14		2.43		5.38
Total from investment operations	1.46		(.37	)	9.16		3.60		6.54
Less dividends and distributions:     Investment income — net	(.86	)	(.98	)	(1.04	)	(1.18	)	(1.10	)
Realized gain on investments — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.85	)	(2.15	)	(3.01	)	(3.12	)	(3.40	)
Net asset value, end of year	$       32.58		$       34.97		$       37.49		$    31.34		$    30.86
Total Investment Return:*
Based on net asset value per share	4.29	%	(.92	)%	30.40	%	12.34	%	24.21	%
Ratios to Average Net Assets:
Expenses	.81	%	.82	%	.80	%	.80	%	.81	%
Investment income — net	2.50	%	2.60	%	2.95	%	3.75	%	3.84	%
Supplemental Data:
Net assets, end of year (in thousands)	$1,428,120		$1,513,406		$1,280,317		$690,116		$521,599
Portfolio turnover	33	%	33	%	38	%	47	%	84	%

* Total investment returns exclude the effects of sales charges.</R>

† Based on average shares outstanding.

 

18

 
<R>

     Convertible Fund. The financial information in the table below, except for the six months ended February 29, 2000, which is provided by MLIM and is unaudited, has been audited in conjunction with the annual audits of the financial statements of Convertible Fund by Deloitte & Touche LLP, independent auditors.</R>

     The following per share data and ratios have been derived from information provided in the financial statements:

<R>

	Class A***
	For the Six Months Ended February 29, 2000†		For the Year Ended August 31,				For the Period January 1, 1997 to August 31, 1997†		For the Year Ended December 31, 1996†
			1999†		1998†
Increase (Decrease) in Net Asset Value:	(unaudited)
Per Share Operating Performance##:
Net asset value, beginning     of period	$  11.75		$  11.59		$  17.36		$   15.57		$    13.43
Investment income — net	.21		.45		.60		.06		—
Realized and unrealized gain (loss) on     investments and foreign currency     transactions—net	.58		.51		(1.37	)	1.75		2.78
Total from investment operations	.79		.96		(.77	)	1.81		2.78
Less dividends and distributions:
Investment income—net	(.21	)	(.79	)	(.32	)	—		—
Realized gain on    investments—net	—		—		(4.55	)	—		(.64	)
In excess of realized gain on     investments—net	—		(.01	)	(.07	)	—		—
Total dividends and distributions	(.21	)	(.80	)	(4.94	)	—		(.64	)
Capital charge resulting from issuance of     Common Stock	—		—		(.06	)	—		—
Capital charge resulting from issuance of     new classes of shares	—		—		—	††	(.02	)	—
Net asset value, end of period	$  12.33		$  11.75		$ 11.59		$    17.36		$    15.57
Total Investment Return:**
Based on net asset value per share	6.86	%#	8.54	%	(7.03	)%	11.50	%#	20.60	%
Ratios to Average Net Assets:
Expenses###	1.26	%*	1.32	%	1.29	%	.90	%*	.78	%
Investment income—net	3.63	%*	3.91	%	4.48	%	4.76	%*	4.98	%
Supplemental Data:
Net assets, end of period (in thousands)	$33,756		$37,142		$52,425		$110,178		$289,993
Portfolio turnover	48.86	%	85.42	%	155.20	%	92.86	%	129.06	%

* Annualized.

** Total investment returns exclude the effects of sales charges. Performance results prior to August 4, 1997 are for when Convertible Fund was a dual structure closed-end investment company with both Capital Shares and Income Shares outstanding. On August 4, 1997, after its Income Shares had been redeemed, Convertible Fund converted to an open-end investment company and Capital Shares outstanding as of that date were designated Class A shares.

***	Formerly Capital Shares.
#	Aggregate total investment return.</R>

## Excludes the effect of per share operating performance of the Fund’s Income Shares, which were redeemed on July 31, 1997. Per share operating performance prior to the period January 1, 1997 to August 1, 1997 reflects when the Fund was a dual structure closed-end management investment company. For the period January 1, 1997 to July 31, 1997, investment income—net per Income Share was $0.73 and dividends of investment income — net per Income Share were $0.70.

### Excluding taxes on undistributed net realized long-term capital gains for years prior to the period January 1, 1997 to August 31, 1997.

† Based on average shares outstanding.

†† Amount is less than $.01 per share.

 

19

<R>

Convertible Fund — Financial Highlights (continued)

	Class B††
	For the Six Months Ended February 29, 2000		For the Year Ended August 31,				For the Period August 4, 1997† to August 31, 1997
			1999		1998
	(unaudited)
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning     of period	$ 11.74		$  11.53		$    17.35		$16.91
Investment income—net	.15		.34		.44		.05
Realized and unrealized gain (loss) on investments      and foreign currency transactions—net	.58		.49		(1.34	)	.39
Total from investment operations	.73		.83		(.90	)	.44
Less dividends and distributions:      Investment income—net	(.14	)	(.61	)	(.28	)	—
Realized gain on      investments—net	—		—		(4.55	)	—
In excess of realized gain on investments—net	—		(.01	)	(.07	)	—
Total dividends and distributions	(.14	)	(.62	)	(4.90	)	—
Capital charge resulting from issuance of      Common Stock	—		—		(.02	)	—
Net asset value, end of period	$  12.33		$  11.74		$    11.53		$17.35
Total Investment Return:** Based on net asset value per share	6.35	%#	7.36	%	(7.76	)%	2.60	%#
Ratios to Average Net Assets: Expenses	2.29	%*	2.35	%	2.35	%	2.66	%*
Investment income—net	2.61	%*	2.91	%	3.31	%	3.77	%*
Supplemental Data: Net assets, end of period (in thousands)	$11,219		$14,774		$23,900		$5,759
Portfolio turnover	48.86	%	85.42	%	155.20	%	92.86	%

* Annualized.

** Total investment returns exclude the effects of sales charges.

#	Aggregate total investment return.</R>
†	Commencement of operations.

†† Based on average shares outstanding.

 

20

 
<R>

Convertible Fund — Financial Highlights (continued)

	Class C††
	For the Six Months Ended February 29, 2000		For the Year Ended August 31,				For the Period August 4, 1997† to August 31, 1997
			1999		1998
	(unaudited)
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$11.74		$11.54		$17.36		$16.91
Investment income — net	.15		.34		.44		.05
Realized and unrealized gain (loss) on investments     and foreign currency transactions — net
	.58		.49		(1.34	)	.40
Total from investment operations	.73		.83		(.90	)	.45
Less dividends and distributions:
Investment income — net	(.15	)	(.62	)	(.28	)	—
Realized gain on investments — net	—		—		(4.55	)	—
In excess of realized gain on investments — net	—		(.01	)	(.07	)	—
Total dividends and distributions	(.15	)	(.63	)	(4.90	)	—
Capital charge resulting from issuance of     Common Stock	—		—		(.02	)	—
Net asset value, end of period	$12.32		$11.74		$11.54		$17.36
Total Investment Return:**
Based on net asset value per share	6.27	%#	7.34	%	(7.76	)%	2.66	%#
Ratios to Average Net Assets:
Expenses	2.29	%*	2.35	%	2.36	%	2.74	%*
Investment income — net	2.61	%*	2.91	%	3.34	%	3.58	%*
Supplemental Data:
Net assets, end of period (in thousands)	$2,458		$3,141		$5,138		$1,014
Portfolio turnover	48.86	%	85.42	%	155.20	%	92.86	%

</R>

* Annualized.

** Total investment returns exclude the effects of sales charges.

#	Aggregate total investment return.
†	Commencement of operations.

†† Based on average shares outstanding.

 

21

 
<R>

Convertible Fund — Financial Highlights (concluded)

	Class D††
	For the Six Months Ended February 29, 2000		For the Year Ended August 31,				For the Period August 4, 1997† to August 31, 1997
			1999		1998
	(unaudited)
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$11.78		$11.61		$17.36		$16.91
Investment income — net	.20		.43		.54		.07
Realized and unrealized gain (loss) on investments     and foreign currency transactions — net
	.57		.50		(1.34	)	.38
Total from investment operations	.77		.93		(.80	)	.45
Less dividends and distributions:
Investment income — net	(.19	)	(.75	)	(.31	)	—
Realized gain on investments — net	—		—		(4.55	)	—
In excess of realized gain on investments — net	—		(.01	)	(.07	)	—
Total dividends and distributions	(.19	)	(.76	)	(4.93	)	—
Capital charge resulting from issuance of     Common Stock	—		—		(.02	)	—
Net asset value, end of period	$12.36		$11.78		$11.61		$17.36
Total Investment Return:**
Based on net asset value per share	6.70	%#	8.22	%	(6.96	)%	2.66	%#
Ratios to Average Net Assets:
Expenses	1.51	%*	1.57	%	1.59	%	1.92	%*
Investment income — net	3.39	%*	3.68	%	4.02	%	4.81	%*
Supplemental Data:
Net assets, end of period (in thousands)	$3,819		$4,435		$7,071		$1,365
Portfolio turnover	48.86	%	85.42	%	155.20	%	92.86	%

</R>

* Annualized.

** Total investment returns exclude the effects of sales charges.

#	Aggregate total investment return.
†	Commencement of operations.

†† Based on average shares outstanding.

 

22

<R>

Investment Objectives

     The investment objectives of Balanced Capital Fund and Convertible Fund are similar, though not identical. Balanced Capital Fund seeks the highest total investment return through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. Convertible Fund seeks high total return from a combination of capital appreciation and investment income. The investment objective of each Fund described in this paragraph is a fundamental policy of that Fund and may not be changed without the approval of the holders of a majority of that Fund’s outstanding voting securities.

     No assurance can be given that, after the Reorganization, Balanced Capital Fund will achieve its investment objective.

Investment Policies

     Balanced Capital Fund invests in equities and debt securities (including short term securities). The proportion Balanced Capital Fund invests in each category at any given time depends on management’s view of how attractive that category appears relative to the others. Under normal market conditions, Balanced Capital Fund will invest at least 25% of the value of its assets in fixed income senior securities. Balanced Capital Fund purchases primarily U.S. securities, but can also buy foreign securities, including securities denominated in foreign currencies. Balanced Capital Fund may invest in debt securities of any maturity. Balanced Capital Fund may also invest in high yield or “junk” bonds.</R>

     Convertible Fund invests primarily in a portfolio of convertible securities and synthetic convertible securities. These convertible securities may be either convertible debt securities or convertible preferred stocks and may be issued by both United States and foreign issuers. Under normal market conditions, Convertible Fund invests at least 65% of its total assets in convertible securities and synthetic convertibles and may invest up to 35% of its assets in other types of securities, including common stock, preferred stock, options, warrants, Long-term Equity Appreciation Participation Securities (“LEAPS”) and nonconvertible debt securities of United States and non-United States issuers. A substantial portion of Convertible Fund’s assets may at times be invested in foreign securities. Convertible Fund may also invest in high yield or “junk” bonds, in certain types of derivative securities and in illiquid securities.

<R>     Securities. Balanced Capital Fund invests principally in equity securities including common stock of large companies. Balanced Capital Fund may invest up to 25% of its assets in securities of foreign issuers. Although Convertible Fund may invest up to 35% of its assets in equity and debt securities, the Fund tends to invest primarily in convertible securities and synthetic convertible securities in order to achieve its goal of high total return. Convertible Fund will normally hold a portion of its portfolio in U.S. dollar or dollar-denominated money market securities to provide for possible redemptions. Each Fund may also invest in derivative securities for hedging purposes.

     Temporary Investments. Balanced Capital Fund reserves the right, as a temporary defensive measure to hold, without limitation, cash or cash equivalents and short term securities, including money market instruments denominated in U.S. dollars or foreign currencies (“Temporary Investments”). A portion of Balanced Capital Fund may be held in Temporary Investments in anticipation of investment in equity securities or to provide for possible redemptions. Short term investments and temporary defensive positions can be easily sold and have limited risk of loss but may limit a Fund’s ability to achieve its investment objective.</R>

     Depositary Receipts. Convertible Fund may invest in the securities of foreign issuers in the form of Depositary Receipts or other securities convertible into securities of foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. American Depositary Receipts (“ADRs”) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary Receipts (“GDRs”) are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the U.S. and in Europe and are designed for use throughout the world. Each Fund may invest in unsponsored Depositary Receipts. The issuers of unsponsored Depositary Receipts are not obligated to disclose material information in the United States, and therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts.

 

23

     Warrants. Convertible Fund may invest in warrants. Warrants do not carry with them the right to dividends or voting rights with respect to the securities that they entitle their holders to purchase, and they do not represent any rights in the assets of the issuer. In addition, warrants involve the risk that the price of the security underlying the warrant may not exceed the exercise price of the warrant and the warrant may expire without any value.

<R>     Convertible Securities. Each Fund may invest in convertible securities but Convertible Fund will, under normal circumstances, have at least 65% invested in convertible securities and synthetic convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A synthetic convertible security is a convertible security created by Fund management by combining two or more separate securities. A synthetic convertible security also may be a security that is convertible into common stock under certain circumstances but instead of the conversion, the holder may receive cash based on the value of the underlying common stock. A convertible security entitles the holder to receive interest generally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have several unique investment characteristics such as (i) higher yields than common stocks, but lower yields than comparable nonconvertible securities, (ii) a lesser degree of fluctuation in value than the underlying stock since they have fixed-income characteristics and (iii) the potential for capital appreciation if the market price of the underlying common stock increases. A convertible security might be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by a Fund is called for redemption, that Fund may be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party.</R>

     High Yield or “Junk” Bonds. Each Fund may invest in high yield or “junk” bonds. Junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for the Fund. Junk bonds generally are less liquid and experience more price volatility than higher rated debt securities. The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay junk bond holders. Junk bonds may be subject to greater call and redemption risk than higher rated debt securities.

<R>     Sovereign Debt. Balanced Capital Fund may invest in sovereign debt securities. These securities are issued or guaranteed by foreign government entities. Investments in sovereign debt are subject to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. Some of these reasons may include cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of its debt position to its economy or its failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a government entity defaults, it may ask for more time in which to pay or for further loans. There is no legal process for collecting sovereign debts that a government does not pay or bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected.</R>

     Illiquid Securities. Each Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Investment of a Fund’s assets in illiquid securities may restrict the ability of that Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. Each Fund may invest in securities restricted to “qualified institutional buyers” under Rule 144A under the Securities Act and in securities of issuers that are sold in private placement transactions between the issuers and their purchasers and that are neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities will be subject to contractual or legal restrictions on transfer.

<R>     Mortgage Backed Securities. Balanced Capital Fund may invest up to 35% of its total assets in mortgage backed securities. Mortgage backed securities in which the Fund invests include mortgage pass-through certificates and multiple-class pass-through securities, and other types of mortgage backed securities that may be available in the future.</R>

 

24

     Investing in mortgage-backed securities involves certain unique risks in addition to those generally associated with investing in the real estate industry in general. These unique risks include the failure of a party to meet its commitments under the related operative documents, adverse interest rate changes and the effects of prepayments on mortgage cash flows.

     Mortgage backed securities are “pass-through” securities, meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to the Fund. The value of mortgage backed securities, like that of traditional fixed-income securities, typically increases when interest rates fall and decreases when interest rates rise. However, mortgage backed securities differ from traditional fixed-income securities because of their potential for prepayment without penalty. The price paid by the Fund for its mortgage backed securities, the yield the Fund expects to receive from such securities and the average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying mortgages. In a period of declining interest rates, borrowers may prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the mortgage backed securities. Moreover, when the Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid.

<R>     Investment in Other Investment Companies. Balanced Capital Fund may invest in other investment companies whose investment objectives and policies are consistent with those of the Fund. In accordance with the Investment Company Act, a Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the Investment Company Act, a Fund may not own more than 3% of the total outstanding voting stock of any investment company and not more than 5% of the value of the Fund’s total assets may be invested in the securities of any investment company. If a Fund acquires shares in investment companies, stockholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such investment companies (including management and advisory fees). Investments by a Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other investment companies.</R>

Other Investment Policies

<R>     Balanced Capital Fund and Convertible Fund have adopted certain other investment policies as set forth below:

     Borrowing and Leverage. Balanced Capital Fund and Convertible Fund are each subject to a fundamental investment restriction, which provides that the Fund may borrow from banks in amounts u to 33¹/3% of its total assets taken at market value and may borrow an additional 5% of its total assets for temporary purposes. As a non-fundamental restriction, each Fund is further limited and may not borrow money or pledge its assets, except that either Fund may borrow from banks as a temporary measure for extraordinary or emergency purposes or to meet redemptions. Neither Fund will purchase securities while borrowings exceed 5% of its total assets.

     Hedging Techniques. Both Balanced Capital Fund and Convertible Fund may engage in various portfolio strategies to hedge their respective portfolios against investment, interest rate and currency risks. For a description of hedging instruments and risks associated with investment in such instruments, see “Details About the Fund — Investment Risks — Derivatives” in the Balanced Capital Fund Prospectus.</R>

     Standby Commitment Agreements. Convertible Fund may from time to time enter into standby commitment agreements. Such agreements commit the Fund, for a stated period of time, to purchase a stated amount of equity securities that may be issued and sold to the Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement, the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued. The Fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to the Fund.

     There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period.

 

25

     Portfolio Strategies Involving Options, Futures and Foreign Exchange Transactions. The Funds are authorized to engage in certain investment practices involving the use of options, futures and foreign exchange, which may expose the Funds to certain risks.

     Repurchase Agreements. Convertible Fund may enter into repurchase agreements. Under a repurchase agreement, the seller agrees, upon entering into the contract with the Fund, to repurchase a security (typically a security issued or guaranteed by the U.S. Government) at a mutually agreed-upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed yield for the Fund insulated from fluctuations in the market value of the underlying security during such period although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund’s return may be affected by currency fluctuations. The Fund takes possession of the underlying securities when investing in repurchase agreements. Nevertheless, if the seller were to default on its obligation to repurchase a security under a repurchase agreement and the market value of the underling security at such time was less than the Fund had paid to the seller, the Fund would realize a loss. The Fund may not invest more than 15% of its net assets in repurchase agreements maturing in more than seven days, together with all other illiquid securities.

     When-Issued Securities and Delayed Delivery Transactions. Convertible Fund may purchase or sell securities on a delayed delivery basis or on a when-issued basis at fixed purchase or sale terms. These transactions occur when securities are purchased or sold by the Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. Although the Fund has not established any limit on the percentage of its assets that may be committed in connection with such transactions, the Fund will maintain a segregated account with its custodian of cash, cash equivalents, U.S. Government securities or other liquid securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount of its commitments in connection with such purchase transactions.

     Short Sales. Convertible Fund may make short sales of securities. A short sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security may decline. The Fund expects to make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility.

     When the Fund makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.

     If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Fund’s gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.

<R>     Lending of Portfolio Securities. Each Fund may from time to time lend securities from its portfolio with a value not exceeding 33¹/3% of its total assets in the case of Convertible Fund, or 20% of total assets in the case of Balanced Capital Fund, to banks, brokers and other financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, that Fund could experience delays and costs in gaining access to the collateral and could suffer a loss to the extent the value of the collateral falls below the market value of the borrowed securities.

     Non-Diversified Status. Convertible Fund is classified as a non-diversified fund under the Investment Company Act, which means that it may invest more of its assets in securities of a single issuer than if it were a diversified fund. If a Fund invests in a smaller number of issuers, the Fund’s risk is increased because developments affecting an individual issuer may have a greater impact on the Fund’s performance. Balanced Capital Fund is a diversified fund, which means it is requied to invest in a greater number of issuers. This lessens the impact an individual issuer may have on Balanced Capital Fund’s performance.</R>

 

26

<R>     Suitability. The economic benefit of an investment in each Fund depends upon many factors beyond the control of that Fund. Because of Convertible Fund’s emphasis on convertible securities and Balanced Capital Fund’s ability to invest in foreign securities, the Funds should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in a Fund will depend upon, among other things, investment objectives and an ability to accept the risks associated with investing in convertible securities, including the risk of loss of principal.</R>

Information Regarding Options, Futures and Foreign Exchange Transactions

     Each Fund may engage in certain investment practices including the use of options, futures and foreign exchange. Each Fund may utilize these strategies for hedging purposes, including anticipatory hedges. Each Fund has authority to write (i.e., sell) put or call options, purchase put or call options on securities and engage in transactions in stock index options, stock index futures and financial futures, and related options on such futures.

     The investment policies of each Fund with respect to futures and options transactions are not fundamental policies and may be modified by the Board of Directors of each Fund without the approval of the Fund’s stockholders. Each Fund is subject to the restrictions of the Commodity Futures Trading Commission with respect to its investments in futures and options thereon.

<R>     For a detailed discussion of the Funds’ investment policies regarding futures and options, including the risks associated therewith, see “Details About the Fund Investment Risks Derivatives” in the Balanced Capital Fund Prospectus.</R>

Investment Restrictions

<R>     Other than as noted above, Balanced Capital Fund and Convertible Fund have identical investment restrictions.</R>

Management

<R>     Directors. The Board of Directors of Balanced Capital Fund consists of seven individuals, five of whom are not “interested persons” as defined in the Investment Company Act. Two of the Directors also serve on the Convertible Fund Board. The Directors are responsible for the overall supervision of the operation of their Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act.

     Information about the Directors of Balanced Capital 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 Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.

     TERRY K. GLENN (59) — President and Director(1)(2) — Executive Vice President of MLIM and Fund Asset Management, L.P. (“FAM”) (which terms as used herein include their corporate predecessors) since 1983; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) since 1993; President of FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988.

     M. COLYER CRUM (68) — Director(2)(3) — 104 Westcliff Road, Weston, Massachusetts 02193. James R. Williston Professor of Investment Management Emeritus, Harvard Business School since 1996; James R. Williston Professor of Investment Management, Harvard Business School, from 1971 to 1996; Director of Cambridge Bancorp.</R>

     LAURIE SIMON HODRICK (37) — Director(2)(3) — 809 Uris Hall, 3022 Broadway, New York, New York 10027. Professor of Finance and Economics, Graduate School of Business, Columbia University since 1998; Associate Professor of Finance and Economics, Graduate School of Business, Columbia University from 1996 to 1998; Associate Professor of Finance, J. L. Kellogg Graduate School of Management, Northwestern University from 1992 to 1996.

     JACK B. SUNDERLAND (71) — Director(2)(3) — P.O. Box 7, West Cornwall, Connecticut 06796. President and Director of American Independent Oil Company, Inc. (an energy company) since 1987; Member of Council on Foreign Relations since 1971.

 

27

<R></R>

     J. THOMAS TOUCHTON (61) — Director(2)(3) — Suite 3405, One Tampa City Center, 201 North Franklin Street, Tampa, Florida 33062. Managing Partner of The Witt Touchton Company and its predecessor, The Witt Co. (a private investment partnership), since 1972; Trustee Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an electric utility holding company).

<R>     FRED G. WEISS (58) — Director(2)(3) — 16450 Maddalena Place, Delray Beach, Florida 33446. Managing Director of FGW Associates since 1997; Vice President, Planning Investment, and Development of Warner Lambert Co. from 1979 to 1997; Director of Watson Pharmaceutical, Inc. (a pharmaceutical company) since 2000; Director of the Michael J. Fox Foundation for Parkinson’s Research; Director of Laboratories Phoenix USA, Inc. (a private drug delivery company); and Director of Kann Institute for Medical Careers, Inc. (a private medical education company).

     ARTHUR ZEIKEL (68) — Director(1)(2) — 300 Woodland Avenue, Westfield, New Jersey 07090. Chairman of MLIM and FAM from 1997 to 1999 and President thereof from 1977 to 1997; Chairman of Princeton Services, from 1997 to 1999, Director thereof from 1993 to 1999 and President thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. (“ML & Co.”) from 1990 to 1999.</R>

(1) Interested person, as defined in the Investment Company Act, of the Fund.

(2) Such Director or officer is a director, trustee or officer of certain other investment companies for which MLAM or FAM acts a the investment adviser or manager.

(3) Member of the Fund’s Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Directors.

<R>     Management and Advisory Arrangements. MLIM serves as the Investment Adviser for Balanced Capital Fund and as Manager for Convertible Fund pursuant to a separate investment advisory agreement and management agreement, respectively (each, an “Investment Advisory Agreement”) that, except for certain minor differences, are identical.

     Pursuant to the Investment Advisory Agreement between each Fund and MLIM, Balanced Capital Fund pays MLIM a management fee at the annual rate of .40% of the average daily net assets of the Fund and Convertible Fund pays MLIM a management fee at the annual rate of .60% of the average daily net assets of the Fund. After the Reorganization, the Combined Fund will pay the management fee at the rate of .40%. See “Summary — Pro Forma Fee Tables.”

     MLIM has retained MLAM U.K. as sub-adviser to each of Convertible Fund and Balanced Capital Fund. Pursuant to a separate sub-advisory agreement between MLIM and MLAM U.K. with respect to each Fund, MLIM pays MLAM U.K. a fee for providing investment advisory services to MLIM with respect to each Fund, in an amount to be determined from time to time by MLIM and MLAM U.K. but in no event in excess of the amount MLIM actually receives for providing services to each Fund pursuant to its Investment Advisory Agreement. The address of MLAM U.K. is 33 King William Street, London EC4R 9AS, England.</R>

Purchase of Shares

<R>     The class structure and purchase and distribution procedures for shares of Convertible Fund are substantially the same as those of Balanced Capital Fund. For a complete discussion of the four classes of shares and the purchase and distribution procedures related thereto see “Your Account — Merrill Lynch Select Pricing^SM System,” “— Participation in Merrill Lynch Fee Based Programs” and “— How to Buy, Sell, Transfer and Exchange Shares” in the Balanced Capital Fund Prospectus.</R>

Redemption of Shares

<R>    The procedure for redeeming shares of Balanced Capital Fund is the same as the procedure for redeeming shares of Convertible Fund. For purposes of computing any CDSC that may be payable upon disposition of Corresponding Shares of Balanced Capital Fund acquired by Convertible Fund stockholders in the Reorganization, the holding period of Convertible Fund shares outstanding on the date the Reorganization takes place will be tacked onto the holding period of the Corresponding Shares of Balanced Capital Fund acquired in the Reorganization. See “Your Account — Merrill Lynch Select Pricing^SM System,” “— Participation in Merrill Lynch Fee Based Programs” and “— How to Buy, Sell, Transfer and Exchange Shares” in the Balanced Capital Fund Prospectus.</R>

 

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Performance

<R>     General. The following tables provide performance information for each class of shares of Convertible Fund and Balanced Capital Fund, including and excluding maximum applicable sales charges, for the periods indicated. Past performance is not indicative of future performance.

Balanced Capital Fund
Average Annual Total Return

	Class A Shares				Class B Shares				Class C Shares				Class D Shares
Period	With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge
Year Ended 3/31/00	(0.92	)%	4.58	%	(0.22	)%	3.48	%	2.57	%	3.50	%	(1.18	)%	4.29	%
Five Years Ended 3/31/00	12.52	%	13.74	%	12.59	%	12.59	%	12.58	%	12.58	%	12.24	%	13.46	%
Ten Years Ended 3/31/00	11.81	%	12.42	%	11.28	%	11.28	%	N/A		N/A		N/A		N/A
Inception† through 3/31/00	N/A		N/A		N/A		N/A		12.71	%	12.71	%	12.47	%	13.59	%

* Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B shares is 4.0% and is reduced to 0% after four years. Class C shares are subject to a 1.0% CDSC for one year.

† Class A shares commenced operations on November 8, 1973. Class B shares commenced operations on October 21, 1988. Class C and Class D shares commenced operations on October 21, 1994.

Convertible Fund
Average Annual Total Return

	Class A Shares#				Class B Shares				Class C Shares				Class D Shares
Period	With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge		With Sales Charge*		Without Sales Charge
Year Ended 12/31/00	3.40	%	9.13	%	4.10	%	8.10	%	7.02	%	8.02	%	3.19	%	8.19	%
Five Years Ended 12/31/00	10.79	%	12.00	%	N/A		N/A		N/A		N/A		N/A		N/A
Ten Years Ended 12/31/00	7.53	%	8.11	%	N/A		N/A		N/A		N/A		N/A		N/A
Inception† through 12/31/00	N/A		N/A		1.80	%	2.36	%	2.35	%	2.35	%	0.88	%	3.17	%

</R>

# Prior to August 4, 1997, the Fund operated as a dual-structure closed-end investment company. On August 4, 1997, the Fund converted to an open-end investment company and Capital Shares outstanding as of that date were designated Class A Shares.

* Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B shares is 4.0% and is reduced to 0% after four years. Class C shares are subject to a 1.0% CDSC for one year.

† Class A shares commenced operations on August 2, 1985. Class B, Class C and Class D shares commenced operations on August 4, 1997.

