-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uhp+YP83Gg2/GZulbXULQJqS22fdU9mCqVEXH5/JCQ6MK3gynbKUR5e9X5TpPxVP JImkFIkWAc61XHc79woUuw== 0000950123-96-003925.txt : 19960801 0000950123-96-003925.hdr.sgml : 19960801 ACCESSION NUMBER: 0000950123-96-003925 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960731 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH CAPITAL FUND INC CENTRAL INDEX KEY: 0000110055 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 132757134 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-49007 FILM NUMBER: 96601592 BUSINESS ADDRESS: STREET 1: P O BOX 9066 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P.O. BOX 9066 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 FORMER COMPANY: FORMER CONFORMED NAME: LIONEL D EDIE CAPITAL FUND INC DATE OF NAME CHANGE: 19760810 497 1 MERRILL LYNCH CAPITAL FUND 1 PROSPECTUS JULY 26, 1996 MERRILL LYNCH CAPITAL FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800 Merrill Lynch Capital Fund, Inc. (the "Fund") seeks to achieve the highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. This 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, 1996, approximately 46.7% 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, please see "Investment Objective and Policies" on page 10. Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 3. Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609) 282-2800], or from other securities dealers which have entered into dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum subsequent purchase is $50, except that for retirement plans the minimum initial purchase is $100 and the minimum subsequent purchase is $1. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ This Prospectus is a concise statement of information about the Fund that is relevant to making an investment in the Fund. This Prospectus should be retained for future reference. A statement containing additional information about the Fund, dated July 26, 1996 (the "Statement of Additional Information"), has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling or by writing the Fund at the above telephone number or address. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ------------------------ MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR 2 FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows.
CLASS A(a) CLASS B(b) CLASS C CLASS D ---------- ----------------------- ------------ ---------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)...... 5.25%(c) None None 5.25%(c) Sales Charge Imposed on Dividend Reinvestments............................ None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower)............ None(d) 4.0% during the first 1.0% for one None(d) year, decreasing 1.0% year annually thereafter to 0.0% after the fourth year Exchange Fee............................... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Advisory Fees(e)................ 0.40% 0.40% 0.40% 0.40% 12b-1 Fees(f): Account Maintenance Fees................. None 0.25% 0.25% 0.25% Distribution Fees........................ None 0.75% 0.75% None (Class B shares convert to Class D shares automatically after approximately eight years and cease being subject to distribution fees) Other Expenses: Custodial Fees........................ 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(g)........ 0.13% 0.15% 0.16% 0.13% Other................................. 0.02% 0.02% 0.02% 0.02% ----- ----- ----- ----- Total Other Expenses.............. 0.16% 0.18% 0.19% 0.16% ----- ----- ----- ----- Total Fund Operating Expenses.............. 0.56% 1.58% 1.59% 0.81% ===== ===== ===== =====
- --------------- (a) Class A shares are sold to a limited group of investors including existing Class A shareholders, certain retirement plans and certain investment programs. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page 17. (b) Class B shares convert to Class D shares automatically approximately eight years after initial purchase. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares"--page 19. (c) Reduced for purchases of $25,000 and over, and waived for purchases of Class A shares by certain retirement plans in connection with certain investment programs. Class A or Class D purchases of $1,000,000 or more are not subject to an initial sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"-- page 17. (d) Class A and Class D shares are not subject to a contingent deferred sales charge ("CDSC"), except that certain purchases of $1,000,000 or more which are not subject to an initial sales charge will instead be subject to a CDSC of 1.0% of amounts redeemed within the first year after purchase. (e) See "Management of the Fund--Management and Advisory Arrangements"--page 13. (f) See "Purchase of Shares--Distribution Plans"--page 23. (g) See "Management of the Fund--Transfer Agency Services"--page 15. 2 3 EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ---------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment including the maximum $52.50 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth on page 2, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A..................................................... $ 58 $70 $82 $119 Class B..................................................... $ 56 $70 $86 $168* Class C..................................................... $ 26 $50 $87 $189 Class D..................................................... $ 60 $77 $95 $147 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A..................................................... $ 58 $70 $82 $119 Class B..................................................... $ 16 $50 $86 $168* Class C..................................................... $ 16 $50 $87 $189 Class D..................................................... $ 60 $77 $95 $147