Stockholder Rights

<R>     Stockholders of Balanced Capital Fund 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 stockholder vote. Balanced Capital Fund does not intend to hold meetings of stockholders in any year in which the Investment Company Act does not require stockholders to act upon any of the following matters: (i) election of Directors; (ii) approval of a management agreement; (iii) approval of distribution arrangements; and (iv) ratification of selection of independent accountants. Voting rights for Directors are not cumulative. Shares of Balanced Capital Fund to be issued to Convertible Fund stockholders in the Reorganization will be fully paid and non-assessable, will have no preemptive rights and will have the conversion rights described in this Prospectus and Proxy Statement and in the Balanced Capital Fund Prospectus. Each share of Balanced Capital Fund common stock is entitled to participate equally in dividends declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities, except that Class B, Class C and Class D shares bear certain additional expenses. Rights attributable to shares of Convertible Fund are substantially identical to those described above.</R>

 

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Dividends

<R>

     The current policy of Convertible Fund with respect to dividends is substantially identical to the policy of Balanced Capital Fund. It is each Fund’s intention to distribute all of its net investment income, if any. In addition, each Fund distributes all net realized capital gains, if any, to stockholders at least annually.</R>

Automatic Dividend Reinvestment Plan

<R>     Each of the Funds offers its stockholders an Automatic Dividend Reinvestment Plan (the “Plan”) with substantially similar terms. Pursuant to the Plans, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the relevant Fund unless a stockholder has elected to receive such dividends in cash. For further information about the Plans, see “Shareholder Services Automatic Dividend Reinvestment Plan” in the Balanced Capital Fund Statement of Additional Information.

     After the Reorganization, a Convertible Fund stockholder who has elected to receive dividends in cash will continue to receive dividends in cash; all other Convertible Fund stockholders will have their dividends automatically reinvested in shares of the Combined Fund. However, if a stockholder owns shares of both Funds, after the Reorganization the stockholder’s election with respect to the dividends of Balanced Capital Fund will control unless the stockholder specifically elects a different option at that time.</R>

Tax Information

<R>     The tax consequences associated with investment in shares of Convertible Fund are substantially similar to the tax consequences associated with investment in shares of Balanced Capital Fund. See “Your Account — Dividends and Taxes” in the Balanced Capital Fund Prospectus.</R>

Portfolio Transactions

<R>     The procedures for engaging in portfolio transactions are generally the same for both Convertible Fund and Balanced Capital Fund. For a discussion of these procedures, see “Portfolio Transactions and Brokerage” in the Balanced Capital Fund Statement of Additional Information.</R>

     Each Fund may effect portfolio transactions on foreign securities exchanges and may incur settlement delays on certain of such exchanges. In addition, costs associated with transactions in foreign securities are generally higher than such costs associated with transactions in U.S. securities.

Portfolio Turnover

<R>     Generally, neither Convertible Fund nor Balanced Capital Fund purchases securities for short term trading profits. However, either Fund may dispose of securities without regard to the time that they have been held when such action, for defensive or other reasons, appears advisable to MLIM. Neither Fund has any limit on its rate of portfolio turnover. The portfolio turnover rates for Convertible Fund for its fiscal years ended August 31, 1998 and 1999 were 155.20% and 85.42%, respectively. The portfolio turnover rates for Balanced Capital Fund for its fiscal years ended March 31, 1999 and 2000 were 33% and 33%, respectively. A high portfolio turnover involves certain tax consequences such as an increase in capital gain dividends or in ordinary income dividends of accrued market discount, and correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions which are borne directly by the Fund.</R>

Additional Information

<R>     Net Asset Value. Both Balanced Capital Fund and Convertible Fund determine net asset value of each class of its shares once daily as of the close of business on the NYSE on each day during which the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. 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.

     Stockholder Services. Balanced Capital Fund offers a number of stockholder services and investment plans designed to facilitate investment in shares of the Fund. In addition, U.S. stockholders of each class of shares of Balanced Capital Fund have an exchange privilege with certain other funds utilizing Select Pricing. Stockholder </R>

 

30

<R>services available to stockholders of Convertible Fund are identical to the stockholder services of Balanced Capital Fund. For a description of these services, see “Shareholder Services” in the Balanced Capital Fund Prospectus.

     Custodian. The Bank of New York acts as custodian of the cash and securities of Balanced Capital Fund and State Street Bank and Trust Company acts as custodian of the cash and securities of Convertible Fund. The principal business address of The Bank of New York is 90 Washington Street, 12th Floor, New York, New York 10286 and the principal business address of State Street Bank and Trust Company is 1776 Heritage Drive, Quincy, Massachusetts 02171. It is presently anticipated that The Bank of New York will serve as the custodian of the Combined Fund.

     Transfer Agent, Dividend Disbursing Agent and Stockholder Servicing Agent. Financial Data Services, Inc. (“FDS”), 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, an affiliate of MLIM and FAM, serves as the transfer agent, dividend disbursing agent and stockholder servicing agent with respect to each Fund (the “Transfer Agent”), at the same fee schedule, pursuant to separate agreements with each of the Funds. For the fiscal year ended March 31, 2000, Balanced Capital Fund paid the Transfer Agent fees totaling $14,499,620; for the fiscal year ended August 31, 1999, Convertible Fund paid the Transfer Agent fees totaling $132,699. FDS will serve as the transfer agent, dividend disbursing agent and stockholder servicing agent for the Combined Fund.

     Capital Stock. Convertible Fund has an authorized capital of 400,000,000 shares of common stock, par value $.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D shares, each of which consists of 100,000,000 shares. Balanced Capital Fund has an authorized capital of 1,300,000,000 shares of common stock, par value $.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D shares. Class A consists of 400,000,000 shares, Class B consists of 500,000,000 shares and Class C and Class D each consists of 200,000,000 shares. The rights, preferences and expenses attributable to the Class A, Class B, Class C and Class D shares of Convertible Fund are identical in all respects to those of the Class A, Class B, Class C and Class D shares of Balanced Capital Fund.

     Stockholder Inquiries. Stockholder inquiries with respect to Convertible Fund and Balanced Capital Fund may be addressed to either Fund by telephone at (609) 282-2800 or at the address set forth on the cover page of this Proxy Statement and Prospectus.</R>

THE REORGANIZATION

General

<R>     Under the Agreement and Plan (attached hereto as Exhibit I), Balanced Capital Fund will acquire substantially all of the assets, and will assume substantially all of the liabilities, of Convertible Fund, in exchange solely for an equal aggregate value of shares to be issued by Balanced Capital Fund. Upon receipt by Convertible Fund of such shares, Convertible Fund will distribute the shares to the holders of shares of Convertible Fund, as described below.

     Generally, the assets transferred by Convertible Fund to Balanced Capital Fund will equal all investments of Convertible Fund held in its portfolio as of the Valuation Time (as defined in the Agreement and Plan) and all other assets of Convertible Fund as of such time.

     Convertible Fund will distribute the shares of Balanced Capital Fund received by it pro rata to its stockholders in exchange for such stockholders’ proportional interests in Convertible Fund. The shares of Balanced Capital Fund received by Convertible Fund stockholders will be of the same class and have the same aggregate net asset value as each such stockholder’s interest in Convertible Fund as of the Valuation Time (previously defined as the “Corresponding Shares”). (See “Terms of the Agreement and Plan — Valuation of Assets and Liabilities” for information concerning the calculation of net asset value.) The distribution will be accomplished by opening new accounts on the books of Balanced Capital Fund in the names of all stockholders of Convertible Fund, including stockholders holding Convertible Fund shares in certificate form, and transferring to each stockholder’s account the Corresponding Shares of Balanced Capital Fund representing such stockholder’s interest previously credited to the account of Convertible Fund. Stockholders holding Convertible Fund shares in certificate form may receive certificates representing the Corresponding Shares of Balanced Capital Fund credited to their account in respect of such Convertible Fund shares by sending the certificates to the Transfer Agent accompanied by a written request for such exchange. <R>

 

31

<R>     Since the Corresponding Shares of Balanced Capital Fund will be issued at net asset value and the shares of Convertible Fund will be valued at net asset value for the purposes of the exchange by the stockholders of Convertible Fund of such shares for the Corresponding Shares, the holders of shares of Convertible Fund will not be diluted as a result of the Reorganization. However, as a result of the Reorganization, a stockholder of Convertible Fund or Balanced Capital Fund would hold a reduced percentage of ownership in the Combined Fund than he or she did in Convertible Fund or Balanced Capital Fund prior to the Reorganization.</R>

Procedure

<R>     On June 21, 2000, the Board of Directors of Convertible Fund, including all of the Directors who are not “interested persons,” as defined by the Investment Company Act, approved the Agreement and Plan and the submission of such Agreement and Plan to Convertible Fund stockholders for approval. The Board of Directors of Balanced Capital Fund, including all of the Directors who are not interested persons, approved the Agreement and Plan on May 2, 2000.</R>

     If the stockholders of Convertible Fund approve the Reorganization at the Meeting, all required regulatory approvals are obtained and certain conditions are either met or waived, it is presently anticipated that the Reorganization will take place during the third calendar quarter of 2000.

     The Board of Directors of Convertible Fund recommends that Convertible Fund stockholders approve the Agreement and Plan.

Terms of the Agreement and Plan

The following is a summary of the significant terms of the Agreement and Plan. This summary is qualified in its entirety by reference to the Agreement and Plan, attached hereto as Exhibit I.

<R>     Valuation of Assets and Liabilities. The respective assets of Convertible Fund and Balanced Capital Fund will be valued as of the Valuation Time. The assets in each Fund will be valued according to the procedures set forth under “Your Account How Shares are Priced” in the Balanced Capital Fund Prospectus. Purchase orders for Convertible Fund shares which have not been confirmed as of the Valuation Time will be treated as assets of Convertible Fund for purposes of the Reorganization; redemption requests with respect to Convertible Fund shares which have not settled as of the Valuation Time will be treated as liabilities of Convertible Fund for purposes of the Reorganization.

     Distribution of Balanced Capital Fund Shares. On the next full business day following the Valuation Time (the “Exchange Date”), Balanced Capital Fund will issue to Convertible Fund a number of shares the aggregate net asset value of which will equal the aggregate net asset value of shares of Convertible Fund as of the Valuation Time. Each holder of Convertible Fund shares will receive, in exchange for his or her proportionate interest in Convertible Fund, Corresponding Shares of Balanced Capital Fund of the same class and having the same aggregate net asset value as the Convertible Fund shares held by such stockholder as of the Valuation Time.

     Expenses. The expenses of the Reorganization that are directly attributable to Convertible Fund and the conduct of its business will be deducted from the assets of Convertible Fund as of the Valuation Time. These expenses are expected to include the expenses incurred in preparing, printing and mailing the proxy materials to be utilized in connection with the Meeting and the expenses related to the solicitation of proxies to be voted at that Meeting. The expenses attributable to Balanced Capital Fund include the costs of printing sufficient copies of its Prospectus and its most recent Annual Report to accompany the Proxy Statement and Prospectus. The expenses of the Reorganization, including expenses in connection with obtaining the IRS ruling, the preparation of the Agreement and Plan, legal fees and audit fees, will be borne equally by each Fund. MLIM has agreed to bear the expenses of the Reorganization attributable to Convertible Fund and Balanced Capital Fund, which expenses are currently estimated to be $98,000 and $66,000, respectively.</R>

     Required Approvals. Under Convertible Fund’s Articles of Incorporation (as amended to date) and relevant Maryland law, stockholder approval of the Agreement and Plan requires the affirmative vote of Convertible Fund stockholders representing a majority of the total number of votes issued and outstanding and entitled to be cast thereon.

<R>     Deregistration and Dissolution. Following the transfer of the assets and liabilities of Convertible Fund to Balanced Capital Fund and the distribution of Corresponding Shares of Balanced Capital Fund to Convertible Fund stockholders, Convertible Fund will terminate its registration under the Investment Company Act and its incorporation under Maryland law and will withdraw its authority to do business in any state where it is required to do so.</R>

 

32

<R>     Amendments and Conditions. The Agreement and Plan may be amended at any time prior to the Exchange Date with respect to any of the terms therein. The obligations of Convertible Fund and Balanced Capital Fund pursuant to the Agreement and Plan are subject to various conditions, including a registration statement on Form N-14 being declared effective by the Commission, approval of the Reorganization by Convertible Fund stockholders, a favorable IRS ruling or an opinion of counsel being received as to tax matters, an opinion of counsel being received as to securities matters and the continuing accuracy of various representations and warranties of Convertible Fund and Balanced Capital Fund being confirmed by the respective parties.

     Termination, Postponement and Waivers. The Agreement and Plan may be terminated, and the Reorganization abandoned at any time, whether before or after adoption thereof by the Convertible Fund stockholders, prior to the Exchange Date, or the Exchange Date may be postponed: (i) by mutual consent of the Boards of Directors of Convertible Fund and Balanced Capital Fund; (ii) by the Board of Directors of Convertible Fund if any condition to Convertible Fund’s obligations has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of Balanced Capital Fund if any condition to Balanced Capital Fund’s obligations has not been fulfilled or waived by such Board.</R>

Potential Benefits to Stockholders as a Result of the Reorganization

<R>     The Board of Directors of Convertible Fund has determined that stockholders are likely to benefit from the Reorganization. First, following the Reorganization, Convertible Fund stockholders will remain invested in an open-end fund that has investment objectives and policies similar, though not identical, to that of Convertible Fund. In addition, Convertible Fund stockholders are likely to experience certain additional benefits, including lower expenses per share, economies of scale and greater flexibility in portfolio management.

     Specifically, after the Reorganization the total operating expenses of the Combined Fund, as a percent of net assets, are estimated to be less than the current operating expenses for Convertible Fund (excluding any fee waiver or expense reimbursement). See “Summary — Pro Forma Fee Tables.” In addition, certain fixed costs, such as costs of printing stockholder reports and proxy statements, legal expenses, audit fees, registration fees, mailing costs and other expenses would be spread across a larger asset base, thereby lowering the expense ratio borne by Convertible Fund stockholders. To illustrate the potential economies of scale for Convertible Fund, the table below shows the operating expense ratio of each class of shares of each Fund and for the Combined Fund on a pro forma basis as of March 31, 2000 (including class specific distribution and account maintenance fees).

	Operating Expense Ratio
Class of Shares	Balanced Capital Fund		Convertible Fund		Combined Fund
A	0	.62%	1	.39%	0	.62%
B	1	.62%	2	.39%	1	.62%
C	1	.62%	2	.39%	1	.62%
D	0	.87%	1	.64%	0	.87%

     The following table sets forth (i) the net assets of Convertible Fund as of the last three fiscal year ends and as of March 31, 2000 and (ii) the net assets of Balanced Capital Fund as of the last four fiscal year ends.

Balanced Capital Fund			Convertible Fund
Date		Net Assets	Date	Net Assets
	As of 3/31/97	$  9,281,203,818	As of 8/31/97	$118,316,015
	As of 3/31/98	$11,887,485,394	As of 8/31/98	$  88,534,081
	As of 3/31/99	$10,502,644,134	As of 8/31/99	$  59,491,588
	As of 3/31/00	$  7,311,472,339	As of 3/31/00	$  50,545,911

     The net assets of Convertible Fund have been declining since the Fund redeemed its Income Shares on July 31, 1997 and then open-ended on August 4, 1997. As of March 31, 2000, the net assets of Convertible Fund are substantially smaller than the net assets of Balanced Capital Fund. MLIM believes that the economies of scale that may be realized as a result of the Reorganization would be beneficial to Convertible Fund stockholders.</R>

     Based on the foregoing, the Board of Directors of Convertible Fund concluded that the Reorganization presents no significant risks or costs (including legal, accounting and administrative costs) that would outweigh the benefits discussed above. In approving the Reorganization, the Board of Directors of each Fund determined that the interests of existing stockholders of that Fund would not be diluted as a result of the Reorganization.

 

33

Tax Consequences of the Reorganization

<R>     General. The Reorganization has been structured with the intention that it qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Code. Convertible Fund and Balanced Capital Fund have elected and qualified for the special tax treatment afforded “regulated investment companies” under the Code, and Balanced Capital Fund intends to continue to so qualify after the Reorganization. Convertible Fund and Balanced Capital Fund have jointly requested a private letter ruling from the IRS to the effect that for Federal income tax purposes: (i) the transfer of substantially all of the assets of Convertible Fund to Balanced Capital Fund in exchange solely for shares of Balanced Capital Fund as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and Convertible Fund and Balanced Capital Fund will each be deemed to be a “party” to the Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to Convertible Fund as a result of the asset transfer solely in exchange for Balanced Capital Fund shares or on the distribution of the Balanced Capital Fund stock to Convertible Fund stockholders under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to Balanced Capital Fund on the receipt of assets of Convertible Fund in exchange for Balanced Capital Fund shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the stockholders of Convertible Fund on the receipt of Corresponding Shares of Balanced Capital Fund in exchange for their shares of Convertible Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of the Convertible Fund assets in the hands of Balanced Capital Fund will be the same as the tax basis of such assets in the hands of Convertible Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Balanced Capital Fund received by the stockholders of Convertible Fund in the Reorganization will be equal to the tax basis of the shares of Convertible Fund surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder’s holding period for the Corresponding Shares of Balanced Capital Fund will be determined by including the period for which such stockholder held the shares of Convertible Fund exchanged therefor provided, that such Convertible Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Balanced Capital Fund’s holding period with respect to the Convertible Fund assets transferred will include the period for which such assets were held by Convertible Fund; and (ix) the taxable year of Convertible Fund will end on the effective date of the Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, Balanced Capital Fund will succeed to and take into account certain tax attributes of Convertible Fund, such as earnings and profits, capital loss carryovers and method of accounting.

     As of March 31, 2000, Balanced Capital Fund had significant net unrealized capital appreciation. After the Reorganization, Convertible Fund stockholders will share in the net unrealized capital appreciation of Balanced Capital Fund and, to the extent such appreciation is realized, will be subject to any tax consequences related to that appreciation. It is anticipated that over time the reduction in expenses experienced by Convertible Fund stockholders as a result of the Reorganization may in whole or in part offset any potential adverse tax liability. In addition, as of March 31, 2000, Convertible Fund had undistributed net realized capital losses, which, after the Reorganization, will be used to offset any net realized capital gains of the Combined Fund. After the Reorganization, current Balanced Capital Fund stockholders will benefit from the ability of Balanced Capital Fund to share in a portion of the undistributed net realized capital losses of Convertible Fund, which can be used to offset realized capital gains. However, because of Balanced Capital Fund’s much greater size, the benefit of these losses to each stockholder will be substantially diluted.</R>

     Stockholders should consult their tax advisers regarding the effect of the Reorganization in light of their individual circumstances. As the foregoing relates only to Federal income tax consequences, stockholders also should consult their tax advisers as to the foreign, state and local tax consequences of the Reorganization.

<R>     Status as a Regulated Investment Company. Both Convertible Fund and Balanced Capital Fund have elected and qualified to be taxed as regulated investment companies under Sections 851-855 of the Code, and after the Reorganization, Balanced Capital Fund intends to continue to so qualify.</R>

Capitalization

<R>     The following table sets forth as of May 31, 2000 (i) the capitalization of Convertible Fund, (ii) the capitalization of Balanced Capital Fund and (iii) the capitalization of the Combined Fund as adjusted to give effect to the Reorganization.</R>

 

34

<R>

Pro Forma Capitalization of Balanced Capital Fund, Convertible Fund and
The Combined Fund as of May 31, 2000
Balanced Capital Fund

	Class A	Class B	Class C	Class D
Total Net Assets:	$2,586,553,014	$2,507,965,516	$279,197,423	$1,415,629,793
Shares Outstanding	80,256,516	80,124,646	9,037,198	44,049,287
Net Asset Value Per Share:	$              32.23	$              31.30	$           30.89	$              32.14
	Convertible Fund
	Class A	Class B	Class C	Class D
Total Net Assets:	$     29,235,671	$       8,777,682	$    2,170,775	$       3,203,410
Shares Outstanding:	2,600,283	780,226	193,081	284,089
Net Asset Value Per Share:	$              11.24	$              11.25	$           11.24	$              11.28
	Combined Fund
	Class A	Class B	Class C	Class D
Total Net Assets*:	$2,615,788,685	$2,516,743,198	$281,368,198	$1,418,833,203
Shares Outstanding:	81,160,058	80,407,131	9,108,715	44,145,401
Net Asset Value Per Share*:	$              32.23	$              31.30	$           30.89	$              32.14

* Total Net Assets and Net Asset Value Per Share include the aggregate value of Convertible Fund’s net assets which would have been transferred to Balanced Capital Fund had the Reorganization been consummated on May 31, 2000. The data does not take into account expenses incurred in connection with the Reorganization or the actual number of shares that would have been issued. No assurance can be given as to how many shares of Balanced Capital Fund the Convertible Fund stockholders will receive on the date the Reorganization takes place, and the foregoing should not be relied upon to reflect the number of shares of Balanced Capital Fund that actually will be received on or after such date.</R>

INFORMATION CONCERNING THE SPECIAL MEETING

Date, Time and Place of Meeting

<R>     The Meeting will be held on September 13, 2000, at the offices of Merrill Lynch Investment Managers, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at 9:00 a.m., Eastern time.</R>

Solicitation, Revocation and Use of Proxies

     A stockholder executing and returning a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a notice of revocation to the Secretary of Convertible Fund. Although mere attendance at the Meeting will not revoke a proxy, a stockholder present at the Meeting may withdraw his proxy and vote in person.

     All shares represented by properly executed proxies, unless such proxies previously have been revoked, will be voted at the Meeting in accordance with the directions on the proxies; if no direction is indicated on a properly executed proxy, such shares will be voted “FOR” approval of the Agreement and Plan.

     It is not anticipated that any matters other than the adoption of the Agreement and Plan will be brought before the Meeting. If, however, any other business properly is brought before the Meeting, proxies will be voted in accordance with the judgment of the persons designated on such proxies.

Record Date and Outstanding Shares

    <R> Only holders of record of shares of Convertible Fund at the close of business on July 17, 2000 (the “Record Date”) are entitled to vote at the Meeting or any adjournment thereof. At the close of business on the Record Date, there were 3,771,993.53 shares of Convertible Fund common stock issued and outstanding and entitled to vote.

Security Ownership of Certain Beneficial Owners and Management of Convertible Fund and Balanced Capital Fund

     To the knowledge of Convertible Fund, the following persons or entities owned beneficially or of record 5% or more of a class of shares of Convertible Fund outstanding on the Record Date.</R>

 

35

 
<R>

Name	Address	Percentage and Class
National Financial Services Corporation	200 Liberty Street 5th floor NY5D New York, NY 10281	7.10% Class A
Charles Schwab & Company, Inc.	101 Montgomery Street San Francisco, CA 94104	7.80% Class A

</R>

     At the Record Date, the Directors and officers of Convertible Fund as a group (10 persons) owned an aggregate of less than 1% of the outstanding shares of Convertible Fund and owned less than 1% of the outstanding shares of common stock of ML & Co.

<R>     To the knowledge of Balanced Capital Fund, the following persons or entities owned beneficially or of record 5% or more of a class of shares of Balanced Capital Fund outstanding on the Record Date.

Name	Address	Percentage and Class
Merrill Lynch Trust Company	P.O. Box 30532 New Brunswick, NJ 08989	55.6% Class A
Merill Lynch Trust Company	P.O. Box 30532 New Brunswick, NJ 08989	27.5% Class D

     At the Record Date, the Directors and officers of Balanced Capital Fund as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of Balanced Capital Fund and owned less than 1% of the outstanding shares of common stock of ML & Co.</R>

Voting Rights and Required Vote

     <R>For purposes of this Proxy Statement and Prospectus, each share of each class of Convertible Fund is entitled to one vote. Approval of the Agreement and Plan requires the affirmative vote of Convertible Fund stockholders representing a majority of the total votes entitled to be cast thereon, with all shares voting as a single class.</R>

     Under Maryland law, stockholders of a registered open-end investment company such as Convertible Fund are not entitled to demand the fair value of their shares upon a transfer of assets and will be bound by the terms of the Reorganization if approved at the Meeting. However, any stockholder of Convertible Fund may redeem his or her Convertible Fund shares prior to the Reorganization.

     A quorum for purposes of the Meeting consists of one-third of the shares entitled to vote at the Meeting, present in person or by proxy. If, by the time scheduled for the Meeting, a quorum of Convertible Fund’s stockholders is not present or if a quorum is present but sufficient votes in favor of the Agreement and Plan are not received from the stockholders of Convertible Fund, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from stockholders. Any such adjournment will require the affirmative vote of a majority of the shares of Convertible Fund present in person or by proxy and entitled to vote at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of any such adjournment if they determine that adjournment and additional solicitation are reasonable and in the interests of the stockholders of Convertible Fund.

ADDITIONAL INFORMATION

<R>     The expenses of preparation, printing and mailing of the enclosed form of proxy, the accompanying Notice and this Proxy Statement and Prospectus and the expenses related to solicitation of proxies to be voted at the Meeting will be attributed to Convertible Fund. The expenses that will be attributed to Balanced Capital Fund include the costs of printing sufficient copies of its Prospectus and its most recent Annual Report to accompany this Proxy Satement and Prospectus. Convertible Fund will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation materials to the beneficial owners of shares of Convertible Fund and will reimburse certain persons that Convertible Fund may employ for their reasonable expenses in assisting in the solicitation of proxies from such beneficial owners of shares of Convertible Fund. MLIM has agreed to bear all of these expenses.</R>

 

36

<R>     In order to obtain the necessary quorum at the Meeting, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by officers of Convertible Fund. Convertible Fund has retained Shareholder Communications Corporation, 17 State Street, New York, New York 10004, 1-800-649-9896, to aid in the solicitation of proxies, at a cost to be borne by MLIM of approximately $5,000 plus aggregate out-of-pocket expenses.</R>

     Broker-dealer firms, including Merrill Lynch, holding shares of Convertible Fund in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will not be permitted to vote without instructions with respect to the approval of the Agreement and Plan. Properly executed proxies that are returned but that are marked “abstain” or with respect to which a broker-dealer has received no instructions and therefore has declined to vote on the proposal (“broker non-votes”) will be counted as present for the purposes of determining a quorum. However, abstentions and broker non-votes will have the same effect as a vote against approval of the Agreement and Plan.

<R>     This Proxy Statement and Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto, which Convertible Fund and Balanced Capital Fund, respectively, have filed with the Commission under the Securities Act and the Investment Company Act, to which reference is hereby made.

     Convertible Fund and Balanced Capital Fund both file reports and other information with the Commission. Reports, proxy statements, registration statements and other information filed by Convertible Fund and Balanced Capital Fund can be inspected and copied at the public reference facilities of the Commission in Washington, D.C. and at the New York Regional Office of the Commission at Seven World Trade Center, New York, New York 10048. Copies of such materials also can be obtained by mail from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains the Balanced Capital Fund Statement of Additional Information, dated July 3, 2000, the Balanced Capital Fund Prospectus, dated July 3, 2000, the prospectus relating to Convertible Fund, dated December 21, 1999, the statement of additional information relating to Convertible Fund, dated December 21, 1999, other material incorporated herein by reference and other information regarding the Funds.</R>

LEGAL PROCEEDINGS

<R>     There are no material legal proceedings to which Convertible Fund or Balanced Capital Fund is a party.</R>

LEGAL OPINIONS

<R>     Certain legal matters in connection with the Reorganization will be passed upon for Convertible Fund and Balanced Capital Fund by Brown & Wood LLP, One World Trade Center, New York, New York 10048.</R>

EXPERTS

<R>     The financial highlights of Convertible Fund and Balanced Capital Fund included in this Proxy Statement and Prospectus have been so included in reliance on the reports of Deloitte & Touche LLP, independent auditors, given on their authority as experts in auditing and accounting. The principal business address of Deloitte & Touche LLP is Princeton Forrestal Village, 116-300 Village Boulevard, Princeton, New Jersey 08540. Deliotte & Touche LLP will serve as the independent auditors for the Combined Fund after the Reorganization.</R>

STOCKHOLDER PROPOSALS

     A stockholder proposal intended to be presented at any subsequent meeting of stockholders of Convertible Fund must be received by Convertible Fund in a reasonable time before Convertible Fund begins to print and mail the proxy solicitation materials to be utilized in connection with such meeting in order to be considered in Convertible Fund’s proxy statement and form of proxy relating to the meeting.

By Order of the Board of Directors,


IRA P. SHAPIRO
Secretary, Merrill Lynch Convertible Fund, Inc.

 

37

EXHIBIT I

AGREEMENT AND PLAN OF REORGANIZATION

<R>     THIS AGREEMENT AND PLAN OF REORGANIZATION (this “Agreement”) is made as of the 10th day of August, 2000, by and between Merrill Lynch Balanced Capital Fund, Inc., a Maryland corporation (“Balanced Capital”), and Merrill Lynch Convertible Fund, Inc., a Maryland corporation (“Convertible” and, together with Balanced Capital, the “Funds”).</R>

PLAN OF REORGANIZATION

</R>     The reorganization will comprise the acquisition by Balanced Capital of substantially all of the assets, and the assumption of substantially all of the liabilities, of Convertible in exchange solely for an equal aggregate value of newly issued shares, with a par value of $.10 per share, of Balanced Capital and the subsequent distribution of Corresponding Shares (defined below) of Balanced Capital to the stockholders of Convertible in exchange for their shares of common stock, par value $.10 per share, of Convertible, including shares of common stock of Convertible representing the Dividend Reinvestment Plan (“DRIP”) shares held in the book deposit accounts of the holders of common stock of Convertible, in liquidation of Convertible, all upon and subject to the terms hereinafter set forth (the “Reorganization”).

     In the course of the Reorganization, shares of Balanced Capital will be distributed to Convertible stockholders as follows: each holder of Convertible shares will be entitled to receive the same class of shares of Balanced Capital (i.e., Class A, Class B, Class C or Class D) (the “Corresponding Shares”) as they held in Convertible immediately prior to the Reorganization. The same distribution fees, account maintenance fees and sales charges (including contingent deferred sales charges), if any, shall apply to the Corresponding Shares as applied to shares of Convertible immediately prior to the Reorganization. The aggregate net asset value of the Corresponding Shares of Balanced Capital to be received by each stockholder of Convertible will equal the aggregate net asset value of the Convertible shares owned by such stockholder on the Exchange Date (defined below). In consideration therefor, on the Exchange Date, Balanced Capital shall acquire substantially all of Convertible’s assets and assume substantially all of Convertible’s obligations and liabilities then existing, whether absolute, accrued, contingent or otherwise. It is intended that the Reorganization described in this Plan shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the “Code”), and any successor provision.</R>

     As promptly as practicable after the consummation of the Reorganization, Convertible shall be dissolved in accordance with the laws of the State of Maryland and will terminate its registration under the Investment Company Act of 1940, as amended (the “1940 Act”).

AGREEMENT

<R>     In order to consummate the Reorganization and in consideration of the promises and the covenants and agreements hereinafter set forth, and intending to be legally bound, Balanced Capital and Convertible hereby agree as follows:

1.   Representations and Warranties of Balanced Capital.

    Balanced  Capital represents and warrants to, and agrees with, Convertible that:

     (a) Balanced Capital is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets and to carry out this Agreement. Balanced Capital has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.

     (b) Balanced Capital is duly registered under the 1940 Act as a non-diversified, open-end management investment company (File No. 811-5723), and such registration has not been revoked or rescinded and is in full force and effect. Balanced Capital has elected and qualified for the special tax treatment afforded regulated investment companies (“RICs”) under Sections 851-855 of the Code at all times since its inception and intends to continue to so qualify until consummation of the Reorganization and thereafter.

     (c) Convertible has been furnished with a statement of assets and liabilities and a schedule of investments of Balanced Capital, each as of March 31, 2000, said financial statements having been audited by Deloitte & </R>

 

I-1

<R>Touche LLP, independent public accountants. An unaudited statement of assets and liabilities of Balanced Capital and an unaudited schedule of investments of Capital, each as of the Valuation Time (defined below), will be furnished to Convertible at or prior to the Exchange Date for the purpose of determining the number of shares of Balanced Capital to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of Balanced Capital as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis.

     (d) Convertible has been furnished with Balanced Capital’s Annual Report to Stockholders for the year ended March 31, 2000 and the financial statements appearing therein fairly present the financial position of Balanced Capital as of the dates indicated in conformity with generally accepted accounting principles applied on a consistent basis.

     (e) Convertible has been furnished with the prospectus and statement of additional information of Balanced Capital, each dated July 3, 2000, and said prospectus and statement of additional information do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

     (f) Balanced Capital has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board of Directors, and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

    (g ) There are no material legal, administrative or other proceedings pending or, to the knowledge of Balanced Capital, threatened against it which assert liability on the part of Balanced Capital or which materially affect its financial condition or its ability to consummate the Reorganization. Balanced Capital is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business.

     (h) Balanced Capital is not a party to or obligated under any provision of its Articles of Incorporation, or its by-laws, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement.

    (i) There are no material contracts outstanding to which Balanced Capital is a party that have not been disclosed in the N-14 Registration Statement (as defined in subsection (l) below) or will not otherwise be disclosed to Convertible prior to the Valuation Time.

     (j) Balanced Capital has no known liabilities of a material amount, contingent or otherwise, other than those shown on its statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as an investment company since the date of Balanced Capital’s most recent annual or semi-annual report to stockholders; and those incurred in connection with the Reorganization. As of the Valuation Time, Balanced Capital will advise Convertible in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time.

     (k) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Balanced Capital of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934 Act”) and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico).

     (l) The registration statement filed by Balanced Capital on Form N-14 relating to the shares of Balanced Capital to be issued pursuant to this Agreement which includes the proxy statement of Convertible and the prospectus of Balanced Capital with respect to the transaction contemplated herein, and any supplement, or amendment thereto or to the documents therein (as amended, the “N-14 Registration Statement”), on its effective date, at the time of the stockholders’ meeting referred to in Section 6(a) of this Agreement and at the Exchange </R>

 

I-2

<R>Date, insofar as it relates to Balanced Capital (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Balanced Capital for use in the N-14 Registration Statement as provided in Section 6(e) of this Agreement.

     (m) Balanced Capital is authorized to issue 1,300,000,000 shares of common stock, par value $.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D Common Stock; Class A consists of 400,000,000 shares, Class B consists of 500,000,000 shares and Class C and Class D each consists of 200,000,000 shares; each outstanding share is fully paid and nonassessable and has full voting rights.

     (n) Balanced Capital shares to be issued to Convertible pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no stockholder of Balanced Capital will have any preemptive right of subscription or purchase in respect thereof.

     (o) At or prior to the Exchange Date, Balanced Capital shares to be transferred to Convertible for distribution to the stockholders of Convertible on the Exchange Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of Convertible presently are qualified, and there are a sufficient number of such shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.

     (p) At or prior to the Exchange Date, Balanced Capital will have obtained any and all regulatory, Director and stockholder approvals necessary to issue the shares of Balanced Capital to Convertible. </R>

2.   Representations and Warranties of Convertible.

<R>     Convertible represents and warrants to, and agrees with, Balanced Capital that:</R>

     (a) Convertible is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets and to carry out this Agreement. Convertible has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.

     (b) Convertible is duly registered under the 1940 Act as a non-diversified, open-end management investment company (File No. 811-07155), and such registration has not been revoked or rescinded and is in full force and effect. Convertible has elected and qualified for the special tax treatment afforded RICs under Sections 851-855 of the Code at all times since its inception, and intends to continue to so qualify through its taxable year ending upon liquidation.

<R>     (c) As used in this Agreement, the term “Investments” shall mean (i) the investments of Convertible shown on the schedule of its investments as of the Valuation Time (as defined in Section 3(c) of this Agreement) furnished to Balanced Capital, and (ii) all other assets owned by Convertible or liabilities incurred as of the Valuation Time. </R>

     (d) Convertible has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of its Board of Directors and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

<R>     (e) Balanced Capital has been furnished with a statement of assets and liabilities and a schedule of investments of Convertible, each as of August 31, 1999, said financial statements having been audited by Deloitte & Touche LLP, independent public accountants. An unaudited statement of assets and liabilities of Convertible and an unaudited schedule of investments of Convertible, each as of the Valuation Time, will be furnished to Balanced Capital at or prior to the Exchange Date for the purpose of determining the number of shares of Balanced Capital to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of Convertible as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis. </R>

 

I-3

<R>     (f) Balanced Capital has been furnished with Convertible’s Annual Report to Stockholders for the year ended August 31, 1999 and the financial statements appearing therein fairly present the financial position of Convertible as of the dates indicated, in conformity with generally accepted accounting principles applied on a consistent basis.

     (g) Balanced Capital has been furnished with Convertible’s Semi-Annual Report to Stockholders for the period ended February 29, 2000 and the financial statements appearing therein fairly present the financial position of Convertible as of the dates indicated in conformity with generally accepted accounting principles applied on a consistent basis.

     (h) Balanced Capital has been furnished with the prospectus and statement of additional information of Convertible, each dated December 21, 1999, and said prospectus and statement of additional information do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. </R>

     (i) There are no material legal, administrative or other proceedings pending or, to the knowledge of Convertible, threatened against it which assert liability on the part of Convertible or which materially affect its financial condition or its ability to consummate the Reorganization. Convertible is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business.

<R>     (j) There are no material contracts outstanding to which Convertible is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to Balanced Capital prior to the Valuation Time. </R>

     (k) Convertible is not a party to or obligated under any provision of its Articles of Incorporation, as amended and restated, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement.

<R>     (l) Convertible has no known liabilities of a material amount, contingent or otherwise, other than those shown on its statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as an investment company since the date of Convertible’s most recent annual or semi-annual report to stockholders and those incurred in connection with the Reorganization. As of the Valuation Time, Convertible will advise Balanced Capital in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time. </R>

     (m) Convertible has filed, or has obtained extensions to file, all Federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all Federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Exchange Date occurs. All tax liabilities of Convertible have been adequately provided for on its books, and no tax deficiency or liability of Convertible has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Exchange Date occurs.

<R>     (n) At both the Valuation Time and the Exchange Date, Convertible will have full right, power and authority to sell, assign, transfer and deliver the Investments. At the Exchange Date, subject only to the delivery of the Investments as contemplated by this Agreement, Convertible will have good and marketable title to all of the Investments, and Balanced Capital will acquire all of the Investments free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the Federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Investments or materially affect title thereto). </R>

     (o) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Convertible of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.

     (p) The N-14 Registration Statement, on its effective date, at the time of the stockholders’ meeting referred to in Section 6(a) of this Agreement and on the Exchange Date, insofar as it relates to Convertible (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not

 

I-4

misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Convertible for use in the N-14 Registration Statement as provided in Section 6(e) of this Agreement.

     (q) Convertible is authorized to issue 400,000,000 shares of common stock, par value $.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; each outstanding share is fully paid and nonassessable and has full voting rights.

<R>     (r) The books and records of Convertible made available to Balanced Capital and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of Convertible.

     (s) Convertible will not sell or otherwise dispose of any of the shares of Balanced Capital to be received in the Reorganization, except in distribution to the stockholders of Convertible. </R>

3.   The Reorganization.

<R>     (a) Subject to receiving the requisite approval of the stockholders of Convertible, and to the other terms and conditions contained herein, Convertible agrees to convey, transfer and deliver to Balanced Capital and Balanced Capital agrees to acquire from Convertible, on the Exchange Date, all of the Investments (including interest accrued as of the Valuation Time on debt instruments) of Convertible, and assume substantially all of the liabilities of Convertible, in exchange solely for that number of shares of Balanced Capital provided in Section 4 of this Agreement. Pursuant to this Agreement, as soon as practicable on or after the Exchange Date Convertible will distribute all shares of Balanced Capital received by it to its stockholders in exchange for their corresponding Convertible shares. Such distribution shall be accomplished by the opening of stockholder accounts on the stock ledger records of Balanced Capital in the amounts due the stockholders of Convertible based on their respective holdings in Convertible as of the Valuation Time.

     (b) Convertible will pay or cause to be paid to Balanced Capital any interest or dividends it receives on or after the Exchange Date with respect to the Investments transferred to Convertible hereunder.

     (c) The Valuation Time shall be 4:00 P.M., Eastern time, on October 20, 2000, or such earlier or later day and time as may be mutually agreed upon in writing (the “Valuation Time”).

     (d) Balanced Capital will acquire substantially all of the assets of, and assume substantially all of the known liabilities of, Convertible, except that recourse for such liabilities will be limited to the net assets of Convertible acquired by Balanced Capital. The known liabilities of Convertible as of the Valuation Time shall be confirmed in writing to Balanced Capital by Convertible pursuant to Section 2(k) of this Agreement.

     (e) Balanced Capital and Convertible will jointly file Articles of Transfer with the State Department of Assessments and Taxation of Maryland and any other such instrument as may be required by the State of Maryland to effect the transfer of the Investments of Convertible to Balanced Capital. </R>

     (f) Convertible will be dissolved following the Exchange Date by filing Articles of Dissolution with the State Department of Assessments and Taxation of Maryland.

<R>4.   Issuance and Valuation of Shares of Balanced Capital in the Reorganization.

     Full shares of Balanced Capital, and to the extent necessary, fractional shares of Balanced Capital, of an aggregate net asset value equal to the net asset value of the assets of Convertible acquired, determined as hereinafter provided, reduced by the amount of liabilities of Convertible assumed by Balanced Capital, shall be issued by Balanced Capital in exchange for such assets of Convertible. The net asset value of Convertible and Balanced Capital shall be determined in accordance with the procedures described in the prospectus of Balanced Capital as of the Valuation Time. Such valuation and determination shall be made by Balanced Capital in cooperation with Convertible. Balanced Capital shall issue its Class A, Class B, Class C and Class D shares to Convertible in certificates or share deposit receipts (one in respect of each class) registered in the name of Convertible. Convertible shall distribute Corresponding Shares of Balanced Capital to its stockholders by redelivering such certificates to Financial Data Services, Inc. </R>

 

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5.   Payment of Expenses.

<R>     (a) The expenses of the Reorganization that are directly attributable to Convertible and the conduct of its business will be deducted from the assets of Convertible as of the Valuation Time. These expenses are expected to include the expenses incurred in preparing, printing and mailing the proxy materials to be utilized in connection with the Meeting and the expenses related to the solicitation of proxies to be voted at that Meeting. The expenses attributable to Balanced Capital include the costs of printing sufficient copies of its Prospectus, and its most recent Annual Report to accompany the Proxy Statement and Prospectus. The expenses of the Reorganization, including expenses in connection with obtaining the Internal Revenue Service (“IRS”) ruling, the preparation of the Agreement and Plan, legal fees and audit fees, will be borne equally by each Fund. Merrill Lynch Investment Managers, L.P. (“MLIM”) has agreed to bear the expenses of the Reorganization attributable to Balanced Capital and Convertible. </R>

     (b) If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages.

<R>6.   Covenants of Balanced Capital and Convertible. </R>

     (a) Convertible agrees to call a special meeting of the stockholders of Convertible to be held as soon as is practicable after the effective date of the N-14 Registration Statement for the purpose of considering the Reorganization as described in this Agreement, and it shall be a condition to the obligations of each of the parties hereto that the holders of a majority of the shares of Convertible issued and outstanding and entitled to vote thereon, shall have approved this Agreement at such a meeting at or prior to the Valuation Time.

<R>     (b) Balanced Capital and Convertible each covenants to operate the business of Balanced Capital and Convertible, respectively, as presently conducted between the date hereof and the Exchange Date.

     (c) Convertible agrees that following the consummation of the Reorganization, it will dissolve in accordance with the laws of the State of Maryland and any other applicable law, it will not make any distributions of any Balanced Capital shares other than to the stockholders of Convertible and without first paying or adequately providing for the payment of all of Convertible’s liabilities not assumed by Balanced Capital, if any, and on and after the Exchange Date it shall not conduct any business except in connection with its dissolution. </R>

     (d) Convertible undertakes that if the Reorganization is consummated, it will file an application pursuant to Section 8(f) of the 1940 Act for an order declaring that Convertible has ceased to be a registered investment company.

<R>     (e) Balanced Capital will file the N-14 Registration Statement with the Securities and Exchange Commission (the “Commission”) and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. Balanced Capital and Convertible agree to cooperate fully with each other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration Statement as required by the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations thereunder and the state securities laws.

     (f) Balanced Capital has no plan or intention to sell or otherwise dispose of the assets of Convertible to be acquired in the Reorganization, except for dispositions made in the ordinary course of business.

     (g) Convertible and Balanced Capital each agrees that by the Exchange Date all of its Federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, the Funds agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. Balanced Capital agrees to retain for a period of ten (10) years following the Exchange Date all returns, schedules and work papers and all material records or other documents relating to tax matters of Convertible for its taxable period first ending after the Exchange Date and for all prior taxable periods. Any information obtained under this subsection shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Exchange Date, Convertible shall prepare, or cause its agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by Convertible with respect to Convertible’s final taxable year ending with its complete liquidation and for any prior periods or taxable years and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by Convertible (other </R>

 

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<R> than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 after the Exchange Date shall be borne by Convertible to the extent such expenses have been accrued by Convertible in the ordinary course without regard to the Reorganization; any excess expenses shall be borne by MLIM at the time such tax returns and Forms 1099 are prepared. </R>

     (h) Convertible agrees to mail to its stockholders of record entitled to vote at the special meeting of stockholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.

<R>     (i) Following the consummation of the Reorganization, Balanced Capital expects to stay in existence and continue its business as a diversified, open-end management investment company registered under the 1940 Act. </R>

7.   Exchange Date.

<R>     (a) Delivery of the assets of Convertible to be transferred, together with any other Investments, and the Balanced Capital shares to be issued, shall be made at the offices of Brown & Wood LLP, One World Trade Center, New York, New York 10048, at 10:00 A.M. on the next full business day following the Valuation Time, or at such other place, time and date agreed to by Convertible and Balanced Capital, the date and time upon which such delivery is to take place being referred to herein as the “Exchange Date.” To the extent that any Investments, for any reason, are not transferable on the Exchange Date, Convertible shall cause such Investments to be transferred to Balanced Capital’s account with The Bank of New York at the earliest practicable date thereafter.

     (b) Convertible will deliver to Balanced Capital on the Exchange Date confirmations or other adequate evidence as to the tax basis of each of the Investments delivered to Balanced Capital hereunder, certified by Deloitte & Touche LLP.

     (c) As soon as practicable after the close of business on the Exchange Date, Convertible shall deliver to Balanced Capital a list of the names and addresses of all of the stockholders of record of Convertible on the Exchange Date and the number of shares of Convertible owned by each such stockholder, certified to the best of their knowledge and belief by the transfer agent for Convertible or by its President. </R>

8.   Convertible Conditions.

     The obligations of Convertible hereunder shall be subject to the following conditions:

<R>     (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the affirmative vote of the holders of a majority of the shares of Convertible, issued and outstanding and entitled to vote thereon, voting together as a single class, and by the Board of Directors of Balanced Capital; and that Balanced Capital shall have delivered to Convertible a copy of the resolution approving this Agreement adopted by Balanced Capital’s Board of Directors, certified by the Secretary of Balanced Capital.

     (b) That Balanced Capital shall have furnished to Convertible a statement of Balanced Capital’s assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of its investments, all as of the Valuation Time, certified on Balanced Capital’s behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by Balanced Capital’s President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date there has been no material adverse change in the financial position of Balanced Capital since the date of Balanced Capital’s most recent annual or semi-annual report to stockholders, other than changes in its portfolio securities since the date of such report or changes in the market value of its portfolio securities.

     (c) That Balanced Capital shall have furnished to Convertible a certificate signed by Balanced Capital’s President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that, as of the Valuation Time and as of the Exchange Date all representations and warranties of Balanced Capital made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that Balanced Capital has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates. </R>

 

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     (d) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

<R>     (e) That Convertible shall have received an opinion of Brown & Wood LLP as counsel to both Balanced Capital and Convertible, in form and substance satisfactory to Convertible and dated the Exchange Date, to the effect that (i) each of Balanced Capital and Convertible is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland; (ii) the Corresponding Shares of Balanced Capital to be issued pursuant to this Agreement are duly authorized and, upon delivery, will be validly issued and fully paid and nonassessable by Balanced Capital, and no stockholder of Balanced Capital has any preemptive right to subscription or purchase in respect thereof (pursuant to the Articles of Incorporation or the by-laws of Balanced Capital or, to the best of such counsel’s knowledge, otherwise); (iii) this Agreement has been duly authorized, executed and delivered by each of Balanced Capital and Convertible, and represents a valid and binding contract, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and court decisions with respect thereto; provided, such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate any material provisions of Maryland law or the Articles of Incorporation, as amended, restated and supplemented, the by-laws, as amended, or any agreement (known to such counsel) to which either Balanced Capital or Convertible is a party or by which either Balanced Capital or Convertible is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Reorganization; (v) Convertible has the power to sell, assign, transfer and deliver the assets transferred by it hereunder and, upon consummation of the Reorganization in accordance with the terms of this Agreement, Convertible will have duly transferred such assets and liabilities in accordance with this Agreement; (vi) to the best of such counsel’s knowledge, no consent, approval, authorization or order of any United States federal court, Maryland state court or governmental authority is required for the consummation by Balanced Capital and Convertible of the Reorganization, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder and under Maryland law and such as may be required under state securities laws; (vii) the N-14 Registration Statement has become effective under the 1933 Act, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the N-14 Registration Statement, and each amendment or supplement thereto, as of their respective effective dates, appear on their face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder; (viii) the descriptions in the N-14 Registration Statement of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; (ix) such counsel does not know of any statutes, legal or governmental proceedings or contracts or other documents related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (x) neither Balanced Capital nor Convertible, to the knowledge of such counsel, is required to qualify to do business as a foreign corporation in any jurisdiction except as may be required by state securities laws, and except where each has so qualified or the failure so to qualify would not have a material adverse effect on Balanced Capital, Convertible or their respective stockholders; (xi) such counsel does not have actual knowledge of any material suit, action or legal or administrative proceeding pending or threatened against Balanced Capital or Convertible, the unfavorable outcome of which would materially and adversely affect Balanced Capital or Convertible; (xii) all corporate actions required to be taken by Balanced Capital and Convertible to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary corporate actions on the part of Balanced Capital and Convertible; and (xiii) such opinion is solely for the benefit of Balanced Capital and Convertible and their Directors and officers. Such opinion also shall state that (x) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement or any amendment or supplement thereto, nothing has come to their attention that would lead them to believe that, on the respective effective dates of the N-14 Registration Statement and any amendment or supplement thereto, (1) the N-14 Registration Statement or any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (2) the prospectus and proxy statement included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not </R>

 

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<R>misleading; and (y) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data relating to Balanced Capital or Convertible contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, Brown & Wood LLP may state that it is relying on certificates of officers of Balanced Capital and Convertible with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of Balanced Capital and Convertible.

     (f) That Convertible shall have received either (a) a private letter ruling from the Internal Revenue Service or (b) an opinion of Brown & Wood LLP, to the effect that for Federal income tax purposes (i) the transfer of substantially all of the Investments of Convertible to Balanced Capital in exchange solely for shares of Balanced Capital as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and Convertible and Balanced Capital will each be deemed to be a “party” to the Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to Convertible as a result of the asset transfer solely in exchange for Balanced Capital shares or on the distribution of the Balanced Capital stock to Convertible stockholders under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to Balanced Capital on the receipt of assets of Convertible in exchange for Balanced Capital shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the stockholders of Convertible on the receipt of Corresponding Shares of Balanced Capital in exchange for their shares of Convertible; (v) in accordance with Section 362(b) of the Code, the tax basis of the Convertible assets in the hands of Balanced Capital will be the same as the tax basis of such assets in the hands of Convertible immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Balanced Capital received by the stockholders of Convertible in the Reorganization will be equal to the tax basis of the shares of Convertible surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder’s holding period for the Corresponding Shares of Balanced Capital will be determined by including the period for which such stockholder held the shares of Convertible exchanged therefor provided, that such Convertible shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Balanced Capital’s holding period with respect to the Convertible assets transferred will include the period for which such assets were held by Convertible; and (ix) the taxable year of Convertible will end on the effective date of the Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, Balanced Capital will succeed to and take into account certain tax attributes of Convertible, such as earnings and profits, capital loss carryovers and method of accounting.

     (g) That all proceedings taken by Balanced Capital and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Convertible.

     (h) That the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Balanced Capital, be contemplated by the Commission.

     (i) That Convertible shall have received from Deloitte & Touche LLP a letter dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to Convertible, to the effect that (i) they are independent public accountants with respect to Balanced Capital within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Balanced Capital included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; and (iii) on the basis of limited procedures agreed upon by Convertible and Balanced Capital and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Balanced Capital included in the N-14 Registration Statement, and inquiries of certain officials of Balanced Capital responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited </R>

 

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<R>financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Convertible and Balanced Capital and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Balanced Capital appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Balanced Capital or from schedules prepared by officials of Balanced Capital having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.

     (j) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Balanced Capital or would prohibit the Reorganization. </R>

     (k) That Convertible shall have received from the Commission such orders or interpretations as Brown & Wood LLP, as counsel to Convertible, deems reasonably necessary or desirable under the 1933 Act and the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

<R>9.   Balanced Capital Conditions.

     The obligations of Balanced Capital hereunder shall be subject to the following conditions:

     (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the Board of Directors of Convertible and by the affirmative vote of the holders of a majority of the shares of common stock of Convertible issued and outstanding and entitled to vote thereon, voting together as a single class; and that Convertible shall have delivered to Balanced Capital a copy of the resolution approving this Agreement adopted by Convertible’s Board of Directors, and a certificate setting forth the vote Convertible stockholders obtained, each certified by the Secretary of Convertible.

     (b) That Convertible shall have furnished to Balanced Capital a statement of Convertible’s assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on Convertible’s behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by Convertible’s President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date there has been no material adverse change in the financial position of Convertible since the date of Convertible’s most recent annual or semi-annual report to stockholders, other than changes in the Investments since the date of such report or changes in the market value of the Investments.

     (c) That Convertible shall have furnished to Balanced Capital a certificate signed by Convertible’s President (or any Vice President) and its Treasurer, dated the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date all representations and warranties of Convertible made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and Convertible has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.

     (d) That Convertible shall have delivered to Balanced Capital a letter from Deloitte & Touche LLP, dated the Exchange Date, stating that such firm has performed a limited review of the Federal, state and local income tax returns of Convertible for the period ended August 31, 1999 (which returns originally were prepared and filed by Convertible), and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the Federal, state and local income taxes of Convertible for the period covered thereby; and that for the period from September 1, 1999, to and including the Exchange Date and for any taxable year of Convertible ending upon the liquidation of Convertible, such firm has performed a limited review to ascertain the amount of applicable Federal, state and local taxes, and has determined that either such amount has been paid or reserves have been established for payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes </R>

 

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were not adequate in all material respects for the satisfaction of Federal, state and local taxes for the period from September 1, 1999, to and including the Exchange Date and for any taxable year of Convertible ending upon the liquidation of Convertible or that Convertible would not continue to qualify as a RIC for Federal income tax purposes for the tax years in question.

     (e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

<R>     (f) That Balanced Capital shall have received an opinion of Brown & Wood LLP, as counsel to both Balanced Capital and Convertible, in form and substance satisfactory to Balanced Capital and dated the Exchange Date, with respect to the matters specified in Section 8(e) of this Agreement and such other matters as Balanced Capital reasonably may deem necessary or desirable.

     (g) That Balanced Capital shall have received a private letter ruling from the Internal Revenue Service or an opinion of Brown & Wood LLP with respect to the matters specified in Section 8(f) of this Agreement.

     (h) That Balanced Capital shall have received from Deloitte & Touche LLP a letter dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to Balanced Capital, to the effect that (i) they are independent public accountants with respect to Convertible within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Convertible included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (iii) on the basis of limited procedures agreed upon by Convertible and Balanced Capital and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Convertible included in the N-14 Registration Statement, and inquiries of certain officials of Convertible responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Balanced Capital and Convertible and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Convertible appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Convertible or from schedules prepared by officials of Convertible having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.

     (i) That the Investments to be transferred to Balanced Capital shall not include any assets or liabilities which Capital, by reason of charter limitations or otherwise, may not properly acquire or assume. </R>

     (j) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Convertible, be contemplated by the Commission.

     (k) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Convertible or would prohibit the Reorganization.

<R>     (l) That Balanced Capital shall have received from the Commission such orders or interpretations as Brown & Wood LLP, as counsel to Balanced Capital, deems reasonably necessary or desirable under the 1933 Act and </R>

 

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the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

<R>     (m) That all proceedings taken by Convertible and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Balanced Capital. </R>

     (n) That prior to the Exchange Date, Convertible shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its stockholders all of its investment company taxable income to and including the Exchange Date, if any (computed without regard to any deduction for dividends paid), and all of its net capital gain, if any, realized to and including the Exchange Date.

10.   Termination, Postponement and Waivers.

<R>     (a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after adoption thereof by the stockholders of Convertible) prior to the Exchange Date, or the Exchange Date may be postponed, (i) by mutual consent of the Boards of Directors of Convertible and Balanced Capital; (ii) by the Board of Directors of Convertible if any condition of Convertible’s obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of Balanced Capital if any condition of Balanced Capital’s obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.

     (b) If the transactions contemplated by this Agreement have not been consummated by March 31, 2001, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of Directors of Convertible and Balanced Capital.

     (c) In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on the part of either Convertible or Balanced Capital or persons who are their directors, trustees, officers, agents or stockholders in respect of this Agreement.

     (d) At any time prior to the Exchange Date, any of the terms or conditions of this Agreement may be waived by the Board of Directors of either Convertible or Balanced Capital, respectively (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the stockholders of their respective fund, on behalf of which such action is taken. In addition, the Boards of Directors of Convertible and Balanced Capital have delegated to MLIM the ability to make non-material changes to the transaction if it deems it to be in the best interests of Convertible and Balanced Capital to do so.

     (e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be terminated by, the consummation of the Reorganization, and neither Convertible nor Balanced Capital nor any of their officers, directors or trustees, agents or stockholders shall have any liability with respect to such representations or warranties after the Exchange Date. This provision shall not protect any officer, director or trustee, agent or stockholder of Convertible or Balanced Capital against any liability to the entity for which that officer, director or trustee, agent or stockholder so acts or to its stockholders, to which that officer, director or trustee, agent or stockholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office.