- --------------- * Assumes conversion to Class D shares approximately eight years after purchase. The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". MERRILL LYNCH SELECT PRICING(SM) SYSTEM The Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM) System. The shares of each class may be purchased at a price equal to the next determined net asset value per share subject to the sales charges and ongoing fee arrangements described below. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment Adviser") or Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM. Funds advised by MLAM or FAM which use the Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds". Each Class A, Class B, Class C or Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares 3 4 bear the expenses of the ongoing account maintenance fees and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges, distribution and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund and accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the deferred sales charges with respect to the Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. The following table sets forth a summary of the distribution arrangements for each class of shares under the Merrill Lynch Select Pricing(SM) System, followed by a more detailed description of each class and a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing(SM) System that the investor believes is most beneficial under his or her particular circumstances. More detailed information as to each class of shares is set forth under "Purchase of Shares". - ------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- ACCOUNT MAINTENANCE DISTRIBUTION CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE ----------------------------------------------------------------------------------------------- A Maximum 5.25% initial sales charge(2)(3) No No No ----------------------------------------------------------------------------------------------- B CDSC for a period of 4 years, at a rate of 4.0% during the first year, decreasing B shares convert to 1.0% annually to 0.0% 0.25% 0.75% D shares automatically after approximately eight years(4) ----------------------------------------------------------------------------------------------- C 1.0% CDSC for one year 0.25% 0.75% No ----------------------------------------------------------------------------------------------- D Maximum 5.25% initial sales charge(3) 0.25% No No ----------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
- --------------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares-- Eligible Class A Investors". 4 5 (3) Reduced for purchases of $25,000 or more, and waived for purchases of Class A shares by certain retirement plans in connection with certain investment programs. Class A and Class D share purchases of $1,000,000 or more may not be subject to an initial sales charge but, if the initial sales charge is waived, will be subject to a 1.0% CDSC for one year. See "Class A" and "Class D" below. (4) The conversion period for dividend reinvestment shares and the conversion and holding periods for certain retirement plans were modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a ten-year conversion period. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Class A: Class A shares incur an initial sales charge when they are purchased and bear no ongoing distribution or account maintenance fees. Class A shares of the Fund are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares of the Fund. Investors that currently own Class A shares of the Fund in a shareholder account are entitled to purchase additional Class A shares of the Fund in that account. Other eligible investors include certain retirement plans and participants in certain investment programs. In addition, Class A shares will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries", when used herein with respect to ML & Co., includes the Investment Adviser, FAM and certain other entities directly or indirectly wholly-owned and controlled by ML & Co.) and their directors and officers, and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is 5.25% which is reduced for purchases of $25,000 and over, and waived for purchases by certain retirement plans in connection with certain investment programs. Purchases of $1,000,000 or more may not be subject to an initial sales charge but if the initial sales charge is waived such purchases will be subject to a 1.0% CDSC if the shares are redeemed within one year after purchase. Sales charges also are reduced under a right of accumulation which takes into account the investor's holdings of all classes of all MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares". Class B: Class B shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25%, and an ongoing distribution fee of 0.75%, of the Fund's average net assets attributable to the Class B shares, and a CDSC if they are redeemed within four years of purchase. Approximately eight years after issuance, Class B shares will convert automatically into Class D shares of the Fund, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately ten years. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Automatic conversion of Class B shares into Class D shares will occur at least once each month on the basis of the relative net asset values of the shares of the two classes on the conversion date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. Shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The conversion period for dividend reinvestment shares and the conversion and holding periods for certain retirement plans are modified as described under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares". 5 6 Class C: Class C shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25%, and an ongoing distribution fee of 0.75%, of the Fund's average net assets attributable to Class C shares. Class C shares are also subject to a CDSC if they are redeemed within one year of purchase. Although Class C shares are subject to a 1.0% CDSC for only one year (as compared to four years for Class B), Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares will be subject to distribution fees that will be imposed on Class C shares for an indefinite period subject to annual approval by the Fund's Board of Directors and regulatory limitations. Class D: Class D shares incur an initial sales charge when they are purchased and are subject to an ongoing account maintenance fee of 0.25% of the Fund's average net assets attributable to Class D shares. Class D shares are not subject to an ongoing distribution fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales charge but if the initial sales charge is waived such purchases will be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. The schedule of initial sales charges and reductions for Class D shares is the same as the schedule for Class A shares, except that there is no waiver for purchases by retirement plans in connection with certain investment programs. Class D shares also will be issued upon conversion of Class B shares as described above under "Class B". See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares". The following is a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing(SM) System that the investor believes is most beneficial under his or her particular circumstances. Initial Sales Charge Alternatives. Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors that previously purchased Class A shares may no longer be eligible to purchase Class A shares of other MLAM-advised mutual funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for reduced initial sales charges on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower return than Class A shares. Deferred Sales Charge Alternatives. Because no initial sales charges are deducted at the time of purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors who do not qualify for a reduction in initial sales charges. Both Class B and Class C shares are 6 7 subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees. Certain investors may elect to purchase Class B shares if they determine it to be most advantageous to have all of their funds invested initially and intend to hold their shares for an extended period of time. Investors in Class B shares should take into account whether they intend to redeem their shares within the CDSC period and, if not, whether they intend to remain invested until the end of the conversion period and thereby take advantage of the reduction in ongoing fees resulting from the conversion into Class D shares. Other investors, however, may elect to purchase Class C shares if they determine that it is advantageous to have all of their assets invested initially and they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. Although Class C shareholders are subject to a shorter CDSC period at a lower rate, they forgo the Class B conversion feature, making their investment subject to account maintenance and distribution fees for an indefinite period of time. In addition, while both Class B and Class C distribution fees are subject to the limitations on asset-based sales charges imposed by the NASD, the Class B distribution fees are further limited under a voluntary waiver of asset-based sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred Sales Charges". 7 8 FINANCIAL HIGHLIGHTS The financial information in the table below has been audited in connection with the annual audits of the financial statements of the Fund by Deloitte & Touche LLP, independent auditors. Financial statements for the year ended March 31, 1996 and the independent auditors' report thereon are included in the Statement of Additional Information. The following per share data and ratios have been derived from information provided in the Fund's audited financial statements. Further information about the performance of the Fund is contained in the Fund's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Fund at the telephone number or address on the front cover of this Prospectus.
CLASS A -------------------------------------------------------------------------------------------- FOR THE YEAR ENDED MARCH 31, -------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- ---------- -------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.... $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 $ 23.65 $ 22.33 ---------- ---------- ---------- ---------- ---------- ---------- -------- Investment income--net................ 1.21 1.01 .97 .87 1.02 1.17 1.11 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................... 5.41 1.77 .50 1.99 2.12 2.24 2.03 ---------- ---------- ---------- ---------- ---------- ---------- -------- Total from investment operations...... 6.62 2.78 1.47 2.86 3.14 3.41 3.14 ---------- ---------- ---------- ---------- ---------- ---------- -------- Less dividends and distributions: Investment income--net............... (1.16) (.94) (.95) (.87) (1.02) (1.14) (1.10) Realized gain on investments--net.... (2.30) (1.56) (.95) (1.00) (.60) (.54) (.72) ---------- ---------- ---------- ---------- ---------- ---------- -------- Total dividends and distributions..... (3.46) (2.50) (1.90) (1.87) (1.62) (1.68) (1.82) ---------- ---------- ---------- ---------- ---------- ---------- -------- Net asset value, end of year.......... $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 $ 23.65 ========== ========== ========== ========== ========== ========== ======== TOTAL INVESTMENT RETURN:* Based on net asset value per share.... 24.50% 10.95% 5.39% 11.33% 12.96% 15.17% 14.04% ========== ========== ========== ========== ========== ========== ======== RATIOS TO AVERAGE NET ASSETS: Expenses.............................. .56% .57% .53% .55% .56% .58% .60% ========== ========== ========== ========== ========== ========== ======== Investment income--net................ 4.09% 3.81% 3.52% 3.56% 4.21% 5.13% 4.80% ========== ========== ========== ========== ========== ========== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)........................... $3,225,758 $2,507,767 $2,237,492 $2,056,023 $1,533,530 $1,083,741 $866,924 ========== ========== ========== ========== ========== ========== ======== Portfolio turnover.................... 