     (f) If any order or orders of the Commission with respect to this Agreement shall be issued prior to the Exchange Date and shall impose any terms or conditions which are determined by action of the Boards of Directors of Convertible and Balanced Capital to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the stockholders of Convertible unless such terms and conditions shall result in a change in the method of computing the number of shares of Balanced Capital to be issued to Convertible in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the stockholders of Convertible prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless Convertible promptly shall call a special meeting of stockholders at which such conditions so imposed shall be submitted for approval. </R>

 

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11.   Indemnification.

<R>     (a) Convertible hereby agrees to indemnify and hold Balanced Capital harmless from all loss, liability and expense (including reasonable counsel fees and expenses in connection with the contest of any claim) which Balanced Capital may incur or sustain by reason of the fact that (i) Balanced Capital shall be required to pay any corporate obligation of Convertible, whether consisting of tax deficiencies or otherwise, based upon a claim or claims against Convertible which were omitted or not fairly reflected in the financial statements to be delivered to Balanced Capital in connection with the Reorganization; (ii) any representations or warranties made by Convertible in this Agreement should prove to be false or erroneous in any material respect; (iii) any covenant of Convertible has been breached in any material respect; or (iv) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Proxy Statement and Prospectus delivered to the stockholders of Convertible and forming a part of the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based on written information furnished to Convertible by Balanced Capital.

     (b) Balanced Capital hereby agrees to indemnify and hold Convertible harmless from all loss, liability and expenses (including reasonable counsel fees and expenses in connection with the contest of any claim) which Convertible may incur or sustain by reason of the fact that (i) any representations or warranties made by Balanced Capital in this Agreement should prove false or erroneous in any material respect, (ii) any covenant of Balanced Capital has been breached in any material respect, or (iii) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, not misleading or (b) the Proxy Statement and Prospectus delivered to stockholders of Convertible and forming a part of the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based on written information furnished to Balanced Capital by Convertible.

     (c) In the event that any claim is made against Balanced Capital in respect of which indemnity may be sought by Balanced Capital from Convertible under Section 11(a) of this Agreement, or in the event that any claim is made against Convertible in respect of which indemnity may be sought by Convertible from Balanced Capital under Section 11(b) of this Agreement, then the party seeking indemnification (the “Indemnified Party”), with reasonable promptness and before payment of such claim, shall give written notice of such claim to the other party (the “Indemnifying Party”). If no objection as to the validity of the claim is made in writing to the Indemnified Party by the Indemnifying Party within thirty (30) days after the giving of notice hereunder, then the Indemnified Party may pay such claim and shall be entitled to reimbursement therefor, pursuant to this Agreement. If, prior to the termination of such thirty-day period, objection in writing as to the validity of such claim is made to the Indemnified Party, the Indemnified Party shall withhold payment thereof until the validity of such claim is established (i) to the satisfaction of the Indemnifying Party, or (ii) by a final determination of a court of competent jurisdiction, whereupon the Indemnified Party may pay such claim and shall be entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with respect to any tax claims, within seven (7) calendar days following the earlier of (A) an agreement between Convertible and Balanced Capital that an indemnity amount is payable, (B) an assessment of a tax by a taxing authority, or (C) a “determination” as defined in Section 1313(a) of the Code. For purposes of this Section 11, the term “assessment” shall have the same meaning as used in Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable provision under the laws of the appropriate taxing authority. In the event of any objection by the Indemnifying Party, the Indemnifying Party promptly shall investigate the claim, and if it is not satisfied with the validity thereof, the Indemnifying Party shall conduct the defense against such claim. All costs and expenses incurred by the Indemnifying Party in connection with such investigation and defense of such claim shall be borne by it. These indemnification provisions are in addition to, and not in limitation of, any other rights the parties may have under applicable law. </R>

 

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12.   Other Matters.

     (a) Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares to any person who at the time of the Reorganization is, to its knowledge, an affiliate of a party to the Reorganization pursuant to Rule 145(c), Capital will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows:

<R> THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL LYNCH BALANCED CAPITAL FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

and, further, that stop transfer instructions will be issued to Balanced Capital’s transfer agent with respect to such shares. Convertible will provide Balanced Capital on the Exchange Date with the name of any Convertible stockholder who is to the knowledge of Convertible an affiliate of Convertible on such date. </R>

     (b) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.

<R>     (c) Any notice, report or demand required or permitted by any provision of this Agreement shall be in writing and shall be made by hand delivery, prepaid certified mail or overnight service, addressed to Convertible or Balanced Capital, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.</R>

     (d) This Agreement supersedes all previous correspondence and oral communications between the parties regarding the Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each party and shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state.

<R>     (e) Copies of the Articles of Incorporation, as amended, restated and supplemented, of Convertible and Balanced Capital are on file with the Department of Assessments and Taxation of the State of Maryland and notice is hereby given that this instrument is executed on behalf of the Directors of each Fund.</R>

     This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.

			<R>Merrill Lynch Balanced Capital Fund, Inc.
		By:	/s/ Donald C. Burke (Donald C. Burke, Vice President and Treasurer) </R>
Attest:
By:	/s/ Thomas D. Jones (THOMAS D. JONES, Secretary)
			<R>Merrill Lynch Convertible Fund, Inc. </R>
		By:	/s/ Donald C. Burke (DONALD C. BURKE, Vice President and Treasurer)
Attest:
By:	<R>/s/ Ira P. Shapiro (Ira P. Shapiro, Secretary)</R>

 

I-14

<R>

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH CONVERTIBLE FUND, INC.
MERRILL LYNCH BALANCED CAPITAL FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800

     This Statement of Additional Information is not a prospectus and should be read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch Convertible Fund, Inc. (“Convertible Fund”) and Merrill Lynch Balanced Capital Fund, Inc. (“Balanced Capital Fund”) dated August 14, 2000 (the “Proxy Statement and Prospectus”), which has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling Balanced Capital Fund at 1-800-456-4587, ext. 123, or by writing to Balanced Capital Fund at the above address. This Statement of Additional Information has been incorporated by reference into the Proxy Statement and Prospectus.

     Further information about Balanced Capital Fund is contained in and incorporated by reference to its Statement of Additional Information, dated July 3, 2000, which is incorporated by reference into and accompanies this Statement of Additional Information.

     The Commission maintains a web site (http://www.sec.gov) that contains the prospectus and statement of additional information of each of Convertible Fund and Balanced Capital Fund, other material incorporated by reference and other information regarding Convertible Fund and Balanced Capital Fund.

The date of this Statement of Additional Information is August 14, 2000. </R>

TABLE OF CONTENTS

General Information	2
Financial Statements	2

GENERAL INFORMATION

<R>     The stockholders of Convertible Fund are being asked to approve the acquisition of substantially all of the assets of Convertible Fund, and the assumption of substantially all of the liabilities of Convertible Fund, by Balanced Capital Fund in exchange solely for an equal aggregate value of shares of Balanced Capital Fund (the “Reorganization”). Balanced Capital Fund is an open-end management investment company organized as a Maryland corporation. A Special Meeting of Stockholders of Convertible Fund to consider the Reorganization will be held at 800 Scudders Mill Road, Plainsboro, New Jersey, on September 13, 2000, at 9:00 a.m., Eastern time.

     For detailed information about the Reorganization, stockholders of Convertible Fund should refer to the Proxy Statement and Prospectus. For further information about Balanced Capital Fund, stockholders should refer to Balanced Capital Fund’s Statement of Additional Information, dated July 3, 2000, which accompanies this Statement of Additional Information and is incorporated by reference herein. </R>

FINANCIAL STATEMENTS

<R>     In accordance with Part B, Item 14(a) of Form N-14, pro forma financial statements reflecting consummation of the Reorganization are not required to be provided in this Statement of Additional Information since the net asset value of Convertible Fund does not exceed 10% of the net asset value of Balanced Capital Fund as of July 31, 2000.

Balanced Capital Fund

     Audited financial statements and accompanying notes for the fiscal year ended March 31, 2000, and the independent auditor’s report thereon, dated May 11, 2000, of Balanced Capital Fund are incorporated herein by reference from Balanced Capital Fund’s Annual Report to Shareholders. </R>

Convertible Fund

<R>     Audited financial statements and accompanying notes for the fiscal year ended August 31, 1999, and the independent auditor’s report thereon, dated October 11, 1999, of Convertible Fund are incorporated herein by reference from Convertible Fund’s Annual Report to Shareholders. Unaudited financial statements and accompanying notes for the six months ended February 29, 2000 of Convertible Fund are incorporated herein by reference from Convertible Fund’s Semi-Annual Report to Shareholders.</R>

 

2

PART C

OTHER INFORMATION

Item 15. Indemnification.

     Reference is made to Article VI of Registrant’s Articles of Incorporation, Article VI of Registrant’s By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C and Class D Distribution Agreements.

     Article VI of the By-Laws provides that each officer and director of the Registrant shall be indemnified by the Registrant to the full extent permitted under the General Laws of the State of Maryland, except that such indemnity shall not protect any such person against any liability to the Registrant or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Absent a court determination that an officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, the decision by the Registrant to indemnify such person must be based upon the reasonable determination of independent counsel or non-party independent directors, after review of the facts, that such officer or director is not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.

     Each officer and director of the Registrant claiming indemnification within the scope of Article VI of the By-Laws shall be entitled to advances from the Registrant for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permitted under the General Laws of the State of Maryland, provided, however, that the person seeking indemnification shall provide to the Registrant a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Registrant has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Registrant for his undertaking; (b) the Registrant is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Registrant at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification.

     The Registrant may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland from liability arising from his or her activities as an officer or director of the Registrant. The Registrant, however, may not purchase insurance on behalf of any officer or director of the Registrant that protects or purports to protect such person from liability to the Registrant or to its stockholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office.

     The Registrant may indemnify, make advances or purchase insurance to the extent provided in Article VI of the By-Laws on behalf of an employee or agent who is not an officer or director of the Registrant.

     In Section 9 of the Class A, Class B, Class C and Class D Distribution Agreements relating to the securities being offered hereby, the Registrant agrees to indemnify the Distributor and each person, if any, who controls the Distributor within the meaning of the Securities Act of 1933 (the “1933 Act”), against certain types of civil liabilities arising in connection with the Registration Statement or Prospectus and Statement of Additional Information.

     Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to Directors, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person or the principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.

 

C-1

Item 16. Exhibits.

<R>

1	(a)	—	Articles of Incorporation of the Registrant, dated July 29, 1987.(a)
	(b)	—	Articles of Amendment dated October 3, 1988 to Articles of Incorporation of the Registrant.(a)
	(c)	—	Articles of Merger between Merrill Lynch Capital Fund, Inc. and Merrill Lynch New Capital Fund, Inc. dated July 29, 1988.(b)
	(d)	—	Articles of Amendment, dated May 27, 1988, to Articles of Incorporation of the Registrant.(b)
	(e)	—	Articles of Amendment, dated October 17, 1994, to Articles of Incorporation of the Registrant.(b)
	(f)	—	Articles Supplementary, dated October 17, 1994, to Articles of Incorporation of the Registrant.(b)
	(g)	—	Articles Supplementary, dated March 17, 1995, to Articles of Incorporation of the Registrant.(b)
	(h)	—	Articles Supplementary, dated November 4, 1998, to Articles of Incorporation of the Registrant.(c)
2		—	By-Laws of the Registrant.(d)
3		—	Not applicable.
4		—	Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch Convertible Fund, Inc.(e)
5		—	Portions of the Articles of Incorporation, as amended, and By-Laws of the Registrant defining the rights of holders of shares of common stock of the Registrant.(f)
6	(a)	—	Investment Advisory Agreement between the Registrant and Merrill Lynch Investment Managers, L.P. (“MLIM”).(a)
	(b)	—	Supplement to Investment Advisory Agreement between the Registrant and MLIM.(d)
7	(a)	—	Form of Revised Class A Shares Distribution Agreement between the Registrant and FAM Distributors, Inc. (formerly Princeton Funds Distributor, Inc.) (the “Distributor”) (including Form of Selected Dealers Agreement).(g)
	(b)	—	Class B Shares Distribution Agreement between the Registrant and the Distributor.(a)
	(c)	—	Letter Agreement between the Registrant and the Distributor, dated September 15, 1993, in connection with the Merrill Lynch Mutual Fund Adviser program.(d)
	(d)	—	Class C Shares Distribution Agreement between the Registrant and the Distributor.(g)
	(e)	—	Class D Shares Distribution Agreement between the Registrant and the Distributor.(g)
8		—	None.
9	(a)	—	Custody Agreement between the Registrant and The Bank of New York.(a)
	(b)	—	Amendment to Custody Agreement between the Registrant and The Bank of New York.(b)
10	(a)	—	Amended and Restated Class B Distribution Plan of the Registrant.(a)
	(b)	—	Form of Class C Distribution Plan of the Registrant and Class C Shares Distribution Plan Sub-Agreement.(g)
	(c)	—	Form of Class D Distribution Plan of the Registrant and Class D Shares Distribution Plan Sub-Agreement.(g)
	(d)	—	Merrill Lynch Select PricingSM System Plan pursuant to Rule l8f-3.(h)
11		—	Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
12		—	Private Letter Ruling from the Internal Revenue Service.(l)
13		—	Credit Agreement between the Registrant and a syndicate of banks (i)
14	(a)	—	Consent of Deloitte & Tuche LLP, independent auditors for the Registrant.
	(b)	—	Consent of Deloitte & Tuche LLP, independent auditors for Merrill Lynch Convertible Fund, Inc.
15		—	Not applicable.
16		—	Power of Attorney.(m)
17	(a)	—	Prospectus dated July 3, 2000, and Statement of Additional Information dated July 3, 2000, of the Registrant.
	(b)	—	Annual Report to Stockholders of the Registrant, for the year ended March 31, 2000.(j)
	(c)	—	Annual Report to Stockholders of Merrill Lynch Convertible Fund, Inc. for the year ended August 31, 1999.(j)
	(d)	—	Semi-Annual Report to Stockholders of Merrill Lynch Convertible Fund, Inc., for the six months ended February 29, 2000.(j)
	(e)	—	Form of Proxy (j) </R>
	(f)	—	Code of Ethics (k)

(a) Refiled on July 27, 1995, as an Exhibit to Post-Effective Amendment No. 32 to the Registrant’s Registration Statement on Form N-1A, pursuant to the Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) phase-in requirements.

(b) Previously filed on July 27, 1995 as an Exhibit to Post-Effective Amendment No. 32 to Registrant’s Registration Statement on Form N-1A.

(c) Previously filed on May 26, 1999 as an Exhibit to Post-Effective Amendment No. 36 to the Registrant’s Registration Statement on Form N-1A.

 

C-2

 

(d) Previously filed as an Exhibit to Post-Effective Amendment No. 30 to Registrant’s Registration Statement on Form N-1A.

(e) Included as Exhibit 1 to the Proxy Statement and Prospectus contained in this Registration Statement.

(f) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7), Articles VI, VII and IX of the Registrant’s Articles of Incorporation, as filed as Exhibits 1(a), (b), (c), (d), (e) and (f) to Post-Effective Amendment No. 32 to the Registrant’s Registration Statement on Form N-1A and to Article II, Article III (Sections 1, 3, 5 and 6), Articles VI, VII, XIII and XIV of the Registrant’s By-Laws, filed as Exhibit 2 to Post-Effective Amendment No. 30 to Registrant’s Registration Statement on Form N-1A.

(g) Previously filed as an exhibit to Post Effective Amendment No. 31 to the Registrant’s Registration Statement on Form N-1A.

(h) Incorporated by reference to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A of Merrill Lynch New York Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (File No. 2-99473), filed on January 25, 1996.<R>

(i) Incorporated by reference to Exhibit 8(b) to the Registration Statement on Form N-1A of Master Premier Growth Trust (File No. 811-09733), filed on December 21, 1999.

(j) Previously filed on June 29, 2000 as an Exhibit to the Registrant’s Registration Statement on Form N-14.

(k)	Incorporated by reference to Exhibit 15 to Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A of Merrill Lynch Middle East/Africa Fund, Inc. (File No. 811-07155), filed on March 29, 2000.
(l)	To be filed by post-effective amendment to this Registration Statement on Form N-14.
(m)	Included on the signature page of the N--14 Registration Statement filed on June 29, 2000 and incorporated herein by reference.</R>

Item 17. Undertakings.

     (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through use of a prospectus which is part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the reoffering prospectus will contain information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by other items of the applicable form.

     (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering of them.

     (3) The Registrant undertakes to file, by post-effective amendment, either a copy of the Internal Revenue Service private letter ruling applied for or an opinion of counsel as to certain tax matters, within a reasonable time after receipt of such ruling or opinion.

 

C-3

SIGNATURES

<R>     As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the Township of Plainsboro and State of New Jersey, on the 11th day of August, 2000.

	Merrill Lynch Balanced Capital Fund, Inc.
	(Registrant)</R>
By	/s/ DONALD C. BURKE
	(Donald C. Burke, Vice President and Treasurer)

     As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signatures	Title	Date
<R>
TERRY K. GLENN* (Terry K. Glenn)	President and Director    (Principal Executive Officer)
DONALD c. BURKE* (Donald C. Burke)	Vice President and Treasurer    (Principal Financial and     Accounting Officer)
M. COLYER CRUM* (M. Colyer Crum)	Director
LAURIE SIMON HODRICK* (Laurie Simon Hodrick)	Director
JACK B. SUNDERLAND* (Jack B. Sunderland)	Director
J. THOMAS TOUCHTON* (J. Thomas Touchton)	Director
FRED G. WEISS* (Fred G. Weiss)	Director
ARTHUR ZEIKEL* (Arthur Zeikel)	Director
*By: /s/ Donald C. Burke (Donald C. Burke, Attorney-in-Fact)	Director	August 11, 2000</R>

 

C-4

EXHIBITS TO INDEX

<R>

Exhibit Number		Description
11	—	Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
14 (a)	—	Consent of Deloitte & Touche LLP, independent auditors for the Registrant
(b)	—	Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Convertible Fund, Inc.
17 (a)	—	Prospectus dated July 3, 2000, and Statement of Additional Information dated July 3, 2000, of the Registrant.

</R>

EX-11

EXHIBIT 11

BROWN & WOOD LLP

ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557

TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599

August 11, 2000                                         

Merrill Lynch Balanced Capital Fund, Inc.
800 Scudders Mill Road
Plainsboro, NJ 08536

Ladies and Gentlemen:

     We have acted as counsel for Merrill Lynch Balanced Capital Fund, Inc. (the “Fund”) in connection with the proposed acquisition by the Fund of substantially all of the assets and the assumption of substantially all of the liabilities of Merrill Lynch Convertible Fund, Inc. (“Convertible”) in exchange solely for an equal aggregate value of shares of the Fund (collectively the “Reorganization”). The opinion is furnished in connection with the Fund’s Registration Statement on Form N-14 under the Securities Act of 1933, as amended File No. 333-40436) (the “Registration Statement”) relating to shares of the Fund, each par value $0.10 per share (the “Shares”), to be issued in the Reorganization.

     As counsel for the Fund, we are familiar with the proceedings taken by it and to be taken by it in connection with the authorization, issuance and sale of the Shares. In addition, we have examined and are familiar with the Articles of Incorporation of the Fund, as amended, and such other documents as we have deemed relevant to the matters referred to in this opinion.

     Based upon the foregoing, we are of the opinion that subsequent to the approval of the Agreement and Plan of Reorganization between the Fund and Convertible forth in the joint proxy statement and prospectus constituting a part of the Registration Statement (the “Proxy Statement and Prospectus”), the Shares, upon issuance in the manner referred to in the Registration Statement, for consideration not less than the par value thereof, will be legally issued, fully paid and non-assessable shares of the Fund.

    We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Proxy Statement and Prospectus constituting a part thereof.

Very truly yours,

/s/ Brown & Wood LLP   

EX-14.(A)

EXHIBIT 14(a)

INDEPENDENT AUDITORS’ CONSENT

Merrill Lynch Balanced Capital Fund, Inc.:

We consent to the incorporation by reference in this Pre-Effective Amendment No. 1 to Registration Statement No. 333-40436 on Form N-14 of our report dated May 11, 2000 appearing in the Annual Report of Merrill Lynch Balanced Capital Fund, Inc. (formerly Merrill Lynch Capital Fund, Inc.) for the year ended March 31, 2000, and to the references to us under the captions “COMPARISON OF THE FUNDS — Financial Highlights — Balanced Capital Fund” and “EXPERTS” also appearing in the Proxy Statement and Prospectus, which is part of this Registration Statement.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
August 10, 2000

EX-14.(B)

EXHIBIT 14(b)

INDEPENDENT AUDITORS’ CONSENT

Merrill Lynch Convertible Fund, Inc.:

We consent to the incorporation by reference in the Pre-Effective Amendment No. 1 to Registration Statement No. 333-40436 on Form N-14 for Merrill Lynch Balanced Capital Fund, Inc. (formerly Merrill Lynch Capital Fund, Inc.) of our report dated October 11, 1999 appearing in the Annual Report of Merrill Lynch Convertible Fund, Inc. for the year ended August 31, 1999, and to the references to us under the captions “COMPARISON OF THE FUNDS — Financial Highlights — Convertible Fund” and “EXPERTS” also appearing in the Proxy Statement and Prospectus, which is part of this Registration Statement.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
August 10, 2000

EX-17.(A)

EXHIBIT 17(a)

Prospectus

[LOGO OF MERRILL LYNCH]

Merrill Lynch Balanced Capital Fund, Inc.

July 3, 2000

This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Table of Contents

PAGE

[GRAPHIC]

KEY FACTS

Merrill Lynch Balanced Capital Fund at a Glance   3

Risk/Return Bar Chart   5

Fees and Expenses   6

[GRAPHIC]

DETAILS ABOUT THE FUND

How the Fund Invests   8

Investment Risks   10

[GRAPHIC]

YOUR ACCOUNT

Merrill Lynch Select Pricing  ^SM System   19

How to Buy, Sell, Transfer and Exchange Shares   25

How Shares are Priced   29

Participation in Merrill Lynch Fee-Based Programs   29

Dividends and Taxes   30

[GRAPHIC]

MANAGEMENT OF THE FUND

Merrill Lynch Investment Managers   32

Financial Highlights   33

[GRAPHIC]

FOR MORE INFORMATION

Shareholder Reports  Back Cover

Statement of Additional Information  Back Cover

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

[GRAPHIC] Key Facts

In an effort to help you better understand the many concepts involved in making an investment decision, we have defined highlighted terms in this prospectus in the sidebar.

Total investment return — the combination of capital appreciation (from increases or decreases in market value) and current income (from dividends or interest).

Equities — Securities representing ownership of a company (“stock”) or securities whose price is linked to the value of securities that represent company ownership.

Debt Securities — securities representing an obligation to pay specified amounts at specified times.

Maturity — the time at which the principal amount of a debt security is scheduled to be returned to investors.

MERRILL LYNCH BALANCED CAPITAL FUND AT A GLANCE

What is the Fund’s investment objective?

The investment objective of the Fund is to seek the highest total investment return through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities.

What are the Fund’s main investment strategies?

The Fund invests in equities and debt securities (including short term securities). Fund management shifts the allocation among these securities types. The proportion the Fund invests in each category at any given time depends on Fund management’s view of how attractive that category appears relative to the others. This flexibility is the keystone of the Fund’s investment strategy. Although the Fund has the flexibility to invest entirely in debt securities, entirely in equity securities or partially in equity securities and partially in debt securities, Fund management expects that usually a majority of the Fund’s assets will be stocks of large companies. The Fund’s management chooses securities using a fundamental, value-oriented investment style. The Fund purchases primarily U.S. securities, but can also buy foreign securities, including securities denominated in foreign currencies. The Fund may invest in debt securities of any maturity. The Fund may also invest in high yield or ‘junk’ bonds.

The Fund cannot guarantee that it will achieve its objective.

What are the main risks of investing in the Fund?

As with any fund, the value of the Fund’s investments — and therefore the value of Fund shares — may go up or down. These changes may occur because a particular stock market in which the Fund invests is rising or falling. At other times, there are specific factors that may affect the value of a particular investment. Changes in the value of the Fund’s debt investments may occur in response to interest rate movements — generally, when interest rates go up, the value of debt securities goes down. For certain debt investments, these specific factors include the possibility that the issuer may default on its obligations. Changes in the value of both the Fund’s equity and debt investments may also occur as the result of specific factors that affect particular investments. If the value of the Fund’s investments goes down, you may lose money.

The Fund can invest a significant portion of its assets in foreign securities. Foreign investing involves special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Foreign securities may also be less liquid and harder to value than U.S. securities. These risks are greater for investments in emerging markets.

High yield or ‘junk’ bonds may be volatile and subject to liquidity, leverage and other types of risk.

Who should invest?

The Fund may be an appropriate investment for you if you:

• Are looking for capital appreciation for long term goals, such as retirement or funding a child’s education, but also seek some current income

• Want a professionally managed and diversified portfolio

• Are willing to accept the risk that the value of your investment may decline in order to seek the highest total investment return

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

4

RISK/RETURN BAR CHART

The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance for Class B shares for each of the past ten calendar years. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual total returns for each class of the Fund’s shares for the periods shown with those of the Standard & Poor’s (S&P) 500 Index and the Merrill Lynch (“ML”) U.S. Domestic Master Bond Index. How the Fund performed in the past is not necessarily an indication of how the Fund will perform in the future.

                                    [GRAPH]

                                1990     0.10%
                                1991    23.39%
                                1992     3.99%
                                1993    12.54%
                                1994    -0.10%
                                1995    31.52%
                                1996    11.50%
                                1997    20.20%
                                1998     5.11%
                                1999     3.45%

          

During the ten-year period shown in the bar chart, the highest return for a quarter was 10.81% (quarter ended December 31, 1999) and the lowest return for a quarter was –11.65% (quarter ended September 30, 1998). The Fund’s year-to-date return as of March 31, 2000 was 1.60%.

Average Annual Total Returns (for the calendar year ended) December 31, 1999	Past One Year	Past Five Years		Past Ten Years/ Since Inception
Balanced Capital Fund* — Class A	(0.95)%	13.84	%	11.25%
S&P 500 Index**	21.04%	28.54	%	18.20%
ML US Domestic Master Bond Index***	(0.96)%	7.73	%	7.75%
Balanced Capital Fund* — Class B	(0.24)%	13.90	%	10.72%†
S&P 500 Index**	21.04%	28.54	%	18.20%
ML US Domestic Master Bond Index***	(0.96)%	7.73	%	7.75%
Balanced Capital Fund* — Class C	2.55%	13.89%		13.02%††
S&P 500 Index**	21.04%	28.54%		27.19%†††
ML US Domestic Master Bond Index***	(0.96)%	7.73%		7.60%†††
Balanced Capital Fund* — Class D	(1.19)%	13.55%		12.72%††
S&P 500 Index**	21.04%	28.54%		27.19%†††
ML US Domestic Master Bond Index***	(0.96)%	7.73%		7.60%†††

*Includes sales charge.

  ** The S&P 500® is the Standard & Poor’s Composite Index of 500 Stocks, a widely recognized, unmanaged index of common stock prices. Past performance is not predictive of future performance.

***This unmanaged Index is comprised of the entire universe of domestic investment grade bonds, including US Treasury bonds, Corporate bonds and mortgages. Past performance is not predictive of future performance.

†This performance does not reflect the effect of the conversion of Class B shares to Class D shares after approximately eight years.

  †† Inception date is October 21, 1994.

†††Since October 31, 1994.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

5

[GRAPHIC] Key Facts

UNDERSTANDING EXPENSES

Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses, which all mutual funds may charge:

Expenses paid directly by the shareholder:

Shareholder Fees — these include sales charges which you may pay when you buy or sell shares of the Fund.

Expenses paid indirectly by the shareholder:

Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.

Management Fee — a fee paid to the Investment Adviser for managing the Fund.

Distribution Fees — fees used to support the Fund’s marketing and distribution efforts, such as compensating Financial Consultants and other financial intermediaries, advertising and promotion.

Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.

FEES AND EXPENSES

The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your Merrill Lynch Financial Consultant can help you with this decision.

This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.

Shareholder Fees (fees paid directly from your investment)(a):	Class A	Class B(b)	Class C	Class D
Maximum Sales Charge (Load) imposed on     purchases (as a percentage of offering price)	5.25%(c)	None	None	5.25%(c)
Maximum Deferred Sales Charge (Load) (as a     percentage of original purchase price or     redemption proceeds, whichever is lower)	None(d)	4.0%(c)	1.0%(c)	None(d)
Maximum Sales Charge (Load) imposed on     Dividend Reinvestments	None	None	None	None
Redemption Fee	None	None	None	None
Exchange Fee	None	None	None	None
Annual Fund Operating Expenses (expenses   that are deducted from your investment):
Management Fee(e)	0.40%	0.40%	0.40%	0.40%
Distribution and/or Service (12b-1) Fees(f)	None	1.00%	1.00%	0.25%
Other Expenses (including transfer agency     fees)(g)	0.16%	0.18%	0.19%	0.16%
Total Annual Fund Operating Expenses	0.56%	1.58%	1.59%	0.81%
(a) In addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or sells shares. See “How to Buy, Sell, Transfer and Exchange Shares.”
(b) Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year.
(e) The Fund pays the Investment Adviser a monthly fee based on the average daily value of the Fund’s net assets at the annual rates of 0.50% of that portion of average daily net assets not exceeding $250 million; 0.45% of that portion of average daily net assets exceeding $250 million but not exceeding $300 million; 0.425% of that portion of average daily net assets exceeding $300 million but not exceeding $400 million; and 0.40% of that portion of average daily net assets exceeding $400 million. For the fiscal year ended March 31, 2000, the Investment Adviser received a fee equal to 0.40% of the Fund’s average daily net assets.
(f) The Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in this Prospectus and in all other Fund materials. If you hold Class B or Class C

MERRILL LYNCH BALANCED CAPITAL FUND, INC. (Footnotes continued from previous page)

shares for a long time, it may cost you more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes.

(g) The Fund pays the Transfer Agent $11.00 for each Class A and Class D shareholder account and $14.00 for each Class B and Class C shareholder account and reimburses the Transfer Agent’s out-of-pocket expenses. The Fund pays a 0.10% fee for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the month the account is closed and ends at the end of the calendar year. For the fiscal year ended March 31, 2000, the Fund paid the Transfer Agent fees totaling $14,499,620.

Examples:

These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund’s operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:

	1 Year	3 Years	5 Years	10 Years
Class A	$579	$695	$821	$1,190
Class B	$561	$699	$860	$1,677	*
Class C	$262	$502	$866	$1,889
Class D	$603	$770	$951	$1,474
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
	1 Year	3 Years	5 Years	10 Years
Class A	$579	$695	$821	$1,190
Class B	$161	$499	$860	$1,677	*
Class C	$162	$502	$866	$1,889
Class D	$603	$770	$951	$1,474

* Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

7

[GRAPHIC] Details About the Fund

ABOUT THE PORTFOLIO MANAGERS

Kurt Schansinger is the Senior Portfolio Manager of the Fund. He has served as First Vice President of MLIM since 1997 and Vice President from 1995 to 1997. Prior to joining MLIM, he was a Senior Vice President of Oppenheimer Capital L.P.

Walter Cuje is the Associate Portfolio Manager of the Fund. Mr. Cuje has been an Associate Portfolio Manager of MLIM since October 1993, First Vice President since 1997 and Vice President from 1991 to 1997.

HOW THE FUND INVESTS

The Fund can invest in both equity securities and debt securities (including money market) and convertible securities. The Fund may invest entirely in equity securities, entirely in debt securities or partly in equity securities and partly in debt securities. Fund management expects that usually a majority of the Fund’s assets will be stocks of large companies.

The Fund’s management will select the percentages of the total portfolio invested in equity securities and debt securities based on its perception of the relative valuation of each asset class compared with that asset class’ historical valuation levels. The Fund presently has a policy (that may be changed by the Board of Directors) of investing at least 25% of net assets in fixed income senior securities, such as debt securities. When Fund management believes equity securities generally are reasonably valued or undervalued, Fund management will focus on equity investments. When Fund management believes equity securities generally are valued at high levels, however, Fund management may increase the percentage of the Fund’s portfolio invested in debt securities. Fund management may increase the Fund’s investments in debt securities whenever it believes that it is appropriate to do so in order to reduce the level of risk in the Fund’s portfolio or that investments in debt securities could potentially provide higher total returns than equity investments.

The equity securities in which the Fund invests will primarily be common stocks of large companies, although the Fund may invest in the securities of smaller or emerging growth companies. The Fund’s management chooses equity securities using a fundamental, value-oriented investment style. This means that the Fund seeks to invest in companies that the Fund’s management believes to be undervalued. A company’s stock is undervalued when the stock’s current price is less than what the Fund believes a share of the company is worth. A company’s worth can be assessed by several factors, such as financial resources, value of tangible assets, sales and earnings growth, rate of return on capital, product development, quality of management and overall business prospects. A company’s stock may become undervalued when most investors fail to perceive the company’s strengths in one or more of these areas. Fund management may also determine a company is undervalued if its stock price is down because of temporary factors from which Fund management believes the company will recover. The Fund will seek to invest in the stock of large, “quality” companies with strong financial resources, reasonable rates of return on capital and experienced management whenever Fund management believes such stocks are undervalued.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

8

ABOUT THE INVESTMENT ADVISER

The Fund is managed by Merrill Lynch Investment Managers.

Preferred Stock — class of stock that often pays dividends at a specified rate and has preference over common stock in dividend payments and liquidation of assets. Preferred stock may also be convertible into common stock.

Investment Grade — any of the four highest debt obligation rating categories by recognized rating agencies, including Moody’s Investors Service, Inc., and Standard & Poor’s.

Yield — the income generated by an investment in the Fund.

Liquidity — the ease with which a security can be traded. Securities that are less liquid have fewer potential buyers and, as a consequence, greater volatility.

Volatility — the amount and frequency of changes to a security’s market value.

The debt securities in which the Fund may invest include:

• corporate debt securities

• mortgage backed securities and asset backed securities

• U.S. and foreign government debt securities

• corporate debt securities convertible into common stock

• money market securities

The Fund may invest in debt securities of any maturity. Changes in the value of debt securities may occur in response to interest rate movements —generally, when interest rates go up, the value of most debt securities goes down. In most cases, when interest rates go up, the value of debt securities with longer term maturities goes down more than the value of debt securities with shorter maturities. Because the Fund may invest a substantial portion of its assets in debt securities with long term maturities, rising interest rates may cause the value of the Fund’s debt investments to decline significantly. The Fund also may invest in preferred stock.

Although Fund management anticipates that the Fund will focus on debt securities that are rated investment grade, the Fund has established no rating criteria for such debt securities. In addition, the Fund may invest a portion of its assets in low rated debt securities, which are commonly called “junk bonds.” Although junk bonds generally have higher yields than debt securities with higher credit ratings, they are high risk investments that may not pay interest or return principal as scheduled. Junk bonds generally are less liquid and experience more price volatility than higher rated fixed income securities. The Fund does not intend to invest in excess of 35% of its assets in junk bonds.

The Fund may invest up to 35% of its assets in various types of mortgage backed securities. Mortgage backed securities represent the right to receive a portion of principal and/or interest payments made on a pool or residential or commercial mortgage loans. Mortgage backed securities frequently react differently to changes in interest rates than other debt securities.

The Fund may invest up to 25% of its assets in securities of foreign issuers. The Fund may invest in issuers from any country. The Fund’s management, however, anticipates that a substantial portion of the Fund’s foreign equity and debt investments will be in issuers in the developed countries of Europe and the Far East. The Fund may also invest in equity and debt securities of issuers in emerging markets, but the Fund’s management anticipates that a greater portion of the Fund’s foreign investments will be in issuers in developed countries.

The Fund may invest in securities denominated in currencies other than the U.S. dollar.

The Fund may as a temporary defensive measure, and without limitation, hold assets in cash or money market securities. Normally a portion of the Fund’s assets would be held in these securities in anticipation of investment in equities or to meet redemptions. Investments in money market securities can be sold easily and have limited risk of loss but may not achieve the Fund’s investment objective.

The Fund has no stated minimum holding period for investments, and will buy or sell securities whenever the Fund’s management sees an appropriate opportunity.

INVESTMENT RISKS

This section contains a summary discussion of the general risks of investing in the Fund. As with any fund, there can be no guarantee that the Fund will meet its goals or that the Fund’s performance will be positive for any period of time.

Market and Selection Risk — Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, including the possibility that one or more markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the stock markets or other funds with similar investment objectives and investment strategies.

Foreign Market Risk — Since the Fund invests in foreign securities, it offers the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than stocks in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

10

Foreign Economy Risk — The economies of certain foreign markets often do not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair the Fund’s ability to purchase or sell foreign securities or transfer the Fund’s assets or income back into the United States, or otherwise adversely affect the Fund’s operations. Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts, and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries.

Currency Risk — Securities in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund’s portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as “currency risk,” means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.

Governmental Supervision and Regulation/Accounting Standards —Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than the United States does. Some countries may not have laws to protect investors the way that the U.S. securities laws do. For example, some countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a company’s financial condition. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments.

Certain Risks of Holding Fund Assets Outside the United States — The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Fund’s ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than investment companies invested only in the United States.

Settlement Risk — Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

12

European Economic and Monetary Union (EMU) — Certain European countries have entered into EMU in an effort to, among other things, reduce barriers between countries, increase competition among companies, reduce government subsidies in certain industries, and reduce or eliminate currency fluctuations among these countries. EMU established a single common European currency (the “euro”) that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro, and are listed, trade and make dividend and other payments only in euros. Although EMU is generally expected to have a beneficial effect, it could negatively affect the Fund in a number of situations, including as follows:

• If the transition to euro, or EMU as a whole, does not proceed as planned, the Fund’s investments could be adversely affected. For example, sharp currency fluctuations, exchange rate volatility and other disruptions of the markets could occur.

• Withdrawal from EMU by a participating country could also have a negative effect on the Fund’s investments, for example if securities redenominated in euros are transferred back into that country’s national currency.

Emerging Markets Risk — The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include those in countries defined as emerging or developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier because they develop unevenly and may never fully develop. They are more likely to experience hyperinflation and currency devaluations, which adversely affects returns to U.S. investors. In addition, the securities markets in many of these countries have far lower trading volumes and less liquidity than developed markets. Since these markets are so small, they may be more likely to suffer sharp and frequent price changes or long term price depression because of adverse publicity, investor perceptions, or the actions of a few large investors. In addition, traditional measures of investment value used in the United States, such as price to earnings ratios, may not apply to certain small markets.

Many emerging markets have histories of political instability and abrupt changes in policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries participate to a significant degree in their economies and securities markets, which may impair investment and economic growth.

Borrowing and Leverage Risk — The Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund’s return. Certain securities that the Fund buys may create leverage including futures and options.

Securities Lending — The Fund may lend securities with a value not exceeding 20% of its assets to financial institutions that provide government securities as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and the value of the collateral falls. These events could trigger adverse tax consequences to the Fund.

Risks associated with certain types of securities in which the Fund may invest include:

Convertibles — Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like a regular debt security, that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risk as the underlying common stock.

Mortgage backed securities — Mortgage backed securities represent the right to receive a portion of principal and/or interest payments made on a pool of residential or commercial mortgage loans. When interest rates fall, borrowers may refinance or otherwise repay principal on their mortgages earlier than scheduled. When this happens, certain types of mortgage backed securities will be paid off more quickly than originally anticipated and the Fund has to invest the proceeds in securities with lower yields. This risk is known as “prepayment risk.” When interest rates rise, certain types of mortgage backed securities will be paid off more slowly than originally anticipated and the value of these securities will fall. This risk is known as extension risk.

Because of prepayment risk and extension risk, mortgage backed securities react differently to changes in interest rates than other fixed income securities. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage backed securities.

Most mortgage backed securities are issued by Federal government agencies, such as the Government National Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) on Federal National Mortgage Association (Fannie Mae) Principal and interest payments on mortgage backed securities issued by the Federal government agencies are guaranteed by either Federal government or the government agency. Such securities have very little credit risk. Mortgage backed securities that are issued by private corporations rather than Federal agencies have credit risk as well as prepayment risk and extension risk.

Mortgage backed securities may be either pass-through securities or collateralized mortgage obligations (CMOs). Pass through securities represent a right to receive principal and interest payments collected on a pool of mortgages, which are passed through to security holders (less servicing costs). CMOs are created by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different priority rights to portions of the underlying mortgage payments. Certain CMO tranches may represent a right to receive interest only (IOs), principal only (POs), or an amount that remains after other floating-rate tranches are paid (an inverse floater). These securities are frequently referred to as “mortgage derivatives” and may be extremely sensitive to changes in interest rates. If the Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates move in a manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

15

[GRAPHIC] Details About the Fund

Small Cap and Emerging Growth Securities — Small cap or emerging growth companies may have limited product lines or markets. They may be less financially secure than larger, more established companies. They may depend on a small number of key personnel. If a product fails, or if management changes, or there are other adverse developments, the Fund’s investment in a small cap or emerging growth company may lose substantial value.

The securities of small cap and emerging growth companies generally trade in lower volumes and are subject to greater and less predictable price changes than the securities of larger, more established companies. Investing in smaller and emerging growth companies requires a long term view.

Debt securities — Debt securities, such as bonds, involve credit risk. This is the risk that the borrower will not make timely payments of principal and interest. The degree of credit risk depends on the issuer’s financial condition and on the terms of the bonds. These securities are also subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than the market price of shorter term securities.

Junk Bonds — Junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for the Fund. Junk bonds generally are less liquid and experience more price volatility than higher rated debt securities. The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay junk bond holders. Junk bonds may be subject to greater call and redemption risk than higher rated debt securities.

Sovereign Debt — The Fund may invest in sovereign debt securities. These securities are issued or guaranteed by foreign government entities. Investments in sovereign debt subject the Fund to the risk that a government entity may delay or refuse to pay interest or repay principal on its sovereign debt. Some of the reasons for that may include cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of its debt position to its economy or its failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a government entity defaults, it may ask for more time in which to pay or for further loans. There may be no bankruptcy proceeding by which all or part of sovereign debt that a government entity has not repaid may be collected.

Illiquid Securities — The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If the Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value.

Restricted Securities — Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that the Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market.

Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the security.

Rule 144A Securities — Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue.

Derivatives — The Fund may use derivative instruments including over-the-counter foreign currency options and options on foreign currency futures. Derivatives are financial instruments whose value is derived from another security, a commodity (such as gold or oil) or an index such as Standard & Poor’s 500 Index. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including:

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

17

[GRAPHIC] Details About the Fund

    Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative
transaction will be unable to honor its financial obligation to the Fund.

    Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment.

    Leverage risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that
relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

    Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the
security is currently worth.

The Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.

STATEMENT OF ADDITIONAL INFORMATION

If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

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[GRAPHIC] Your Account

MERRILL LYNCH SELECT PRICING  ^SM SYSTEM

The Fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Consultant can help you determine which share class is best suited to your personal financial goals.

For example, if you select Class A or D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver.

If you select Class B or C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. In addition, you may be subject to a deferred sales charge when you sell Class B or C shares.

The Fund’s shares are distributed by Merrill Lynch Funds Distributor, a division of FAM Distributors, Inc., an affiliate of Merrill Lynch.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

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[GRAPHIC] Your Account

The table below summarizes key features of the Merrill Lynch Select Pricing  ^SM System.

	Class A	Class B	Class C	Class D
Availability	Limited to certain investors including: •   Current Class A  shareholders •   Certain Retirement  Plans •  Participants in  certain Merrill Lynch-  sponsored programs •  Certain affiliates of  Merrill Lynch,  selected securities  dealers and other  financial  intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.
Initial Sales Charge?	Yes. Payable at time of purchase. Lower sales charges available for larger investments.	No. Entire purchase price is invested in shares of the Fund.	No. Entire purchase price is invested in shares of the Fund.	Yes. Payable at time of purchase. Lower sales charges available for larger investments.
Deferred Sales Charge?	No. (May be charged for purchases over $1 million that are redeemed within one year.)	Yes. Payable if you redeem within four years of purchase.	Yes. Payable if you redeem within one year of purchase.	No. (May be charged for purchases over $1 million that are redeemed within one year.)
Account Maintenance and Distribution Fees?	No.	0.25% Account Maintenance Fee 0.75% Distribution Fee.	0.25% Account Maintenance Fee 0.75% Distribution Fee.	0.25% Account Maintenance Fee No Distribution Fee.
Conversion to Class D shares?	No.	Yes, automatically after approximately eight years.	No.	No.

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Right of Accumulation — permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all shares you own in the Merrill Lynch mutual funds that offer Select Pricing options.

Letter of Intent — permits you to pay the sales charge that would be applicable if you add up all shares of Merrill Lynch Select Pricing ^SM System funds that you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares — Initial Sales Charge Options

If you select Class A or Class D shares, you will pay a sales charge at the time of purchase.

Your Investment	As a % of Offering Price	As a % of Your Investment*	Dealer Compensation as a % of Offering Price
Less than $25,000	5.25%	5.54%	5.00%
$25,000 but less than     $50,000	4.75%	4.99%	4.50%
$50,000 but less than     $100,000	4.00%	4.17%	3.75%
$100,000 but less than     $250,000	3.00%	3.09%	2.75%
$250,000 but less than     $1,000,000	2.00%	2.04%	1.80%
$1,000,000 and over**	0.00%	0.00%	0.00%

 * Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Investment Adviser compensates the selling dealer from its own funds. However, if you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer- sponsored retirement or savings plans.

No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for:

• Purchases under a Right of Accumulation or Letter of Intent

• Merrill Lynch Blueprint  ^SM Program participants

• TMA  ^SM Managed Trusts

• Certain Merrill Lynch investment or central asset accounts

• Certain employer-sponsored retirement or savings plans

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[GRAPHIC] Your Account

• Purchases using proceeds from the sale of certain Merrill Lynch closed-end funds under certain circumstances

• Certain investors, including directors or trustees of Merrill Lynch mutual funds and Merrill Lynch employees

• Certain fee-based programs of Merrill Lynch and other financial intermediaries that have agreements with the Distributor or its affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch Financial Consultant can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not.

If you redeem Class A or Class D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this “Reinstatement Privilege” may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Consultant, other financial intermediary or the Fund’s Transfer Agent at 1-800-MER-FUND.

Class B and Class C Shares — Deferred Sales Charge Options

If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within four years after purchase or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares.

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Class B Shares

If you redeem Class B shares within four years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule:

Years Since Purchase	Sales Charge*
0 – 1	4.00%
1 – 2	3.00%
2 – 3	2.00%
3 – 4	1.00%
4 and thereafter	0.00%

 * The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. Not all Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply.

The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as:

• Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59 ¹ /2 years old

• Redemption by certain eligible 401(a) and 401(k) plans, certain related accounts, certain group plans participating in the Merrill Lynch Blueprint ^SM Program and certain retirement plan rollovers

• Redemption in connection with participation in certain fee-based programs of Merrill Lynch or other financial intermediaries that have agreements with the Distributor or its affiliates

• Withdrawals resulting from shareholder death or disability as long as the waiver request is made within one year of death or disability or, if later, reasonably promptly following completion of probate, or in connection with involuntary termination of an account in which Fund shares are held

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[LOGO] Your Account

• Withdrawals through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established

Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes.

Different conversion schedules apply to Class B shares of different Merrill Lynch mutual funds. For example, Class B shares of a fixed income fund typically convert approximately ten years after purchase compared to approximately eight years for equity funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund’s eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund’s conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well.

Class C Shares

If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relative to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

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HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES

The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying, selling, transferring or exchanging shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Consultant may help you with this decision.

Because of the high costs of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts.

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[GRAPHIC] Your Account

If You Want To	Your Choices	Information Important for You to Know
Buy Shares	First, select the share class appropriate for you	Refer to the Merrill Lynch Select Pricing table on page 20. Be sure to read this Prospectus carefully.
	Next, determine the amount of your investment	The minimum initial investment for the Fund is $1,000 for all accounts except:     • $250 for certain Merrill Lynch fee-based programs     • $100 for retirement plans.
		(The minimums for initial investments may be waived under certain circumstances.)
	Have your Merrill Lynch Financial Consultant or securities dealer submit your purchase order	The price of your shares is based on the next calculation of net asset value after your order is placed. Any purchase orders placed prior to the close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time) will be priced at the net asset value determined that day.
		Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Merrill Lynch may charge a processing fee to confirm a purchase. This fee is currently $5.35.
	Or contact the Transfer Agent	To purchase shares directly, call the Transfer Agent at 1-800-MER- FUND and request a purchase application. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this Prospectus.
Add to Your Investment	Purchase additional shares	The minimum investment for additional purchases is generally $50 except that retirement plans have a minimum additional purchase of $1 and certain programs, such as automatic investment plans, may have higher minimums.
		(The minimums for additional purchases may be waived under certain circumstances.)
	Acquire additional shares through the automatic dividend reinvestment plan	All dividends are automatically reinvested without a sales charge.
	Participate in the automatic investment plan	You may invest a specific amount on a periodic basis through certain Merrill Lynch investment or central asset accounts.
Transfer Shares to Another Selected Securities Dealer or Other Financial Intermediary	Transfer to a participating selected securities dealer or other financial intermediary	You may transfer your Fund shares only to another securities dealer or other financial intermediary that has entered into an agreement with Merrill Lynch. Certain shareholder services may not be available for the transferred shares. You may only purchase additional shares of funds previously owned before the transfer. All future trading of these assets must be coordinated by the receiving firm.
	Transfer to a non- participating selected securities dealer or other financial intermediary	You must either:     • Transfer your shares to an account with the Transfer Agent; or     • Sell your shares paying any applicable deferred sales charge.

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[GRAPHIC] Your Account

If You Want To	Your Choices	Information Important for You to Know
Sell Your Shares	Have your Merrill Lynch Financial Consultant, selected securities dealer or financial intermediary submit your sales order	The price of your shares is based on the next calculation of net asset value after your order is placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your dealer prior to that day’s close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time). Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business day.
		Securities dealers or other financial intermediaries, including Merrill Lynch, may charge a fee to process a redemption of shares. Merrill Lynch currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent.
		The Fund may reject an order to sell shares under certain circumstances.
	Sell through the Transfer Agent	You may sell shares held at the Transfer Agent by writing to the Transfer Agent at the address on the inside back cover of this prospectus. All shareholders on the account must sign the letter. A signature guarantee will generally be required but may be waived in certain limited circumstances. You can obtain a signature guarantee from a bank, securities dealer, securities broker, credit union, savings association, national securities exchange or registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. The Transfer Agent will normally mail redemption proceeds within seven days following receipt of a properly completed request. If you make a redemption request before the Fund has collected payment for the purchase of shares, the Fund or the Transfer Agent may delay mailing your proceeds. This delay will usually not exceed ten days.
		You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-800-MER- FUND for details.
Sell Shares Systematically	Participate in the Fund’s Systematic Withdrawal Plan	You can choose to receive systematic payments from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA®, CBA® or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your Merrill Lynch Financial Consultant or other financial intermediary for details.

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[GRAPHIC] Your Account

If You Want To	Your Choices	Information Important for You to Know
Exchange Your Shares	Select the fund into which you want to exchange. Be sure to read that fund’s prospectus	You can exchange your shares of the Fund for shares of many other Merrill Lynch mutual funds. You must have held the shares used in the exchange for at least 15 calendar days before you can exchange to another fund.
		Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares (and are not eligible to purchase Class A shares), you will exchange into Class D shares.
		Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will apply. The time you hold Class B or C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. If you exchange Class A or D shares for money market fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class B or C shares of the Fund will be exchanged for Class B shares of Summit.
		To exercise the exchange privilege contact your Merrill Lynch Financial Consultant or call the Transfer Agent at 1-800-MER-FUND.
		Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future.

Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses.

The Investment Adviser, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.

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HOW SHARES ARE PRICED

Net Asset Value — the market value of the Fund’s total assets after deducting liabilities, divided by the number of shares outstanding.

When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open, as of the close of business on the Exchange based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund’s net asset value may change on days when you will not be able to purchase or redeem the Fund’s shares.

Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, and Class D shares will have a higher net asset value than Class B or Class C shares. Also dividends paid on Class A and Class D shares will generally be higher than dividends paid on Class B and Class C shares because Class A and Class D shares have lower expenses.

PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS

If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances.

You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program.

Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary.

DIVIDENDS AND TAXES

The Fund will distribute at least annually any net investment income and any net realized long-term capital gains. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. If your account is with Merrill Lynch and you would like to receive dividends in cash, contact your Merrill Lynch Financial Consultant. If your account is with the Transfer Agent and you would like to receive dividends in cash, contact the Transfer Agent. Capital gains may be taxable to you at different rates depending, in part, on how long the Fund has held the assets sold.

You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Capital gain dividends are generally taxed at different rates than ordinary income dividends.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if you are a foreign entity, the Fund’s ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.

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“BUYING A DIVIDEND”

Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser.

Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.

By law, the Fund must withhold 31% of your dividends and redemption proceeds if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect.

This section summarizes some of the consequences under current Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws.

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[LOGO] Management of the Fund

MERRILL LYNCH INVESTMENT MANAGERS

Merrill Lynch Investment Managers, the Fund’s Investment Adviser, manages the Fund’s investments and its business operations under the overall supervision of the Fund’s Board of Directors. The Investment Adviser has the responsibility for making all investment decisions for the Fund. The Investment Adviser has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the Investment Adviser may pay a fee for services it receives. The Fund pays the Investment Adviser a monthly fee based on the average daily value of the Fund’s net assets at the annual rates of 0.50% of that portion of average daily net assets not exceeding $250 million; 0.45% of that portion of average daily net assets exceeding $250 million but not exceeding $300 million; 0.425% of that portion of average daily net assets exceeding $300 million but not exceeding $400 million; and 0.40% of that portion of average daily net assets exceeding $400 million. For the fiscal year ended March 31, 2000, the Investment Adviser received a fee equal to 0.40% of the Fund’s average daily net assets.

Merrill Lynch Investment Managers was organized as an investment adviser in 1977 and offers investment advisory services to more than 40 organized investment companies. Merrill Lynch Asset Management is part of the Asset Management Group of ML&Co. The Asset Management Group which had approximately $556 billion in investment company and other portfolio assets under management as of May 2000. This amount includes assets managed for Merrill Lynch affiliates.

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FINANCIAL HIGHLIGHTS

The Financial Highlights table is intended to help you understand the Fund’s financial performance for the periods shown. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends). This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund’s financial statements, is included in the Fund’s annual report to shareholders, which is available upon request.

	Class A										Class B
	For the Year Ended March 31,										For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996		2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$35.03		$37.56		$31.39		$30.90		$27.74		$34.25		$36.68		$30.72		$30.30		$27.28
Investment income — net	.94		1.00		1.11		1.25		1.21		.57		.63		.74		.91		.90
Realized and unrealized gain (loss) on   investments  and foreign currency   transactions — net	.62		(1.28	)	8.14		2.43		5.41		.60		(1.25	)	7.96		2.39		5.29
Total from investment operations	1.56		(.28	)	9.25		3.68		6.62		1.17		(.62	)	8.70		3.30		6.19
Less dividends and distributions:
Investment income — net	(.94	)	(1.08	)	(1.11	)	(1.25	)	(1.16	)	(.66	)	(.64)		(.77	)	(.94	)	(.87	)
Realized gain on investments  — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.93	)	(2.25	)	(3.08	)	(3.19	)	(3.46	)	(3.65	)	(1.81	)	(2.74	)	(2.88	)	(3.17	)
Net asset value, end of year	$32.66		$35.03		$37.56		$31.39		$30.90		$31.77		$34.25		$36.68		$30.72		$30.30
Total Investment Return:*
Based on net asset value per share	4.58	%	(.68	%)	30.71	%	12.62	%	24.50	%	3.48	%	(1.65	%)	29.38	%	11.48	%	23.22	%
Ratios to Average Net Assets:
Expenses	.56	%	.57	%	.55	%	.55	%	.56	%	1.58	%	1.59	%	1.57	%	1.57	%	1.58	%
Investment income — net	2.74	%	2.86	%	3.21	%	3.99	%	4.09	%	1.71	%	1.85	%	2.19	%	2.97	%	3.07	%
Supplemental Data:
Net assets, end of year (in thousands)	$2,721,503		$3,631,440		$4,155,677		$3,291,219		$3,225,758		$2,853,699		$4,866,564		$5,938,708		$4,977,431		$5,025,504
Portfolio turnover	33	%	33	%	38	%	47	%	84	%	33	%	33	%	38	%	47	%	84	%

* Total investment returns exclude the effects of sales charges.

† Based on average shares outstanding.

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FINANCIAL HIGHLIGHTS (concluded)

	Class C										Class D
	For the Year Ended March 31,										For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:	2000†		1999†		1998†		1997†		1996		2000†		1999†		1998†		1997†		1996
Per Share Operating Performance:
Net asset value, beginning of year	$33.82		$36.31		$30.44		$30.08		$27.17		$34.97		$37.49		$31.34		$30.86		$27.72
Investment income — net	.57		.62		.73		.90		.92		.86		.91		1.02		1.17		1.16
Realized and unrealized gain (loss) on   investments and foreign currency   transactions — net	.59		(1.25	)	7.89		2.36		5.24		.60		(1.28	)	8.14		2.43		5.38
Total from investment operations	1.16		(.63	)	8.62		3.26		6.16		1.46		(.37	)	9.16		3.60		6.54
Less dividends and distributions:
Investment income — net	(.63	)	(.69	)	(.78	)	(.96	)	(.95	)	(.86	)	(.98	)	(1.04	)	(1.18	)	(1.10	)
Realized gain on investments — net	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)	(2.99	)	(1.17	)	(1.97	)	(1.94	)	(2.30	)
Total dividends and distributions	(3.62	)	(1.86	)	(2.75	)	(2.90	)	(3.25	)	(3.85	)	(2.15	)	(3.01	)	(3.12	)	(3.40	)
Net asset value, end of period	$31.36		$33.82		$36.31		$30.44		$30.08		$32.58		$34.97		$37.49		$31.34		$30.86
Total Investment Return:*
Based on net asset value per share	3.50	%	(1.70	%)	29.40	%	11.45	%	23.25	%	4.29	%	(.92	%)	30.40	%	12.34	%	24.21	%
Ratios to Average Net Assets:
Expenses	1.59	%	1.59	%	1.58	%	1.58	%	1.59	%	81	%	.82	%	.80	%	.80	%	.81	%
Investment income — net	1.70	%	1.83	%	2.18	%	2.96	%	3.08	%	2.50	%	2.60	%	2.95	%	3.75	%	3.84	%
Supplemental Data:
Net assets, end of year (in thousands)	$308,150		$491,234		$512,783		$322,438		$259,131		$1,428,120		$1,513,406		$1,280,317		$690,116		$521,599
Portfolio turnover	33	%	33	%	38	%	47	%	84	%	33	%	33	%	38	%	47	%	84	%

* Total investment returns exclude the effects of sales charges.