84% 89% 86% 55% 59% 86% 85% ========== ========== ========== ========== ========== ========== ======== Average commission rate paid.......... $ .0382 --+ --+ --+ --+ --+ --+ ========== ========== ========== ========== ========== ========== ======== 1989 1988 1987 -------- -------- -------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.... $ 21.32 $ 27.97 $ 26.19 -------- -------- -------- Investment income--net................ 1.07 .91 .88 Realized and unrealized gain (loss) on investments and foreign currency transactions--net.................... 1.69 (1.58) 3.44 -------- -------- -------- Total from investment operations...... 2.76 (.67) 4.32 -------- -------- -------- Less dividends and distributions: Investment income--net............... (.73) (.22) (.44) Realized gain on investments--net.... (1.02) (5.76) (2.10) -------- -------- -------- Total dividends and distributions..... (1.75) (5.98) (2.54) -------- -------- -------- Net asset value, end of year.......... $ 22.33 $ 21.32 $ 27.97 ======== ======== ======== TOTAL INVESTMENT RETURN:* Based on net asset value per share.... 13.42% (1.69%) 18.44% ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses.............................. .64% .60% .62% ======== ======== ======== Investment income--net................ 4.79% 3.57% 3.52% ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)........................... $678,958 $657,682 $700,643 ======== ======== ======== Portfolio turnover.................... 63% 85% 109% ======== ======== ======== Average commission rate paid.......... --+ --+ --+ ======== ======== ========
- --------------- * Total investment returns exclude the effects of sales loads. + Data not required for the period. 8 9
CLASS B ---------------------------------------------------------------------------------------------- FOR THE YEAR ENDED MARCH 31, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989+++ ---------- ---------- ---------- ---------- ---------- -------- -------- ------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period...................... $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27 $ 22.64 ---------- ---------- ---------- ---------- ---------- -------- -------- ------- Investment income--net....... .90 .74 .70 .65 .80 .96 .91 .22 Realized and unrealized gain on investments and foreign currency transactions--net........... 5.29 1.72 .48 1.89 2.05 2.19 1.96 .72 ---------- ---------- ---------- ---------- ---------- -------- -------- ------- Total from investment operations.................. 6.19 2.46 1.18 2.54 2.85 3.15 2.87 .94 ---------- ---------- ---------- ---------- ---------- -------- -------- ------- Less dividends and distributions: Investment income--net...... (.87) (.66) (.68) (.63) (.81) (.93) (.96) (.54) Realized gain on investments--net.......... (2.30) (1.56) (.95) (1.00) (.60) (.54) (.72) (.77) ---------- ---------- ---------- ---------- ---------- -------- -------- ------- Total dividends and distributions............... (3.17) (2.22) (1.63) (1.63) (1.41) (1.47) (1.68) (1.31) ---------- ---------- ---------- ---------- ---------- -------- -------- ------- Net asset value, end of period...................... $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27 =========== =========== =========== =========== =========== ========= ========= ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share....................... 23.22% 9.81% 4.36% 10.16% 11.81% 14.03% 12.84% 4.42%# =========== =========== =========== =========== =========== ========= ========= ======== RATIOS TO AVERAGE NET ASSETS: Expenses..................... 1.58% 1.59% 1.55% 1.56% 1.58% 1.60% 1.62% 1.70%* =========== =========== =========== =========== =========== ========= ========= ======== Investment income--net....... 3.07% 2.79% 2.50% 2.53% 3.14% 4.11% 3.72% 4.43%* =========== =========== =========== =========== =========== ========= ========= ======== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................. $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065 $620,842 $365,773 $32,254 =========== =========== =========== =========== =========== ========= ========= ======== Portfolio turnover........... 84% 89% 86% 55% 59% 86% 85% 63% =========== =========== =========== =========== =========== ========= ========= ======== Average commission rate paid........................ $ .0382 --+ --+ --+ --+ --+ --+ --+ =========== =========== =========== =========== =========== ========= ========= ======== CLASS C CLASS D --------------------- -------------------- FOR THE FOR THE PERIOD PERIOD OCTOBER OCTOBER FOR THE 21, FOR THE 21, YEAR 1994++ YEAR 1994++ ENDED TO ENDED TO MARCH MARCH MARCH MARCH 31, 31, 31, 31, -------- -------- -------- -------- 1996 1995 1996 1995 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period...................... $ 27.17 $ 26.81 $ 27.72 $ 27.27 -------- -------- -------- -------- Investment income--net....... .92 .49 1.16 .48 Realized and unrealized gain on investments and foreign currency transactions--net........... 5.24 1.03 5.38 1.15 -------- -------- -------- -------- Total from investment operations.................. 6.16 1.52 6.54 1.63 -------- -------- -------- -------- Less dividends and distributions: Investment income--net...... (.95) (.43) (1.10) (.45) Realized gain on investments--net.......... (2.30) (.73) (2.30) (.73) -------- -------- -------- -------- Total dividends and distributions............... (3.25) (1.16) (3.40) (1.18) -------- -------- -------- -------- Net asset value, end of period...................... $ 30.08 $ 27.17 $ 30.86 $ 27.72 ========= ========= ========= ========= TOTAL INVESTMENT RETURN:** Based on net asset value per share....................... 23.25% 6.07%# 24.21% 6.42%# ========= ========= ========= ========= RATIOS TO AVERAGE NET ASSETS: Expenses..................... 1.59% 1.64%* .81% .87%* ========= ========= ========= ========= Investment income--net....... 3.08% 3.22%* 3.84% 3.94%* ========= ========= ========= ========= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................. $259,131 $ 46,902 $521,599 $171,201 ========= ========= ========= ========= Portfolio turnover........... 84% 89% 84% 89% ========= ========= ========= ========= Average commission rate paid........................ $ .0382 --+ $ .0382 --+ ========= ========= ========= =========