† Based on average shares outstanding.

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

34

                                   POTENTIAL
                                   INVESTORS
                         Open an account (two options)

             1                                            2

       MERRILL LYNCH                                TRANSFER AGENT
   FINANCIAL CONSULTANT                       Financial Date Services, Inc.
   OR SECURITIES DEALER                         ADMINISTRATIVE OFFICES
  Advises shareholders on                        4800 Deer Lake Drive East
  their Fund investments.                    Jacksonville, Florida 32246-6484
                                                     MAILING ADDRESS
                                                     P.O. Box 45289
                                             Jacksonville, Florida 32232-5289
                                                Performs recordkeeping and
                                                     reporting services.

                                 DISTRIBUTOR
                      Merrill Lynch Funds Distributor,
               a division of Princeton Funds Distributor, Inc.
                                P.O. Box 9081
                      Princeton, New Jersey 08543-9081
                    Arranges for the sale of Fund shares.

             COUNSEL                                           CUSTODIAN
         Brown & Wood LLP              THE FUND           The Bank of New York
      One World Trade Center     The Board of Directors     100 Church Street
  New York, New York 10048-0557    oversees the Fund    New York, New York 10286
Provides legal advice to the Fund.                       Holds the Fund's assets
                                                             for safekeeping

       INDEPENDENT AUDITORS                       INVESTMENT ADVISER
      Deloitte & Touche LLP                          Merrill Lynch
   Princeton Forrestal Village                  Asset Management, L.P.
    116-300 Village Boulevard                   ADMINISTRATIVE OFFICES
Princeton, New Jersey 08540-6400                800 Scudders Mill Road
      Audits the financial                   Plainsboro, New Jersey 08536
    statements of the Fund on                        MAILING ADDRESS
   behalf of the shareholders.                        P.O. Box 9011
                                           Princeton, New Jersey 08543-9011
                                                    TELEPHONE NUMBER
                                                     1-800-MER-FUND
                                        Manages the Fund's day-to-day activities
          

MERRILL LYNCH BALANCED CAPITAL FUND, INC.

[GRAPHIC] For More Information

Shareholder Reports

Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. In the Fund’s annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND.

The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your Merrill Lynch Financial Consultant or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and Merrill Lynch brokerage or mutual fund account number. If you have any questions, please call your Merrill Lynch Financial Consultant or the Transfer Agent at 1-800-MER-FUND.

Statement of Additional Information

The Fund’s Statement of Additional Information contains further information about the

Fund and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone number or address indicated above, if you have any questions.

Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC’s Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from information contained in this Prospectus.

Investment Company Act file #811-2405

Code #10044-07-00

© Merrill Lynch Investment Managers, L.P.

Prospectus

[LOGO OF MERRILL LYNCH]

Merrill Lynch Balanced

Capital Fund, Inc.

July 3, 2000

As Revised July 3, 2000

STATEMENT OF ADDITIONAL INFORMATION

Merrill Lynch Balanced Capital Fund, Inc.

P.O. Box 9011, Princeton, New Jersey 08543-9011 • Phone No. (609) 282-2800

        Merrill Lynch Balanced Capital Fund, Inc. (the “Fund”) seeks to achieve the highest total investment return through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. This approach permits management of the Fund to vary investment policy based on its evaluation of changes in economic and market trends. Total investment return is the aggregate of income and capital value changes. Consistent with this policy, the Fund’s portfolio may, at any given time, be invested substantially in equity securities, corporate bonds or money market securities. It is the expectation of management that, over longer periods, a major portion of the Fund’s portfolio will consist of equity securities of larger market capitalization, quality companies. Since January 1, 1974, the portion of the Fund’s portfolio invested in equity securities has ranged from approximately 43% to 98%, with the balance being invested in corporate bonds, money market securities, government bonds and mortgage-backed securities. On March 31, 2000, approximately 63% of the Fund’s portfolio was invested in equity securities. There can be no assurance that the Fund’s investment objective will be achieved. For more information on the Fund’s investment objective and policies, see “Investment Objective and Policies.”

        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 “Purchase of Shares.”

        This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated July 3, 2000 (the “Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling (800) MER-FUND or by writing the Fund at the above address. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.

Merrill Lynch Investment Managers — Investment Adviser

Merrill Lynch Funds Distributor — Distributor

The date of this Statement of Additional Information is July 3, 2000.

TABLE OF CONTENTS

	Page
Investment Objective and Policies	2
Description of Certain Investments	2
Mortgage Backed Securities	6
Investment in Foreign Issuers	7
Derivatives	9
Other Investment Policies and Practices	12
Investment Restrictions	14
Portfolio Turnover	17
Management of the Fund	17
Directors and Officers	17
Compensation of Directors	18
Management and Advisory Arrangements	19
Code of Ethics	20
Purchase of Shares	21
Initial Sales Charge Alternatives — Class A and Class D Shares	21
Reduced Initial Sales Charges	23
Deferred Sales Charge Alternatives — Class B and Class C Shares	26
Distribution Plans	29
Limitations on the Payment of Deferred Sales Charges	31
Redemption of Shares	32
Redemption	32
Repurchase	33
Reinstatement Privilege — Class A and Class D Shares	33
Pricing of Shares	34
Determination of Net Asset Value	34
Computation of Offering Price Per Share	35
Portfolio Transactions and Brokerage	35
Shareholder Services	37
Investment Account	37
Exchange Privilege	37
Fee-Based Programs	40
Retirement and Education Savings Plans	40
Automatic Investment Plans	40
Automatic Dividend Reinvestment Plan	41
Systematic Withdrawal Plan	41
Dividends and Taxes	42
Dividends	42
Taxes	42
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions	44
Special Rules for Certain Foreign Currency Transactions	45
Performance Data	45
General Information	48
Description of Shares	48
Independent Auditors	48
Custodian	48
Transfer Agent	48
Legal Counsel	48
Reports to Shareholders	49
Shareholder Inquiries	49
Additional Information	49
Financial Statements	49

INVESTMENT OBJECTIVE AND POLICIES

        The investment objective of the Fund is to achieve the highest total investment return. To do this, management of the Fund shifts the emphasis among equity, debt (including money market) and convertible securities. This flexible, total investment return approach is called a “fully managed” investment policy. It distinguishes the Fund from other investment companies, which often seek either capital growth or current income. Of course, there is no assurance that the Fund will attain this objective.

        The Fund’s investment philosophy is based on the belief that, as in the past, the structure of the United States’ economy and the economies and securities markets of other countries will undergo continuous change. Thus, the fully managed approach puts maximum emphasis on investment flexibility.

        The two principal features of the Fund’s management approach are flexibility and concentration in “quality” companies.

         Flexibility.    The Fund’s fully managed investment approach makes use of equity, debt (including money market) and convertible securities. Freedom to move among these different types of securities as prevailing trends change is the keystone of the Fund’s investment policy.

         Concentration in “Quality” Companies.    The earnings of quality companies generally tend to grow consistently. Their internal strengths — good financial resources, a strong balance sheet, satisfactory rate of return on capital, a good industry position and superior management skills — give the Fund confidence that these companies consistently will perform at high levels. The Fund considers quality companies to be those that conform most closely to these characteristics. Most of the Fund’s equity portfolio is in the common stocks of these quality companies.

         Sometimes, to reduce risk and to achieve the highest total investment return, the Fund may invest in other securities:

         Non-convertible, long-term debt securities, including “deep discount” corporate debt securities, mortgage-backed securities issued or guaranteed by governmental entities or private issuers, and debt securities issued or guaranteed by governments, their agencies and instrumentalities. Such debt securities generally will be “investment grade.” However, the Fund has established no rating criteria for the debt securities in which it may invest, and the Fund may invest in securities that are rated in the medium to low rating categories of nationally recognized statistical rating organizations such as Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) or which, in the Investment Adviser’s judgment, possess similar credit characteristics. Such securities, are sometimes referred to as “high yield/high risk securities” or “junk bonds.” The Fund does not intend to invest in excess of 35% of its total assets in high yield/high risk securities. See Appendix A — “Ratings of Debt Securities and Preferred Stock” for additional information regarding ratings of debt securities.

        Merrill Lynch Investment Managers (the “Investment Adviser” or “MLIM”) expects that over longer periods a larger portion of the Fund’s portfolio will consist of equity securities. However, the flexible fully managed investment approach enables the Fund to switch its emphasis to debt and convertible securities if, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. The Investment Adviser will determine the emphasis among equity and debt securities, including convertible securities, based on its evaluation as to the types of securities presently providing the opportunity for the highest total investment return consistent with prudent risk. On March 31, 2000, approximately 63% of the Fund’s portfolio was invested in equity securities.

Description of Certain Investments

         Convertible Securities.    Convertible securities entitle the holder to receive interest payments paid on corporate debt securities or the dividend preference on a preferred stock until such time as the convertible security matures or is redeemed or until the holder elects to exercise the conversion privilege.

        The characteristics of convertible securities include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were issued in nonconvertible form.

        In analyzing convertible securities, the Investment Adviser will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered by the underlying common stock, among other things.

         Convertible securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by the Fund are denominated in United States dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. As described herein, the Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of such fluctuations.

        Apart from currency considerations, the value of convertible securities is influenced by both the yield of nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its “investment value.” To the extent interest rates change, the investment value of the convertible security typically will fluctuate. However, at the same time, the value of the convertible security will be influenced by its “conversion value,” which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock. If, because of a low price of the common stock the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value.

        To the extent the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities’ investment value.

        Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision, indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.

         Securities of Smaller or Emerging Growth Companies.    An investment in the Fund involves greater risk than is customarily associated with funds that invest in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. Because of these factors, the Fund believes that its shares may be suitable for investment by persons who can invest without concern for current income and who are in a financial position to assume above-average investment risk in search of above-average long-term reward. It is not intended as a complete investment program but is designed for those long-term investors who are prepared to experience above-average fluctuations in net asset value.

        While the issuers in which the Fund will invest may offer greater opportunities for capital appreciation than large cap issuers, investments in smaller or emerging growth companies may involve greater risks and thus may be considered speculative. Management believes that properly selected companies of this type have the potential to increase their earnings or market valuation at a rate substantially in excess of the general growth of the economy. Full development of these companies and trends frequently takes time and, for this reason, the Fund should be considered as a long-term investment and not as a vehicle for seeking short-term profits.

        The securities in which the Fund invests will often be traded only in the over-the-counter market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by the Fund of portfolio securities to meet redemptions or otherwise may require the Fund to sell these securities at a discount from market prices or during periods when in management’s judgment such disposition is not desirable or to make many small sales over a lengthy period of time.

        While the process of selection and continuous supervision by management does not, of course, guarantee successful investment results, it does provide access to an asset class not available to the average individual due to the time and cost involved. Careful initial selection is particularly important in this area as many new enterprises have promise but lack certain of the fundamental factors necessary to prosper. Investing in small and emerging growth companies requires specialized research and analysis. In addition, many investors cannot invest sufficient assets in such companies to provide wide diversification.

        Small companies are generally little known to most individual investors although some may be dominant in their respective industries. Management of the Fund believes that relatively small companies will continue to have the opportunity to develop into significant business enterprises. The Fund may invest in securities of small issuers in the relatively early stages of business development which have a new technology, a unique or proprietary product or service, or a favorable market position. Such companies may not be counted upon to develop into major industrial companies, but management believes that eventual recognition of their special value characteristics by the investment community can provide above-average long-term growth to the portfolio.

        Equity securities of specific small cap issuers may present different opportunities for long-term capital appreciation during varying portions of economic or securities markets cycles, as well as during varying stages of their business development. The market valuation of small cap issuers tends to fluctuate during economic or market cycles, presenting attractive investment opportunities at various points during these cycles.

        Smaller companies, due to the size and kinds of markets that they serve, may be less susceptible than large companies to intervention from the Federal government by means of price controls, regulations or litigation.

         Temporary Investments.    The Fund reserves the right, as a temporary defensive measure, to hold, without limitation, assets in temporary investments (“Temporary Investments”) including cash and money market securities. Under certain adverse investment conditions, the Fund may restrict the markets in which its assets will be invested and may increase the proportion of assets invested in Temporary Investments. Investments made for defensive purposes will be maintained only during periods in which the Investment Adviser determines that economic or financial conditions are adverse for holding or being primarily invested in equity securities. A portion of the Fund normally would be held in Temporary Investments in anticipation of investment in equity securities or to provide for possible redemptions.

         Illiquid or Restricted Securities.    The Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund’s assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund’s operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.

        The Fund may invest in securities that are not registered (“restricted securities”) under the Securities Act of 1933, as amended (the “Securities Act”). Restricted securities may be sold in private placement transactions between the issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund’s investments in private placements may consist of direct investments and may include investments in smaller, less-seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material nonpublic information which may restrict the Fund’s ability to conduct portfolio transactions in such securities.

        144A Securities.    The Fund may purchase restricted securities that can be offered and sold to “qualified institutional buyers” under Rule 144A under the Securities Act. The Board has determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund’s Board. The Board has adopted guidelines and delegated to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will continue to develop, the Board will carefully monitor the Fund’s investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities.

         Investment in Other Investment Companies.    The Fund may invest in other investment companies whose investment objectives and policies are consistent with those of the Fund. In accordance with the Investment Company Act, the Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the Investment Company Act the Fund may not own more than 3% of the total outstanding voting stock of any investment company and not more than 5% of the value of the Fund’s total assets may be invested in the securities of any investment company. If the Fund acquires shares in investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such investment companies (including management and advisory fees). Investments by the Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other investment companies.

        Junk Bonds.    Junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for the Fund. The major risks in junk bond investments include the following:

        Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuer’s industry and to general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.

        The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The issuer’s ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing.

        Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally paid off before the junior obligations.

        Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If an issuer redeems the junks bonds, the Fund may have to invest the proceeds in bonds with lower yields and may lose income.

        Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds than on other higher rated fixed income securities.

        Junk bonds may be less liquid than higher rated fixed income securities even under normal economic conditions. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgement may play a greater role in valuing certain of the Fund’s portfolio securities than in the case of securities trading in a more liquid market.

The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.

Mortgage Backed Securities

        The Fund may invest up to 35% of its total assets in mortgage backed securities. Mortgage backed securities in which the Fund invests include mortgage pass-through certificates and multiple-class pass-through securities, such as REMIC pass-through certificates, CMOs and stripped mortgage backed securities, and other types of mortgage backed securities that may be available in the future.

        The Fund may invest in guaranteed mortgage pass-through securities which represent participation interests in pools of residential mortgage loans and which are issued by United States governmental lenders or by private lenders and guaranteed by the United States Government or one of its agencies or instrumentalities, including but not limited to the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). In general, Ginnie Mae certificates are guaranteed by the full faith and credit of the United States Government for timely payment of principal and interest on the certificates. Fannie Mae certificates are generally guaranteed by Fannie Mae, a federally chartered and privately-owned corporation for full and timely payment of scheduled principal and interest on the certificates. In general, Freddie Mac certificates are guaranteed by Freddie Mac, a corporate instrumentality of the United States Government, for timely payment of interest and the ultimate collection of all principal of the related mortgage loans.

        Mortgage backed securities also include CMOs and REMIC pass-through or participation certificates, which may be issued by, among others, United States Government agencies and instrumentalities as well as private lenders. CMOs and REMIC certificates are issued in multiple classes and the principal of and interest on the mortgage assets may be allocated among the several classes of CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC certificates, often referred to as a “tranche,” is issued at a specified adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Generally, interest is paid or accrues on all classes of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in the lowest tranche of CMOs and REMIC certificates.

         Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates but also may be collateralized by other mortgage assets such as whole loans or private mortgage pass-through securities. Debt service on CMOs is provided from payments of principal and interest on collateral of mortgage assets and any reinvestment income thereon.

        A REMIC is a pool of assets that qualifies for special tax treatment under the Code and consists of certain mortgages or deeds of trust primarily secured by interests in real property and other permitted investments. Investors may purchase “regular” and “residual” interests in REMIC trusts although the Fund does not intend to invest in “residual interests.”

        Risks Associated with Mortgage-Backed Securities.    Investing in mortgage-backed securities involves certain unique risks in addition to those generally associated with investing in the real estate industry in general. These unique risks include the failure of a party to meet its commitments under the related operative documents, adverse interest rate changes and the effects of prepayments on mortgage cash flows.

        Mortgage backed securities are “pass-through” securities, meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to the Fund. The value of mortgage backed securities, like that of traditional fixed-income securities, typically increases when interest rates fall and decreases when interest rates rise. However, mortgage backed securities differ from traditional fixed-income securities because of their potential for prepayment without penalty. The price paid by the Fund for its mortgage backed securities, the yield the Fund expects to receive from such securities and the average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying mortgages. In a period of declining interest rates, borrowers may prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the mortgage backed securities. Moreover, when the Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid.

        To the extent that the Fund purchases mortgage backed securities at a premium, mortgage foreclosures and principal prepayments may result in a loss to the extent of the premium paid. If the Fund buys such securities at a discount, both scheduled payments of principal and unscheduled prepayments will increase current and total returns and will accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments of the underlying mortgages may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively change a security that was considered short or intermediate-term at the time of purchase into a long-term security. Since long-term securities generally fluctuate more widely in response to changes in interest rates than shorter-term securities, maturity extension risk could increase the inherent volatility of the Fund. Under certain interest rate and prepayment scenarios, the Fund may fail to recoup fully its investment in mortgage backed securities notwithstanding any direct or indirect governmental or agency guarantee.

Investment in Foreign Issuers

         General.    The Fund may invest up to 25% of its total net assets in the securities of foreign issuers. Investment in securities of foreign issuers involves certain risks not typically involved in domestic investments, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the possible imposition of exchange controls or other foreign governmental laws or restrictions. Securities prices in different countries are subject to different economic, financial, political and social factors. Changes in foreign currency exchange rates will affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, difficulty in obtaining or enforcing a court judgment, economic, political or social instability or diplomatic developments that could affect investments in those countries. Certain foreign investments also may be subject to foreign withholding taxes. These risks often are heightened for investments in smaller, emerging capital markets.

        Public Information.    Securities of foreign issuers may not be registered with the Commission, nor may the issuers thereof be subject to the reporting requirements of such agency. Accordingly, there may be less publicly available information about a foreign issuer than about a U.S. issuer and such foreign issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of U.S issuers.

         Trading Volume, Clearance and Settlement.    Foreign financial markets, while generally growing in trading volume, typically have substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have different clearance and settlement procedures. Delays in settlement could result in periods when assets of the Fund are uninvested and no return is earned thereon. The inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.

         Government Supervision and Regulation.    There generally is less governmental supervision and regulation of exchanges, brokers and issuers in foreign countries than there is in the United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protection securities laws that apply with respect to securities transactions consummated in the United States. Further, brokerage commissions and other transaction costs on foreign securities exchanges generally are higher than in the United States.

         Foreign Government Debt Securities.    The Funds may invest in debt securities issued by foreign governments. Investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of an emerging market country’s debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. Holders of government debt, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors.

        As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, a Fund may have limited the legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country. Government obligors in developing and emerging market countries are among the world’s largest debtors to commercial banks, other governments, international financial organizations and other financial institutions. Some issuers of the government debt securities in which a Fund may invest have in the past experienced substantial difficulties in servicing their external debt obligations, which led to defaults on certain obligations and the restructuring of certain indebtedness. Restructuring arrangements have included, among other things, reducing and rescheduling interest and principal payments by negotiating new or amended credit agreements.

         European Economic and Monetary Union.    For a number of years, certain European countries have been seeking economic unification that would, among other things, reduce barriers between countries, increase competition among companies, reduce government subsidies in certain industries, and reduce or eliminate currency fluctuations among these European countries. The Treaty on European Union (the “Maastricht Treaty”) set out a framework for the European Economic and Monetary Union (“EMU”) among the countries that comprise the European Union (“EU”). EMU established a single common European currency (the “euro”) that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all EMU participants by July 1, 2002. EMU took effect for the initial EMU participants as of January 1, 1999. Certain securities issued in participating EU countries (beginning with government and corporate bonds) were redenominated in the euro, and are listed, traded and make dividend and other payments only in euros.

        No assurance can be given that EMU will take full effect, that all the changes planned for the EU can be successfully implemented, or that these changes will result in the economic and monetary unity and stability intended. There is a possibility that EMU will not be completed, or will be completed but then partially or completely unwound. Because any participating country may opt out of EMU within the first three years, it is also possible that a significant participant could choose to abandon EMU, which could diminish its credibility and influence. Any of these occurrences could have adverse effects on the markets of both participating and non-participating countries, including sharp appreciation or depreciation of participants’ national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the European markets, an undermining of European economic stability, the collapse or slowdown of the drive toward European economic unity, and/or reversion of the attempts to lower government debt and inflation rates that were introduced in anticipation of EMU. Also, withdrawal from EMU by an initial participant could cause disruption of the financial markets as securities redenominated in euros are transferred back into that country’s national currency, particularly if the withdrawing country is a major economic power. Such developments could have an adverse impact on the Fund’s investments in Europe generally or in specific countries participating in EMU. Gains or losses from euro conversions may be taxable to Fund shareholders under foreign or, in certain limited circumstances, U.S. tax laws.

Derivatives

        The Fund may use instruments referred to as “Derivatives.” Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil) or an index ( a measure of value or rates, such as the Standard & Poor’s 500 Index or the prime lending rate). Derivatives allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments.

Hedging.    The Fund may use Derivatives for hedging purposes. Hedging is a strategy in which a Derivative is used to offset the risk that other Fund holdings may decrease in value. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced.

        The Fund may use Derivatives and trading strategies including the following:

Options on Securities and Securities Indices

         Writing Call Options.    The Fund may write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which correlates with securities held in its portfolio. When the Fund writes a call option, in return for an option premium the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond 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. Writing a call option may involve correlation risk.

        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 credit risk. OTC options also involve greater liquidity risk. See “Additional Risk Factors of OTC Transactions; Limitation on the Use of OTC Derivatives” 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 an asset at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral (“margin”) equal to a percentage (generally less than 5%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk.

        The sale of a futures contract limits the Fund’s risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract’s expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract.

        The purchase of a futures contract may protect the Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.

        The Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying asset is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). The Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a “commodity pool” under regulations of the Commodity Futures Trading Commission.

Foreign Exchange Transactions

        The Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, “Currency Instruments”) for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar.

         Forward Foreign Exchange Transactions.    Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. The Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. The Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. The Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and liquidity risk.

         Currency Futures.    The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts. See “Futures” Currency futures involve substantial currency risk, and also involve leverage risk.

        Currency Options.    The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See “Types of Options” above and “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below. Currency options involve substantial currency risk, and may also involve credit, leverage or liquidity risk.

         Limitations on Currency Hedging.    The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a “cross-hedge”). The Fund will only enter into a cross-hedge if the Investment Adviser believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged.

        Risk Factors in Hedging Foreign Currency Risks.    Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Fund’s use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund’s shares, the net asset value of the Fund’s shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund’s hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decreases its total return, as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.

        It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging.

Risk Factors in Derivatives

         Derivatives are volatile and involve significant risks, including:

        Credit Risk — the risk that the counterparty on a Derivative transaction will be unable to honor its financial obligation to the Fund.

         Currency Risk — the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.

         Leverage Risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

        Liquidity Risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth.

        Use of Derivatives for hedging purposes involves correlation risk. If the value of the Derivative moves more or less than the value of the hedged instruments the Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments.

        The Fund intends to enter into transactions involving Derivatives only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives.” However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Derivative without incurring substantial losses, if at all.

        Certain transactions in Derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Fund to potential losses, which exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund’s exposure to loss.

Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives

        Certain Derivatives traded in OTC markets, including OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer’s quotation may be used.

        Because Derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Derivatives traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement.

Other Investment Policies and Practices

         Borrowing and Leverage.    The Fund may borrow up to 33 ¹ /3% of its total assets, taken at market value, but only from banks as a temporary measure for extraordinary or emergency purposes, including to meet redemptions (so as not to force the Fund to liquidate securities at a disadvantageous time) or to settle securities transactions. The Fund will not purchase securities at any time when borrowings exceed 5% of its total assets, except (a) to honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for settlements of other securities transactions. The purchase of securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Fund’s exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income.

        The use of leverage by the Fund creates an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Although the principal of such borrowings will be fixed, the Fund’s assets may change in value during the time the borrowings are outstanding. Borrowings will create interest expenses for the Fund which can exceed the income from the assets purchased with the borrowings. To the extent the income or capital appreciation derived from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Fund’s return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to shareholders as dividends will be reduced. In the latter case, the Investment Adviser in its best judgment nevertheless may determine to maintain the Fund’s leveraged position if it expects that the benefits to the Fund’s shareholders of maintaining the leveraged position will outweigh the current reduced return.

        Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Investment Adviser from managing the Fund’s portfolio in accordance with the Fund’s investment objectives and policies. However, a breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so.

        The Fund at times may borrow from affiliates of the Investment Adviser, provided that the terms of such borrowings are not less favorable than those available from comparable sources of funds in the marketplace.

         Lending of Portfolio Securities.    Subject to investment restriction (5) below, the Fund may lend securities with a value not exceeding 20% its total assets to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. government which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. 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 of 1940, as amended (the “Investment Company Act”). During the period of such a loan, the Fund typically receives the income on both the loaned securities and the collateral and thereby increases its yield. In certain circumstances, the Fund may receive a flat fee for its loans. Such loans are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder’s, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral and could suffer a loss to the extent the value of the collateral falls below the market value of the borrowed securities.

        No Rating Criteria for Debt Securities.    The Fund has not established any rating criteria for the debt securities in which it may invest and such securities may not be rated at all for creditworthiness. Securities rated in the medium to low rating categories of nationally recognized statistical rating organizations, such as S&P and Moody’s and unrated securities of comparable quality (such lower rated and unrated securities are referred to herein as “high yield/high risk securities” or “junk bonds”) are speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. In purchasing such securities, the Fund will rely on the Investment Adviser’s judgment, analysis and experience in evaluating the creditworthiness of an issuer of such securities. The Investment Adviser will take into consideration, among other things, the issuer’s financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer’s management and regulatory matters. The Fund does not intend to purchase debt securities that are in default or that the Investment Adviser believes will be in default.

        The market values of high yield/high risk securities tend to reflect individual issuer developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Issuers of high yield/high risk securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high yield/high risk securities may be more likely to experience financial stress especially if such issuers are highly leveraged. During such periods, service of debt obligations also may be adversely affected by specific issuer developments, or the issuer’s inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of high yield/high risk securities because such securities may be unsecured and may be subordinated to other creditors of the issuer.

        High yield/high risk securities may have call or redemption features which would permit an issuer to repurchase the securities from the Fund. If a call were exercised by the issuer during a period of declining interest rates, the Fund likely would have to replace such called securities with lower yielding securities, thus decreasing the net investment income to the Fund and, consequently, dividends to shareholders.

        The Fund may have difficulty disposing of certain high yield/high risk securities because there may be a thin trading market for such securities. To the extent that a secondary trading market for high yield/high risk securities does exist, it generally is not as liquid as the secondary market for higher rated securities. Reduce secondary market liquidity may have an adverse impact on market price and the Fund’s ability to dispose of particular issues when necessary to meet the Fund’s liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain high yield/high risk securities also may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing the Fund’s portfolio. Market quotations generally are available on many high yield/high risk securities only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. The Fund’s Directors, or the Investment Adviser will consider carefully the factors affecting the market for high yield/high risk, lower rated securities in determining whether any particular security is liquid or illiquid and whether current market quotations are readily available.

        Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of high yield/high risk securities, particularly in a thinly traded market. Factors adversely affecting the market value of high yield/high risk securities are likely to affect adversely the Fund’s net asset value. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default on a portfolio holding or participate in the restructuring of the obligations.

         Suitability.    The economic benefit of an investment in the Fund depends upon many factors beyond the control of the Fund, the Investment Adviser and its affiliates. Because of its emphasis on foreign securities, the Fund should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in the Fund will depend upon, among other things, such investor’s investment objectives and such investor’s ability to accept the risks associated with investing in foreign securities, including the risk of loss of principal.

Investment Restrictions

        The Fund has adopted a number of fundamental and non-fundamental investment restrictions and policies relating to the investment of its assets and its activities. The fundamental policies set forth below may not be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities (which for this purpose and under the Investment Company Act of 1940, as amended (the “Investment Company Act”) means the lesser of (i) 67% of the Fund’s shares present at a meeting at which more than 50% of the outstanding shares of the Fund are represented or (ii) more than 50% of the Fund’s outstanding shares). 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 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).

         (3)  Make investments for the purpose of exercising control or management.

        (4)   Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein.

         (5)  Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers’ acceptances and repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time.

         (6)  Issue senior securities to the extent such issuance would violate applicable law.

         (7)  Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 ¹ /3% of its total assets (including the amount borrowed), (ii) the Fund may, to the extent permitted by law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund’s investment policies as set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies.

         (8)  Underwrite securities of other issuers, except insofar as the Fund technically may be deemed an underwriter under the Securities Act 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.

        In addition, the Fund has adopted non-fundamental investment restrictions, which may be changed by the Board of Directors without shareholder approval, the Fund may not:

         (a)  Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. As a matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the “fund of funds” provisions) of the Investment Company Act at any time the Fund’s shares are owned by another investment company that is part of the same group of investment companies as the Fund.

         (b)  Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund does not, however, currently intend to engage in short sales, except short sales “against the box.”

         (c)  Invest in securities that cannot be readily resold because of legal or contractual restrictions or that cannot otherwise be marketed, redeemed or put to the issuer or to a third party, if at the time of acquisition more than 15% of its net assets would be invested in such securities. This restriction shall not apply to securities that mature within seven days or securities that the Board of Directors of the Fund has otherwise determined to be liquid pursuant to applicable law. Securities purchased in accordance with Rule 144A under the Securities Act and determined to be liquid by the Board of Directors are not subject to the limitations set forth in this investment restriction.

         (d)  Notwithstanding fundamental investment restriction (7) above, borrow amounts in excess of 5% of its total assets, taken at acquisition or market value, whichever is lower and then only from banks. The purchase of securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging or borrowing increases the Fund’s exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income as a temporary measure for extraordinary or emergency purposes.

         (e)  maintain less than 25% of the value of its assets in fixed income senior securities, including but not limited to debt securities and preferred stock.

        Portfolio securities of the Fund generally may not be purchased from, sold or loaned to the Investment Adviser or its affiliates or any of their directors, officers or employees, acting as principal, unless pursuant to a rule or exemptive order under the Investment Company Act.

        The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of any such transaction, the sum of the market value of OTC options currently outstanding that are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding that were sold by the Fund and margin deposits on the Fund’s existing OTC options on financial futures contracts exceeds 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund that are illiquid or are not otherwise readily marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is “in-the-money” (i.e., current market value of the underlying securities minus the option’s strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is “in-the-money.” This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Board of Directors of the Fund without the approval of the Fund’s shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position.

        In addition, as a non-fundamental policy which may be changed by the Board of Directors and to the extent required by the Commission or its staff, the Fund will, for purposes of investment restriction (1), treat securities issued or guaranteed by the government of any one foreign country as the obligations of a single issuer.

        As another non-fundamental policy, the Fund will not invest in securities that are subject to material legal restrictions on repatriation of assets or (b) cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable, including repurchase agreements and purchase and sale contracts maturing in more than seven days, if, regarding all such securities, more than 15% of its net assets, taken at market value, would be invested in such securities.

        Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) with the Investment Adviser, the Fund is prohibited from engaging in certain transactions involving Merrill Lynch or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions permitted pursuant to an exemptive order under the Investment Company Act. See “Portfolio Transactions and Brokerage.” Without such an exemptive order, the Fund is prohibited from engaging in portfolio transactions with Merrill Lynch or its affiliates acting as principal.

        The Fund’s investments will be limited in order to allow the Fund to qualify as a “regulated investment company” for purposes of the Code. See “Dividends and Taxes—Taxes.” To qualify, among other requirements, the Fund will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Fund’s total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. These tax-related limitations may be changed by the Directors of the Fund to the extent necessary to comply with changes to the Federal tax requirements. The Fund is “diversified” under the Investment Company Act and must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets.

Portfolio Turnover

        The Investment Adviser will effect portfolio transactions without regard to the time the securities have been held, if, in its judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, financial or economic conditions. As a result of its investment policies, the Fund may engage in a substantial number of portfolio transactions and the Fund’s portfolio turnover rate may vary greatly from year to year or during periods within a year. The portfolio turnover rate is calculated by dividing the lesser of the Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. Government securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high portfolio turnover may result in negative tax consequences, such as an increase in capital gain dividends. High portfolio turnover may also involve correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund.

MANAGEMENT OF THE FUND

Directors and Officers

        The Directors of the Fund consist of seven individuals, five of whom are not “interested persons” of the Fund as defined in the Investment Company Act (the “non-interested Directors”). The Directors are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act. Information about the Directors, executive officers and the portfolio manager of the Fund, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Director, executive officer and the portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011.

         TERRY K. GLENN (59) — President and Director(1)(2) — Executive Vice President of the Investment Adviser and Fund Asset Management, L.P. (“FAM”) (which terms as used herein include their corporate predecessors) since 1983; President of FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) since 1993; President of Princeton Administrators, L.P. since 1988.

        M. COLYER CRUM (68) — Director(2)(3) — 104 Westcliff Road, Weston, Massachusetts 02193. James R. Williston Professor of Investment Management Emeritus, Harvard Business School since 1996; James R. Williston Professor of Investment Management, Harvard Business School, from 1971 to 1996; Director of Cambridge Bancorp.

         LAURIE SIMON HODRICK (37) — Trustee(2)(3) — 809 Uris Hall, 3022 Broadway, New York, New York 10027. Professor of Finance and Economics, Graduate School of Business, Columbia University since 1998; Associate Professor of Finance and Economics, Graduate School of Business, Columbia University from 1996 to 1998; Associate Professor of Finance, J.L. Kellogg Graduate School of Management, Northwestern University from 1992 to 1996.

         JACK B. SUNDERLAND (71) — Director(2)(3) — P.O. Box 7, West Cornwall, Connecticut 06796. President and Director of American Independent Oil Company, Inc. (an energy company) since 1987; Member of Council on Foreign Relations since 1971.

        J. THOMAS TOUCHTON (61) — Director(2)(3) — Suite 3405, One Tampa City Center, 201 North Franklin Street, Tampa, Florida 33062. Managing Partner of The Witt Touchton Company and its predecessor, The Witt Co. (a private investment partnership), since 1972; Trustee Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an electric utility holding company).

         FRED G. WEISS (58) — Director(2)(3) — 16450 Maddalena Place, Delray Beach, Florida 33446. Managing Director of FGW Associates since 1997; Vice President, Planning Investment, and Development of Warner Lambert Co. from 1979 to 1997; Director of Watson Pharmaceutical, Inc. (a pharmaceutical company) since 2000; Director of the Michael J. Fox Foundation for Parkinson’s Research; Director of Laboratories Phoenix USA, Inc. (a private drug delivery company); and Director of Kann Institute for Medical Careers, Inc. (a private medical education company).

        ARTHUR ZEIKEL (68) — Director(1)(2) — 300 Woodland Avenue, Westfield, New Jersey 07090. Chairman of the Investment Adviser and FAM from 1997 to 1999 and President thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999, Director thereof from 1993 to 1999 and President thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. (“ML & Co.”) from 1990 to 1999.

         KURT SCHANSINGER (40) — Senior Vice President(1)(2) — First Vice President of the Investment Adviser since 1997; Vice President of the Investment Adviser from 1996 to 1997; prior thereto, Senior Vice President of Oppenheimer Capital L.P.

         WALTER CUJE (41) — Vice President(1)(2) — Director (Equity Fund Management) of the Investment Adviser since 1997; Vice President of the Investment Adviser from 1991 to 1997.

         DONALD C. BURKE (40) — Vice President and Treasurer(1)(2) — Senior Vice President and Treasurer of the Investment Adviser and FAM since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; First Vice President of the Investment Adviser from 1997 to 1999; Vice President of the Investment Adviser from 1990 to 1997; Director of Taxation of the Investment Adviser since 1990.

         THOMAS D. JONES , III (35) — Secretary(1)(2) —  Director (Legal Advisory) since 2000; Vice President of the Investment Adviser since 1998; Attorney with the Investment Adviser and FAM since 1992.

(1) Interested person, as defined in the Investment Company Act, of the Fund.

(2) Such Director or officer is a trustee, director or officer of certain other investment companies for which MLIM or FAM acts as the investment adviser or manager.

(3) Member of the Fund’s Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Directors.

        As of June 1, 2000, the Directors and officers of the Fund as a group (11 persons) owned an aggregate of less than 1% of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director and officer of the Fund, and the other officers of the Fund owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co.

Compensation of Directors

        The Fund pays each non-interested Director a fee of $3,500 per year plus $500 per Board meeting attended. The Fund also compensates each member of the Audit and Nominating Committee (the “Committee”), which consists of the non-interested Directors at a rate of $2,500 per Committee meeting attended. The Fund pays the Chairman of the Committee an additional fee of $1,000 per Committee meeting attended. The Fund reimburses each non-interested Director for his out-of-pocket expenses relating to attendance at Board and Committee meetings.

        The following table shows the compensation earned by the non-interested Directors for the fiscal year ended March 31, 2000 and the aggregate compensation paid to them from all registered investment companies advised by the Investment Adviser and its affiliate, FAM (“MLIM/FAM-advised funds”), for the calendar year ended December 31, 1999.

Name	Position with Fund	Compensation From Fund	Pension or Retirement Benefits Accrued as Part of Fund Expense	Estimated Annual Benefits upon Retirement	Aggregate Compensation from Fund and Other MLIM/FAM- Advised Funds(1)
M. Colyer Crum	Director	$8,000	None	None	$122,975
Laurie Simon Hodrick(2)	Director	$7,000	None	None	$ 53,000
Jack B. Sunderland	Director	$8,000	None	None	$143,975
J. Thomas Touchton	Director	$8,000	None	None	$142,725
Fred G. Weiss	Director	$9,000	None	None	$122,975

(1) The Directors serve on the boards of MLIM/FAM-advised funds as follows: Mr. Crum (14 registered investment companies consisting of 14 portfolios); Ms. Hodrick (14 registered investment companies consisting of 14 portfolios); Mr. Sunderland (18 registered investment companies consisting of 33 portfolios); Mr. Touchton (18 registered investment companies consisting of 33 portfolios); and Mr. Weiss (14 registered investment companies consisting of 14 portfolios).

(2) Ms. Hodrick was elected a Director of the Fund and certain other MLIM/FAM Advised Funds on November 4, 1999.

        Directors of the Fund may purchase Class A shares of the Fund at net asset value. See “Purchase of Shares—Initial Sales Charge Alternatives—Class A and Class D Shares—Reduced Initial Sales Charges—Purchase Privilege of Certain Persons.”

Management and Advisory Arrangements

         Investment Advisory Services.    The Investment Adviser provides the Fund with investment advisory and management services. Subject to the supervision of the Directors, the Investment Adviser is responsible for the actual management of the Fund’s portfolio and constantly reviews the Fund’s holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Fund.

         Investment Advisory Fee.    The Fund has entered into an investment advisory agreement with the Investment Adviser (the “Advisory Agreement”), pursuant to which the Investment Adviser receives for its services to the Fund monthly compensation at the annual rates of 0.50% of that portion of the average daily net assets not exceeding $250 million; 0.45% of that portion of the average daily net assets exceeding $250 million but not exceeding $300 million; 0.425% of that portion of the average daily net assets exceeding $300 million but not exceeding $400 million; and 0.40% of that portion of the average daily net assets exceeding $400 million. The table below sets forth information about the total management fees paid by the Fund to the Investment Adviser for the periods indicated.

Period	Investment Advisory Fee
Fiscal year ended March 31, 2000	$37,480,574
Fiscal year ended March 31, 1999	$45,106,929
Fiscal year ended March 31, 1998	$41,894,654

        The Investment Adviser has entered into a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited (“MLAM U.K.”) pursuant to which MLAM U.K. provides investment advisory services to the Investment Adviser with respect to the Fund. The Investment Adviser paid no fees to MLAM U.K. for the fiscal years ended March 31, 2000, 1999 and 1998.

         Payment of Fund Expenses.    The Investment Advisory Agreement obligates the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of the Investment Adviser. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by Merrill Lynch Funds Distributor, a division of FAMD (the “Distributor”); charges of the custodian and sub-custodian, and the transfer agent; expenses of redemption of shares; SEC fees; expenses of registering the shares under Federal, state or foreign laws; fees and expenses of non-interested Directors; insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Accounting services are provided for the Fund by the Investment Adviser. The Distributor will pay certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses will be financed by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares —Distribution Plans.”

         Organization of the Investment Adviser.    The Investment Adviser is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are “controlling persons” of the Investment Adviser as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its management or policies.

        The following entities may be considered “controlling persons” of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.’s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.

         Duration and Termination.    Unless earlier terminated as described herein, the Investment Advisory Agreement and sub-advisory agreement will continue in effect from year to year if approved annually (a) by the Directors of the Fund or by a majority of the voting securities 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 or by vote of the shareholders of the Fund.

         Transfer Agency Services.    Financial Data Services, Inc. (the “Transfer Agent”), a subsidiary of ML & Co., acts as the Fund’s Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the “Transfer Agency Agreement”). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B or Class C account and is entitled to reimbursement for certain transaction charges and out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge will be assessed on all accounts 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.

         Distribution Expenses.    The Fund has entered into four separate distribution agreements with the Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreements”). The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreements are subject to the same renewal requirements and termination provisions as the Investment Advisory Agreement described above.

Code of Ethics

        The Board of Directors of the Fund has approved a Code of Ethics under Rule 17j-1 of the Investment Company Act that covers the Fund and the Fund’s Investment Adviser and Distributor ( the “Code of Ethics”). The Code of Ethics significantly restricts the personal investing activities of all employees of the Investment Adviser and Distributor and, as described below, imposes additional more onerous restrictions on fund investment personnel.

        The Code of Ethics requires that all employees of the Investment Adviser and Distributor preclear any personal securities investments (with limited exceptions, such as mutual funds, high-quality short-term securities and direct obligations of the U.S. government). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser and Distributor 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 Investment Adviser. Furthermore, the Code of Ethics provides for trading “blackout periods” which prohibit trading by investment personnel of the Fund within seven calendar days before or after trading by the Fund in the same or equivalent security.

PURCHASE OF SHARES

        Reference is made to “How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus.

        The Fund offers four classes of shares under the Merrill Lynch Select 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 or Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges (“CDSCs”), distribution fees and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See “Shareholder Services — Exchange Privilege.”

        Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares.

        The Merrill Lynch Select Pricing  ^SM System is used by more than 50 registered investment companies advised by the Investment Adviser or its affiliate, FAM. Funds advised by the Investment Adviser or FAM that utilize the Merrill Lynch Select Pricing  ^SM System are referred to herein as “Select Pricing Funds.”

        The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers prior to the close of business on the New York Stock Exchange (the “NYSE”) (generally 4:00 p.m., Eastern time) which includes orders received after the determination of net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE in order to purchase shares at that day’s offering price.

        The Fund or the Distributor may suspend the continuous offering of the Fund’s shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Fund or the Distributor. Neither the Distributor nor the dealers or other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $5.35) to confirm a sale of shares to such customers. Purchases made directly through the Transfer Agent are not subject to the processing fee.

Initial Sales Charge Alternatives — Class A and Class D Shares

        Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charges and, in the case of Class D shares, the account maintenance fee. Although some investors who previously purchased Class A shares may no longer be eligible to purchase Class A shares of other Select Pricing Funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares.

        The term “purchase,” as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term “purchase” also includes purchases by any “company,” as that term is defined in the Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser.

Eligible Class A Investors

        Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors who currently own Class A shares in a shareholder’s 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 retirement or savings plans, including eligible 401(k) plans, may purchase Class A shares at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by MLIM 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 the bank has $3 million or more initially invested in Select Pricing Funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA  ^SM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company serves as trustee and certain purchases made in connection with certain fee-based programs. In addition, Class A shares are offered at net asset value to ML & Co. and its subsidiaries and their directors and employees and to members of the Boards of MLIM/FAM-advised investment companies. Certain persons who acquired shares of certain MLIM/FAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions are met. In addition, Class A shares of the Fund and certain other Select Pricing Funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds in shares of the Fund and certain other Select Pricing Funds.

Class A and Class D Sales Charge Information

Class A Shares
Fiscal Year Ended March 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2000	$134,112	$  9,755	$124,357	$      17
1999	$375,455	$26,209	$349,246	$54,988
1998	$553,366	$43,421	$509,945	$60,049

Class D Shares
Fiscal Year Ended March 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2000	$    297,549	$  19,042	$    278,507	$      42
1999	$1,328,780	$  89,253	$1,239,527	$19,091
1998	$2,040,769	$137,456	$1,903,313	$18,937

        The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.

Reduced Initial Sales Charges

         Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the reduced sales efforts that will be needed in obtaining such investments.

         Reinvested Dividends.    No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends.

        Right of Accumulation.    Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser’s combined holdings of all classes of shares of the Fund and of any other Select Pricing Funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser’s securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation.

        Letter of Intent.    Reduced sales charges are applicable to purchases aggregating $25,000 or more of the Class A or Class D shares of the Fund or any Select Pricing Funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intent. The Letter of Intent is available only to investors whose accounts are established and maintained at the Fund’s Transfer Agent. The Letter of Intent is not available to employee benefit plans for which Merrill Lynch provides plan participant recordkeeping services. The Letter of Intent is not a binding obligation to purchase any amount of Class A or Class D shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Fund and of other Select Pricing Funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to at least 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the further reduced percentage sales charge that would be applicable to a single purchase equal to the total dollar value of the Class A or Class D shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charge on any previous purchase.

        The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intent 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. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions and trade associations. Investors placing orders to purchase Class A or Class D shares of the Fund through Blueprint will acquire the Class A or Class D shares at net asset value plus a sales charge calculated in accordance with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class A and Class D shares of the Fund are being offered at net asset value plus a sales charge  ¹ /2 of 1% for corporate or group IRA programs placing orders to purchase their Class A or Class D shares through Blueprint. Services, including the exchange privilege, available to Class A and Class D investors through Blueprint, however, may differ from those available to other investors in Class A or Class D shares.

        Class A and Class D shares are offered at net asset value to Blueprint participants through the Merrill Lynch Directed IRA Rollover Program (the “IRA Rollover Program”) available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian rollover assets from employer-sponsored retirement and savings plans whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service Agreement.

        Orders for purchases and redemptions of Class A or Class D shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint ^SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

         TMA  ^SM Managed Trusts.    Class A shares are offered at net asset value to TMA  ^SM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services.

         Employee Access  ^SM Accounts.    Provided applicable threshold requirements are met, either Class A or Class D shares are offered at net asset value to Employee Access  ^SM Accounts available through authorized employers. The initial minimum investment for such accounts is $500, except that the initial minimum investment for shares purchased for such accounts pursuant to the Automatic Investment Program is $50.

         Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements.    Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class A or Class D shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at (800) 237-7777.

         Purchase Privilege of Certain Persons.    Directors of the Fund, members of the Boards of other MLIM/FAM-advised investment companies, ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes MLIM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML & Co.) and their directors and employees, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund’s suitability standards.

        Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Financial Consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the Financial Consultant’s previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis; and, second, the investor must establish that such redemption had been made within 60 days prior to the investment in the Fund and the proceeds from the redemption had been maintained in the interim in cash or a money market fund.

        Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated (“notice”) if the following conditions are satisfied: first, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and the shares of such other fund were subject to a sales charge either at the time of purchase or on a deferred basis; and, second, such purchase of Class D shares must be made within 90 days after such notice.

        Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of shares of such other mutual fund and that such shares have been outstanding for a period of no less than six months; and, second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund.

         Closed-End Fund Investment Option.    Class A shares of the Fund and certain other Select Pricing Funds (“Eligible Class A Shares”) are offered at net asset value to shareholders of certain closed-end funds advised by FAM or MLIM 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 from a sale of their closed-end fund shares of common stock in Eligible Class A Shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to buy Class A shares) or Class D shares of the Fund and other Select Pricing Funds (“Eligible Class D Shares”), if the following conditions are met. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Eligible Class D Shares. Second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option.

        Shareholders of certain MLIM/FAM-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.

         Acquisition of Certain Investment Companies.    Class D shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.

         Purchases Through Certain Financial Intermediaries.    Reduced sales charges may be applicable for purchases of Class A or Class D shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to time.

Deferred Sales Charge Alternatives — Class B and Class C Shares

        Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Select Pricing Funds.

        Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor’s dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees.

        The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See “Pricing of Shares — Determination of Net Asset Value” below.

Contingent Deferred Sales Charges — Class B Shares

        Class B shares that are redeemed within four years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the four-year period. A transfer of shares from a shareholder’s account to another account will be assumed to be made in the same order as a redemption.

        The following table sets forth the Class B CDSC:

Year Since Purchase Payment  Made	CDSC as a Percentage of Dollar Amount Subject to Charge
0–1	4.0%
1–2	3.0%
2–3	2.0%
3–4	1.0%
4 and thereafter	None

        To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because of dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the applicable rate in the third year after purchase for shares purchased on or after October 21, 1994).

        The Class B CDSC may be waived on redemptions of shares in connection with certain post-retirement withdrawals from an Individual Retirement Account (“IRA”) or other retirement plan or following the death or disability (as defined in the Internal Revenue Code of 1986, as amended) of a shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability or, if later, reasonably promptly following completion of probate. The Class B CDSC also may be waived on redemptions of shares by certain eligible 401(a) and 401(k) plans in connection with group plans placing orders through the Merrill Lynch Blueprint  ^SM Program. The CDSC may also be 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 may be waived for any Class B shares that were acquired and held at the time of the redemption in an Employee Access ^SM Account available through employers providing eligible 401(k) plans. The Class B CDSC may also be waived for any Class B shares that are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan managed by the MLIM Private Portfolio Group and held in such account at the time of redemption. The Class B CDSC may also be waived or its terms may be modified in connection with certain fee-based programs. The Class B CDSC may also be waived in connection with involuntary termination of an account in which Fund shares are held or for withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See “Shareholder Services — Fee Based Programs” and “—Systematic Withdrawal Plan.”

         Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements.    Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class B shares with a waiver of the CDSC upon redemption, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Such Class B shares will convert into Class D shares approximately ten years after the plan purchases the first share of any Select Pricing Fund. Minimum purchase requirements may be waived or varied for such plans. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at (800) 237-7777.

         Merrill Lynch Blueprint  ^SM Program.    Class B shares are offered to certain participants in Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as trade associations and credit unions. 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.

         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 the average daily net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the “Conversion Date”) on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes.

        In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at the Conversion Date the conversion of Class B shares to Class D shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the Fund.

        In general, Class B shares of equity Select Pricing Funds will convert approximately eight years after initial purchase and Class B shares of taxable and tax-exempt fixed income Select Pricing Funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified for investors that participate in certain fee-based programs. See “Shareholder Services —Fee-Based Programs.”

        Class B shareholders of the Fund exercising the exchange privilege described under “Shareholder Services —Exchange Privilege” will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange.

        Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered.

Contingent Deferred Sales Charges — Class C Shares

        Class C shares that are redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder’s account to another account will be assumed to be made in the same order as a redemption. The Class C CDSC may be waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plans. See “Shareholder Services—Systematic Withdrawal Plan.” The Class C CDSC of the Fund and certain other Select Pricing Funds may be waived with respect to Class C shares purchased by an investor with the net proceeds of a tender offer made by certain MLIM/FAM-advised closed end funds, including Merrill Lynch Senior Floating Rate Fund II, Inc. Such waiver is subject to the requirement that the tendered shares shall have been held by the investor for a minimum of one year, and to such other conditions as are set forth in the prospectus for the related closed end fund.

Class B and Class C Sales Charge Information

Class B Shares*
Fiscal Year Ended March 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
2000	$6,595,342	$6,595,342
1999	$5,913,754	$5,913,754
1998	$4,375,961	$4,375,961
*  Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder’s participation in certain fee-based programs.
Class C Shares
Fiscal Year Ended March 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
2000	$    134,746	$    134,746
1999	$    277,813	$    277,813
1998	$      91,818	$      91,818

        Merrill Lynch compensates its Financial Consultants for selling Class B and Class C shares at the time of purchase from its own funds. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (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. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities Dealers, Inc. (the “NASD”) asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below.

Distribution Plans

        Reference is made to “Fees and Expenses” in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a “Distribution Plan”) with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes.

        The Distribution Plans for each of the Class B, Class C and Class D shares 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 selected securities dealers, including Merrill Lynch, or other financial intermediaries (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class B, Class C and Class D shares. Each of those classes has exclusive voting rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan).

        The Distribution Plans for Class B and Class C shares provides that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor and selected securities dealers, including Merrill Lynch, or other financial intermediaries (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, selected securities dealers and other financial intermediaries for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through selected securities dealers and other financial intermediaries without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants, selected securities dealers and other financial intermediaries in connection with the sale of the Class B and Class C shares.

        The Fund’s Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and each related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Directors shall be committed to the discretion of the non-interested Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that each Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the non-interested Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders and all material amendments are required to be approved by the vote of Directors, including a majority of the non-interested Directors who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of the Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Distribution Plan or such report, the first two years in an easily accessible place.

        Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans annually, as of December 31 of each year, on a “fully allocated accrual” basis and quarterly on a “direct expense and revenue/cash” basis. On the fully allocated accrual basis, revenues consist of the account maintenance fees, distribution fees, the CDSCs and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and CDSCs and the expenses consist of financial consultant compensation.

        As of December 31, 1999, the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch for the period since the commencement of operations of Class B shares exceeded the fully allocated accrual expenses by approximately $36,033,000 (1.01% of Class B net assets at that date). As of March 31, 2000, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $265,961,856 (9.29% of Class B net assets at that date). As of December 31, 1999, the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch for the period since the commencement of operations of Class C shares exceeded the fully allocated accrual revenues by approximately $1,628,000 (.43% of Class C net assets at that date). As of March 31, 2000, direct cash expenses for the period since the commencement of operations of Class C shares exceeded direct cash expenses by $12,791,729 (4.14% of Class C net assets at that date).

        For the fiscal year ended March 31, 2000, the Fund paid the Distributor $40,069,311 pursuant to the Class B Distribution Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $4.0 billion), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class B shares. For the fiscal year ended March 31, 2000, the Fund paid the Distributor $4,201,316 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of approximately $420.1 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 March 31, 2000, the Fund paid the Distributor $3,928,515 pursuant to the Class D Distribution Plan (based on average daily net assets subject to such Class D Distribution Plan of approximately $1.6 billion), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class D shares.

Limitations on the Payment of Deferred Sales Charges

        The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the “voluntary maximum”) in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made.

        The following table sets forth comparative information as of March 31, 2000 with respect to the Class B and Class C shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and, with respect to the Class B shares, the Distributor’s voluntary maximum.

	Data Calculated as of March 31, 2000
	(in thousands)
	Eligible Gross Sales(1)	Allowable Aggregate Sales Charge(2)	Allowable Interest on Unpaid Balance(3)	Maximum Amount Payable	Amounts Previously Paid to Distributor(4)	Aggregate Unpaid Balance	Annual Distribution Fee at Current Net Asset Level(5)
Class B Shares for the period October     21, 1988 (commencement of     operations) to March 31, 2000
Under NASD Rule as Adopted	$6,959,647	$433,805	$147,560	$ 581,365	$302,426	$278,939	$21,476
Under Distributor’s Voluntary Waiver	$6.959,647	$433,805	$  35,971	$  469,776	$302,426	$167,350	$21,476
Class C Shares, for the period October     21, 1994 (commencement of     operations) to March 31, 2000
Under NASD Rule as Adopted	$    745,560	$  46,411	$  12,709	$    59,120	$  14,276	$  44,843	$  2,318

(1) Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares acquired through dividend reinvestment and the exchange privilege.

(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund (“Summit”) which are not reflected in Eligible Gross Sales. Shares of Summit can only be purchased by exchange from another fund (the “redeemed fund”). Upon such an exchange, the maximum allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption. This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made.

(3) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule.

(4) Consists of CDSC payments, distribution fee payments and accruals. See “What are the Fund’s fees and expenses?” in the Prospectus. Of the distribution fee payments made with respect to Class B shares prior to July 7, 1993 under the distribution plan in effect at that time, at a 1.0% rate, 0.75% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in Class A shares in conjunction with the shareholder’s participation in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFA  ^SM ) Program (the “MFA Program”). The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA Program.

(5) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B and Class C shares).

REDEMPTION OF SHARES

        Reference is made to “How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus.

        The Fund is required to redeem for cash all shares of the Fund upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption.

        The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than seven days only for any period during which trading on the NYSE is restricted as determined by the Commission or the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of the Fund.

        The value of shares at the time of redemption may be more or less than the shareholder’s cost, depending in part on the market value of the securities held by the Fund at such time.

        The Fund has entered into a joint committed line of credit with other investment companies advised by the Investment Adviser and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances.

Redemption

        A shareholder wishing to redeem shares held with the Transfer Agent may do so without charge by tendering the shares directly to the Transfer Agent at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. Redemption requests should not be sent to the Fund. The redemption request in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent’s register. The signature(s) on the redemption requests may require a guarantee by an “eligible guarantor institution” as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. In the event a signature guarantee is required, notarized signatures are not sufficient. In general, signature guarantees are waived on redemptions of less than $50,000 as long as the following requirements are met: (i) all requests require the signature(s) of all persons in whose name(s) shares are recorded on the Transfer Agent’s register; (ii) all checks must be mailed to the stencil address of record on the Transfer Agent’s register and (iii) the stencil address must not have changed within 30 days. Certain rules may apply regarding certain account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship, contra broker transactions, and institutional accounts. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority.

        A shareholder may also redeem shares held with the Transfer Agent by telephone request. To request a redemption from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder of record and be for an amount less than $50,000. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The shares being redeemed must have been held for at least 15 days. Telephone redemption requests will not be honored in the following situations: the accountholder is deceased, the proceeds are to be sent to someone other than the shareholder of record, funds are to be wired to the client’s bank account, a systematic withdrawal plan is in effect, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced, the address on the account has changed within the last 30 days or share certificates have been issued on the account.

        Since this account feature involves a risk of loss from unauthorized or fraudulent transactions, the Transfer Agent will take certain precautions to protect your account from fraud. Telephone redemption may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

        For shareholders redeeming directly with the Transfer Agent, payments will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of such Fund shares, which will not usually exceed 10 days. In the event that a shareholder account held directly with the Transfer Agent contains a fractional share balance, such fractional share balance will be automatically redeemed by the Fund.

Repurchase

        The Fund also will repurchase Fund shares through a shareholder’s listed selected securities dealer or other financial intermediary. The Fund normally will accept orders to repurchase Fund shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the close of business on the NYSE, in order to obtain that day’s closing price.

        The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch, another selected securities dealer or other financial intermediary may charge its customers a processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase of shares to such customers. Repurchases made directly through the Transfer Agent on accounts held at the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. However, a shareholder whose order for repurchase is rejected by the Fund may redeem Fund shares as set forth above.

Reinstatement Privilege — Class A and Class D Shares

         Shareholders who have redeemed their Class A or Class D shares of the Fund have a privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor’s Merrill Lynch Financial Consultant within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds.

PRICING OF SHARES

Determination of Net Asset Value

        Reference is made to “How Shares are Priced” in the Prospectus.

        The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The NYSE is not open for trading on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

        Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Manager and Distributor are accrued daily.

        The per share net asset value of Class B, Class C and Class D shares generally will be lower than the per share net asset value of Class A shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares, and the daily expense accruals of the account maintenance fees applicable with respect to the Class D shares; moreover, the per share net asset value of the Class B and Class C shares generally will be lower than the per share net asset value of Class D shares reflecting the daily expense accruals of the distribution fees and higher transfer agency fees applicable with respect to Class B and Class C shares of the Fund. It is expected, however, that the per share net asset value of the four classes will tend to converge (although not necessarily meet) immediately after the payment of dividends, which will differ by approximately the amount of the expense accrual differentials between the classes.

        Portfolio securities that 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 for long positions, and at the last available ask price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Directors as the primary market. Long positions in securities traded in the OTC market are valued at the last available bid price in the OTC market prior to the time of valuation. Short positions in securities traded in the OTC market are valued at the last available ask price in the OTC market prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Other investments, including financial futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are stated at fair value as determined in good faith by or under the direction of the Directors of the Fund. Such valuations and procedures will be reviewed periodically by the Directors.

        Generally, trading in non-U.S. securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund’s net asset value.

Computation of Offering Price Per Share

        An illustration of the computation of the offering price for Class A, Class B, Class C and Class D shares of the Fund based on the value of the Fund’s net assets and number of shares outstanding on March 31, 2000 is set forth below.

	Class A	Class B	Class C	Class D
Net Assets	$2,721,502,638	$2,853,698,663	$308,150,542	$1,428,120,496
Number of Shares Outstanding	83,337,007	89,822,342	9,826,762	43,837,364
Net Asset Value Per Share (net assets divided by number of shares      outstanding)	$               32.66	$               31.77	$             31.36	$               32.58
Sales Charge (for Class A and Class D      shares: 5.25% of offering price; 5.54%      of net asset value per share)*	1.81	**	**	1.81
Offering Price	$               34.47	$               31.77	$             31.36	$               34.39

 * Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.

** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares. See “Purchase of Shares —  Deferred Sales Charge Alternatives — Class B and Class C Shares” herein.

PORTFOLIO TRANSACTIONS AND BROKERAGE

        Subject to policies established by the Board of Directors of the Fund, the Investment Adviser is primarily responsible for the execution of the Fund’s portfolio transactions and the allocation of brokerage. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities and does not use any particular broker or dealer. In executing transactions with brokers and dealers, the Investment Adviser seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firm’s risk in positioning a block of securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund does not necessarily pay the lowest spread or commission available. In addition, consistent with the Conduct Rules of the NASD and policies established by the Board of Directors of the Fund, the Manager may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the Fund neither qualifies nor disqualifies such broker or dealer to execute transactions for the Fund.

        Subject to obtaining the best net results, brokers who provide supplemental investment research services to the Investment Adviser 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 Investment Adviser under the Investment Advisory Agreement, and the expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. If in the judgment of the Investment Adviser the Fund will benefit from supplemental research services, the Investment Adviser is authorized to pay brokerage commissions to a broker furnishing such services that are in excess of commissions that another broker may have charged for effecting the same transaction. Certain supplemental research services may primarily benefit one or more other investment companies or other accounts for which the Investment Adviser exercises investment discretion. Conversely, the Fund may be the primary beneficiary of the supplemental research services received as a result of portfolio transactions effected for such other accounts or investment companies.

        The Fund anticipates that its brokerage transactions involving securities of issuers domiciled in countries other than the United States generally will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transaction costs on foreign stock exchange transactions generally are higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States.

         Information about the brokerage commissions paid by the Fund, including commissions paid to Merrill Lynch, is set forth in the following table:

Period	Aggregate Brokerage Commissions Paid	Commissions Paid to Merrill Lynch
Fiscal year ended March 31, 2000	$8,172,216	$704,936
Fiscal year ended March 31, 1999	$6,476,661	$429,881
Fiscal year ended March 31, 1998	$5,117,527	$279,047

        For the fiscal year ended March 31, 2000, the brokerage commissions paid to Merrill Lynch represented 8.63% of the aggregate brokerage commissions paid and involved 9.69% of the Fund’s dollar amount of transactions involving payment of brokerage commissions.

        The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Fund will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which Merrill Lynch is a member or in a private placement in which Merrill Lynch serves as placement agent except pursuant to procedures approved by the Board of Directors of the Fund that either comply with rules adopted by the Commission or with interpretations of the Commission staff. See “Investment Objective and Policies—Investment Restrictions.”

        Section 11(a) of the Exchange Act generally prohibits members of the United States national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Fund and annual statements as to aggregate compensation will be provided to the Fund.

        The Board of Directors of the Fund has considered the possibility of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Fund to the Investment Adviser. After considering all factors deemed relevant, the Board of Directors made a determination not to seek such recapture. The Board will reconsider this matter from time to time.

        Because of different objectives or other factors, a particular security may be bought for one or more clients of the Investment Adviser or its affiliates when one or more clients of the Investment Adviser or an affiliate are selling the same security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Investment Adviser or an affiliate acts as manager transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or an affiliate during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price.

SHAREHOLDER SERVICES

        The Fund offers a number of shareholder services and investment plans described below that are designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans and instructions as to how to participate in the various services or plans, or how to change options with respect thereto, can be obtained from the Fund, by calling the telephone number on the cover page hereof, or from the Distributor, Merrill Lynch, selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors and certain of these services are not available to investors who place purchase orders for the Fund’s shares through the Merrill Lynch Blueprint ^SM Program.

Investment Account

        Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of dividends. The statements will also show any other activity in the account since the previous statement. Shareholders will also receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of dividends. A shareholder with an account held at the Transfer Agent may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. A shareholder may also maintain an account through Merrill Lynch, selected securities dealer or other financial intermediary. Upon the transfer of shares out of a Merrill Lynch, selected securities dealer or other financial intermediary brokerage account, an Investment Account in the transferring shareholder’s name may be opened automatically at the Transfer Agent.

        Share certificates are issued only for full shares and only upon the specific request of a shareholder who has an Investment Account. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent.

         Shareholders may transfer their Fund shares from Merrill Lynch, selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into a selected dealer agreement with Merrill Lynch. Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may purchase additional shares of funds owned before the transfer and all future trading of these assets must be coordinated by the new firm. If a shareholder wishes to transfer his or her shares to a securities dealer or other financial intermediary that has not entered into a selected dealer agreement with Merrill Lynch, the shareholder must either (i) redeem his or her shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. The shareholder may also request the new securities dealer to maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer for the benefit of the shareholder whether the securities dealer has entered into a selected dealer agreement or not.

         Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from Merrill Lynch to another securities dealer or other financial intermediary should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares, paying any applicable CDSC, so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares.

Exchange Privilege

        U.S. shareholders of each class of shares of the Fund have an exchange privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund (“Summit”), a series of Financial Institutions Series Trust, which is a Merrill Lynch-sponsored money market fund specifically designated for exchange by holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes.

         Exchanges of Class A and Class D Shares.     Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second Select Pricing Fund if the shareholder holds any Class A shares of the second fund in the account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second Select Pricing Fund, but does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second Select Pricing Fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class D shares are exchangeable with shares of the same class of other Select Pricing Funds.

        Exchanges of Class A or Class D shares outstanding (“outstanding Class A or Class D shares”) for Class A or Class D shares of other Select Pricing Funds or for Class A shares of Summit, (“new Class A or Class D shares”) are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the “sales charge previously paid” shall include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A or Class D shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class A or Class D shares on which the dividend was paid. Based on this formula, Class A and Class D shares generally may be exchanged into the Class A or Class D shares, respectively, of the other funds with a reduced sales charge or without a sales charge.

         Exchanges of Class B and Class C Shares.    Certain Select Pricing Funds with Class B or Class C shares outstanding (“outstanding Class B or Class C shares”) offer to exchange their Class B or Class C shares for Class B or Class C shares, respectively, of certain other Select Pricing Funds or for Class B shares of Summit (“new Class B or Class C shares”) on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the CDSC that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is “tacked” to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. (“Special Value Fund”) after having held the Fund’s Class B shares for two and a half years. The 2% CDSC that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of 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 Special Value Fund Class B shares for more than five years.

        Exchanges for Shares of a Money Market Fund.    Class A and Class D shares are exchangeable for Class A shares of Summit and Class B and Class C shares are exchangeable for Class B shares of Summit. Class A shares of Summit have an exchange privilege back into Class A or Class D shares of Select Pricing Funds; Class B shares of Summit have an exchange privilege back into Class B or Class C shares of Select Pricing Funds and, in the event of such an exchange, the period of time that Class B shares of Summit are held will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Class B shares. Class B shares of Summit will be subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Class B shares. This exchange privilege does not apply with respect to certain Merrill Lynch fee-based programs for which alternative exchange arrangements may exist. Please see your Merrill Lynch Financial Consultant for further information.

        Prior to October 12, 1998, exchanges from the Fund and other Select Pricing Funds into a money market fund were directed to certain Merrill Lynch-sponsored money market funds other than Summit. Shareholders who exchanged Select Pricing Fund shares for shares of such other money market funds and subsequently wish to exchange those money market fund shares for shares of the Fund will be subject to the CDSC schedule applicable to such Fund shares, if any. The holding period for the money market fund shares will not count toward satisfaction of the holding period requirement for reduction of the CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. However, the holding period for Class B or Class C shares of the Fund received in exchange for such money market fund shares will be aggregated with the holding period for the fund shares originally exchanged for such money market fund shares for purposes of reducing the CDSC or satisfying the Conversion Period.

         Exchanges by Participants in the MFA Program.    The exchange privilege is modified with respect to certain retirement plans which participate in the MFA Program. Such retirement plans may exchange Class B, Class C or Class D shares that have been held for at least one year for Class A shares of the same fund on the basis of relative net asset values in connection with the commencement of participation in the MFA Program, i.e., no CDSC will apply. The one year holding period does not apply to shares acquired through reinvestment of dividends. Upon termination of participation in the MFA Program, Class A shares will be re-exchanged for the class of shares originally held. For purposes of computing any CDSC that may be payable upon redemption of Class B or Class C shares so reacquired, or the Conversion Period for Class B shares so reacquired, the holding period for the Class A shares will be “tacked” to the holding period for the Class B or Class C shares originally held. The Fund’s exchange privilege is also modified with respect to purchases of Class A and Class D shares by non-retirement plan investors under the MFA Program. First, the initial allocation of assets is made under the MFA Program. Then, any subsequent exchange under the MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other Select Pricing Fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA Program.

         Exercise of the Exchange Privilege.    To exercise the exchange privilege, a shareholder should contact his or her Merrill Lynch Financial Consultant, who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other Select Pricing Funds with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealers or other financial intermediaries. The Fund reserves the right to require a properly completed Exchange Application.

        Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To request an exchange from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the accountholder is deceased, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

        This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor.

Fee-Based Programs

        Certain Merrill Lynch and other financial intermediary fee-based programs, including pricing alternatives for securities transactions (each referred to in this paragraph as a “Program”), may permit the purchase of Class A shares at net asset value. Under specified circumstances, participants in certain Programs may deposit other classes of shares which will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch or other financial intermediary, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program’s client agreement and from the Transfer Agent at 1-800-MER-FUND (1-800-637-3863).

Retirement and Education Savings Plans

         Individual retirement accounts and other retirement and education savings plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. There may be fees associated with investing through these plans. Information with respect to these plans is available on request from Merrill Lynch.

        Dividends received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans. Different tax rules apply to Roth IRA plans and education savings plans. Investors considering participation in any retirement or education savings plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan.

Automatic Investment Plans

        A shareholder may make additions to an Investment Account at any time by purchasing Class A shares (if he or she is an eligible Class A investor) or Class B, Class C or Class D shares at the applicable public offering price. These purchases may be made either through the shareholder’s securities dealer, or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Fund’s Automatic Investment Plan. The Fund would be authorized, on a regular basis, to provide systematic additions to the Investment Account of such shareholder through charges of $50 or more to the regular bank account of the shareholder by either pre-authorized checks or automated clearing house debits. Alternatively, an investor that maintains a CMA® or CBA® Account may arrange to have periodic investments made in the Fund in amounts of $100 ($1 or more for retirement accounts) or more through the CMA® or CBA® Automated Investment Program.

Automatic Dividend Reinvestment Plan

        Unless specific instructions are given as to the method of payment, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund determined as of the close of business on the NYSE on the monthly payment date for such dividends. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends.

         Shareholders may, at any time, by written notification to Merrill Lynch if their account is maintained with Merrill Lynch, or by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained with the Transfer Agent, elect to have subsequent dividends paid in cash, rather than reinvested in shares of the Fund or vice versa (provided that, in the event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder’s bank account.

Systematic Withdrawal Plan

        A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders that have acquired shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more.

        At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder’s account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and the class of shares to be redeemed. Redemptions will be made at net asset value determined as of the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the shares will be redeemed as of the close of business on the NYSE on the following business day. The check for the withdrawal payment will be mailed or the direct deposit will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends on all shares in the Investment Account are reinvested automatically in Fund shares. A shareholder’s Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.

        With respect to redemptions of Class B or Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See “Purchase of Shares — Deferred Sales Charge Alternatives —Class B and Class C Shares.” Where the systematic withdrawal plan is applied to Class B shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will be applied thereafter to Class D shares if the shareholder so elects. If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Merrill Lynch Financial Consultant.

         Withdrawal payments should not be considered as dividends. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder’s original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors that maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year’s scheduled withdrawals or $1,200, whichever is greater. Automatic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals.

         Alternatively, a shareholder whose shares are held within a CMA® or CBA® or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA® or CBA® Systematic Redemption Program. The minimum fixed dollar amount redeemable is $50. The proceeds of systematic redemptions will be posted to the shareholder’s account three business days after the date the shares are redeemed. All redemptions are made at net asset value. A shareholder may elect to have his or her shares redeemed on the first, second, third or fourth Monday of each month, in the case of monthly redemptions, or of every other month, in the case of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the shareholder may select the month in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The CMA® or CBA® Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automated Investment Program. For more information on the CMA® or CBA® Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch Financial Consultant.

DIVIDENDS AND TAXES

Dividends

        The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such net investment income will be paid at least annually. All net realized capital gains, if any, will be distributed to the Fund’s shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal year, the Fund has net income from certain foreign currency transactions, such income will be distributed at least annually.

        See “Shareholder Services — Automatic Dividend Reinvestment Plan” for information concerning the manner in which dividends may be reinvested automatically in shares of the Fund. A shareholder whose account is maintained at the Transfer Agent or whose account is maintained through Merrill Lynch, another selected securities dealer or other financial intermediary may elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on Class B and Class C shares will be lower than the per share dividends on Class A and Class D shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends on Class D shares will be lower than the per share dividends on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See “Pricing of Shares—Determination of Net Asset Value.”

Taxes

        The Fund intends to continue to qualify for the special tax treatment afforded 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 that 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.

        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.

        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). Certain categories of capital gains are taxable at different rates. Generally not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amount of any capital gain dividends as well as any amount of capital gain dividends in the 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 that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared.

        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 the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares.

        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.

        Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the U.S. withholding tax.

        Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments (“backup withholding”). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund’s knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding.

        Dividends 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.

        The Fund may invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities (“high yield bonds”), as previously described. Some of these high yield bonds may be purchased at a discount and may therefore cause the Fund to accrue and distribute income before amounts due under the obligations are paid. In addition, a portion of the interest payments on such high yield securities may be treated as dividends for Federal income tax purposes; in such case, if the issuer of such high yield/high risk securities is a domestic corporation, dividend payments by the Fund will be eligible for the dividends received deduction to the extent of the deemed dividend portion of such interest payments.

        The Fund may make investments that produce taxable income that is not matched by a corresponding receipt of cash or an offsetting loss deduction. Such investments would include obligations that have original issue discount or that accrue discount, obligations that accrue negative amortization and obligations that are subordinated in the mortgaged-backed or asset-backed securities structure. Such taxable income would be treated as income earned by the Fund and would be subject to the distribution requirements of the Code. Because such income may not be matched by a corresponding receipt of cash by the Fund or an offsetting deduction, the Fund may be required to borrow money or dispose of other securities to be able to make distributions to shareholders. The Fund intends to make sufficient and timely distributions to shareholders so as to qualify for treatment as a RIC at all times.

        The Fund may invest up to 10% of its total assets in securities of other investment companies. If the Fund purchases shares of an investment company (or similar investment entity) organized under foreign law, the Fund will be treated as owning shares in a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. The Fund may be subject to U.S. federal income tax, and an additional tax in the nature of interest (the “interest charge”), on a portion of the distributions from such a company and on gain from the disposition of the shares of such a company (collectively referred to as “excess distributions”), even if such excess distributions are paid by the Fund as a dividend to its shareholders. The Fund may be eligible to make an election with respect to certain PFICs in which it owns shares that will allow it to avoid the taxes on excess distributions. However, such election may cause the Fund to recognize income in a particular year in excess of the distributions received from such PFICs. Alternatively, the Fund could elect to “mark to market” at the end of each taxable year all shares that it holds in PFICs. If it made this election, the Fund would recognize as ordinary income any increase in the value of such shares over their adjusted basis and as ordinary loss any decrease in such value to the extent it did not exceed prior increases. By making the mark-to-market election, the Fund could avoid imposition of the interest charge with respect to its distributions from PFICs, but in any particular year might be required to recognize income in excess of the distributions it received from PFICS and its proceeds from dispositions of PFIC stock.

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.

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 stocks, securities or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, futures or forward foreign exchange contracts will be valued for purposes of the RIC diversification requirements applicable to the Fund.

        Under Code Section 988, special rules are provided for certain transactions in a foreign currency other than the taxpayer’s functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from futures contracts that are not “regulated futures contracts” and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment for such transactions. 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 such shareholder’s 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 that are derived from interest on U.S. Government obligations. State law varies as to whether dividend income attributable to U.S. Government obligations is exempt from state income tax.

         Shareholders are urged to consult their own tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund.

PERFORMANCE DATA

        From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A, Class B, Class C and Class D shares in accordance with formulas 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 as in the case of Class B and Class C shares and the maximum sales charge in the case of Class A and D shares. Dividends paid by the Fund with respect to all shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that account maintenance and distribution 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 annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time.

        Set forth below is total return information for the Class A, Class B, Class C and Class D shares of the Fund for the periods indicated.

	Class A Shares		Class B Shares		Class C Shares	Class D Shares
Period	Expressed as a percentage based on a hypothetical $1,000 investment		Expressed as a percentage based on a hypothetical $1,000 investment		Expressed as a percentage based on a hypothetical $1,000 investment	Expressed as a percentage based on a hypothetical $1,000 investment
	Average Annual Total Return (including maximum applicable sales charges)
One Year Ending March 31, 2000	(0.92%	)	(0.22%	)	2.57%	(1.18%	)
Five Years Ending March 31, 2000	12.52%		12.59%		12.58%	12.24%
Ten Years Ending March 31, 2000	11.81%		11.28%		—	—
Inception (October 21, 1994) to March 31, 2000	—		—		12.71%	12.47%

        Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. The Fund’s total return will vary depending on market conditions, the securities comprising the Fund’s portfolio, the Fund’s operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost.

        In order to reflect the reduced sales charges in the case of Class A or Class D shares, or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under “Purchase of Shares,” the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC, and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of CDSCs, a lower amount of expenses may be deducted.

        On occasion, the Fund may compare its performance to various indices including the Merrill Lynch Master Bond Index, the Standard & Poor’s 500 Index, the Dow Jones Industrial Average, or to performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc. (“Morningstar”), CDA Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune Magazine or other industry publications. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard deviation and beta. In addition, from time to time, the Fund may include the Fund’s Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature. The Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political, or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance, discussion of the Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period.

GENERAL INFORMATION

Description of Shares

        The Fund, a diversified, open-end investment company, was organized as a Maryland corporation on July 29, 1987 and is the successor to a fund that was organized in Delaware under the name Lionel D. Edie Capital Fund, Inc. in September 1973, and changed its name to Merrill Lynch Capital Fund, Inc. in June 1976. On approximately July 1, 2000, the Fund changed its name to Merrill Lynch Balanced Capital Fund, Inc. The authorized capital stock of the Fund consists of 1,300,000,000 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. Class A consists of 400,000,000 shares, Class B consists of 500,000,000 shares and Classes C and D each consist of 200,000,000 shares. Shares of Class A, Class B, Class C and Class D Common Stock represent interests in the same assets of the Fund and have identical voting, dividend, liquidation and other rights and the same terms and conditions 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 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 full share held and fractional votes for fractional shares held in 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 act upon any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Each share of Class A, Class B, Class C and Class D 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. Stock certificates are issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case.

Independent Auditors

        Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village Boulevard, Princeton, New Jersey 08540 has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to approval by the independent Directors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund.

Custodian

        The Bank of New York, 100 Church Street, New York, New York 10286, acts as custodian of the Fund’s assets (the “Custodian”). Under its contract with the Fund, the Custodian is authorized, among other things, to establish separate accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside of the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Fund’s cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund’s investments.

Transfer Agent

        Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund’s Transfer Agent. The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See “How to Buy, Sell, Transfer and Exchange Shares—Through the Transfer Agent” in the Prospectus.

Legal Counsel

        Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is counsel for the Fund.

Reports to Shareholders

        The fiscal year of the Fund ends on March 31 of each year. The Fund sends to its shareholders, at least semi-annually, reports showing the Fund’s portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year, shareholders will receive Federal income tax information regarding dividends.

Shareholder Inquiries

         Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Statement of Additional Information.

Additional Information

        The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made.

        Under a separate agreement, ML & Co. has granted the Fund the right to use the “Merrill Lynch” name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund has granted ML & Co. under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by ML & Co.

        To the knowledge of the Fund, the following entities owned beneficially 5% or more of a class of the Fund’s shares as of June 1, 2000:

Name	Address	Percent of Class
Merrill Lynch Trust Company	P.O. Box 30532 New Brunswick, NJ 08989	55.6% of Class A
Merrill Lynch Trust Company	P.O. Box 30532 New Brunswick, NJ 08989	27.5% of Class D

FINANCIAL STATEMENTS

        The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business day.

APPENDIX A

RATINGS OF DEBT SECURITIES AND PREFERRED STOCK

Description of Moody’s Investors Service, Inc.’s (“Moody’s”) Corporate Ratings

Aaa Bonds which are rated “Aaa” are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edged.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.

Aa Bonds which are rated “Aa” are judged to be of high quality by all standards. Together with the “Aaa” group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in “Aaa” securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in “Aaa” securities.

A Bonds which are rated “A” possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.

Baa Bonds which are rated “Baa” are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.

Ba Bonds which are rated “Ba” are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.

B Bonds which are rated “B” generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

Caa Bonds which are rated “Caa” are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.

Ca Bonds which are rated “Ca” represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.

C Bonds which are rated “C” are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

         Note:  Moody’s applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Description of Moody’s Short-Term Debt Ratings

         Moody’s short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody’s makes no representation that rated bank or insurance company obligations are exempt from registration under the Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody’s represent that any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer. Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:

         Prime-1.    Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics:

• Leading market positions in well-established industries.

• High rates of return on funds employed.

• Conservative capitalization structure with moderate reliance on debt and ample asset protection.

• Broad margins in earnings coverage of fixed financial charges and high internal cash generation.

• Well-established access to a range of financial markets and assured sources of alternate liquidity.

         Prime-2.    Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.

         Prime-3.    Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.

        Not Prime.    Issuers rated Not Prime do not fall within any of the Prime rating categories.

        If any issuer represents to Moody’s that its short-term debt obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within the parentheses beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody’s evaluates the financial strength of the affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody’s makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement.

         Moody’s ratings are opinions, not recommendations to buy or sell, and their accuracy is not guaranteed. A rating should be weighed solely as one factor in an investment decision and you should make your own study and evaluation of any issuer whose securities or debt obligations you consider buying or selling.

Description of Moody’s Preferred Stock Ratings

        Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.

        Preferred stock rating symbols and their definitions are as follows:

aaa An issue which is rated “aaa” is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks.

aa An issue which is rated “aa” is considered to be a high-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future.

a An issue which is rated “a” is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the “aaa” and “aa” classification, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.

baa An issue which is rated “baa” is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.

ba An issue which is rated “ba” is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.

b An issue which is rated “b” generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.

caa An issue which is rated “caa” is likely to be in arrears on dividends payments. This rating designation does not purport to indicate the future status of payments.

ca An issue which is rated “ca” is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments.

c This is the lowest rated class of preferred or preference stock. Issues so rated can thus be regarded as having extremely poor prospects of ever attaining any real investment standing.

         Note:  Moody’s applies numerical modifiers 1, 2 and 3 in each rating classification; the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issuer ranks in the lower end of its generic rating category.

Description of Standard & Poor’s (“Standard & Poor’s”) Corporate Debt Ratings

        A Standard & Poor’s corporate or municipal debt rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation.

        The debt rating is not recommendation to purchase, sell or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

        The ratings are based on current information furnished by the obligors or obtained by Standard & Poor’s from other sources it considers reliable. Standard & Poor’s does not perform any audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

        The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of payment — capacity and willingness of the obligor to meet its financial commitment on the obligation in accordance with the terms of the obligation;

II. Nature of and provisions of the obligation; and

III. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

AAA Debt rated “AAA” has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

AA Debt rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A Debt rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB Debt rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Debt rated “BB”, “B”, “CCC”, “CC” and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such debt will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB Debt rated “BB” is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B Debt rated “B” is more vulnerable to non-payment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments on the obligation.

CCC Debt rated “CCC” is currently vulnerable to non-payment, and is dependent upon favorable business, financial, or economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC The rating “CC” is currently highly vulnerable to non-payment.

C The “C” rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.

D Debt rated “D” is in payment default. The “D” rating category is used when interest payments or principal repayments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.

r The ‘r’ highlights derivative, hybrid, and certain other obligations that Standard & Poor’s believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an ‘r’ symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.

        Plus (+) or minus (-):  The ratings from “AA” to “CCC” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

         N.R.  indicates not rated.

        Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.

        Bond Investment Quality Standards:  Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories (“AAA”, “AA”, “A”, “BBB”, commonly known as “investment grade” ratings) are generally regarded as eligible for bank investment. Also, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries in general.

Description of Standard & Poor’s Commercial Paper Ratings

        A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from “A” for the highest-quality obligations to “D” for the lowest. These categories are as follows:

A-1 A short-term obligation rated A-1 is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B A short-term obligation rated B is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

C A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

D Debt rated “D” is in payment default. The “D” rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period.

        A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to Standard & Poor’s by the issuer or obtained by Standard & Poor’s from other sources it considers reliable. Standard & Poor’s does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information or based on other circumstances.

CODE #: 10257-07-00