- --------------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Data not required for the period. ++ Commencement of Operations. +++ Class B shares commenced operations on October 21, 1988. # Aggregate total investment return. 9 10 INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to achieve the highest total investment return consistent with prudent risk. 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 other economies and their securities markets will undergo continuous change. Thus, the fully managed approach puts maximum emphasis on 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 achieve at high levels. The Fund considers quality companies to be those which 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 which are rated below "investment grade". See "Investment Objective and Policies" and Appendix A in the Statement of Additional Information for a discussion of the risks involved in investing in securities which are rated below "investment grade." -- Convertible securities, i.e., fixed income issues which give the owner the option of a later exchange for common stock. 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 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 for the common stock, the conversion value is substantially below the investment value of the convertible security, the price of the convertible security will be governed principally by its investment value. 10 11 -- Cash or money-market securities to produce interest income during periods of defensive investment. The Investment Adviser 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, 1996, approximately 46.7% of the Fund's portfolio was invested in equity securities. The Fund may invest in the securities of smaller or emerging growth 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. The Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "Securities Act"), but can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act. However, the Fund will not invest more than 15% of its total assets in illiquid investments, which includes securities for which there is no readily available market, securities subject to contractual restrictions on resale, certain investments in asset-backed and receivable-backed securities and restricted securities, unless the Fund's Board of Directors continuously determines, based on the trading markets for the specific restricted security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board of Directors, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Board of Directors carefully monitors the Fund's investments in these securities purchased pursuant to Rule 144A, focusing on such factors, among others, as valuation, liquidity and availability of information. These investments in securities purchased pursuant to Rule 144A 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 restricted securities. The Fund may invest up to 25% of its total assets in securities of foreign issuers. Investments in securities of foreign issuers involve certain risks, including fluctuations in foreign exchange rates, future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws or restrictions. In addition, foreign companies are not subject to accounting, auditing and financial reporting standards and requirements comparable to those of U.S. companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in 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. To the extent such investments are subject to withholding or other taxes or to regulations relating to repatriation of assets, the Fund's distributable income will be reduced. The prices of securities in different countries may be subject to different economic, financial, political and social factors. 11 12 Among the risks to which an investment in the Fund is subject are interest rate risk and credit risk. Interest rate risk is the risk that the portion of the Fund's net asset value attributable to the Fund's fixed-income securities may fall when interest rates rise and rise when interest rates fall. In general, fixed-income securities with longer maturities will be subject to greater volatility resulting from interest rate fluctuations than will fixed-income securities with shorter maturities. Credit risk is the risk that an issuer of fixed-income securities that the Fund owns will not make timely payments of interest or repayments of principal from the issuer. Credit risk is greater in lower-rated securities. Investment Restrictions. The Fund's investment activities are subject to further restrictions that are described in the Statement of Additional Information. Investment restrictions and policies which are fundamental policies may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose and under the Investment Company Act of 1940, as amended (the "Investment Company Act") means the lesser of (a) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (b) more than 50% of the outstanding shares). Among its fundamental policies, the Fund may not invest more than 25% of its total assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). Investment restrictions and policies that are non-fundamental policies may be changed by the Board of Directors without shareholder approval. As a non-fundamental policy, the Fund may not borrow amounts in excess of 5% of its total assets, taken at acquisition or market value, whichever is lower and then only from banks as a temporary measure for extraordinary or emergency purposes. 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 which will reduce net income. As a non-fundamental policy, the Fund will not invest in securities which cannot readily be resold because of legal or contractual restrictions or which are not otherwise readily marketable, including repurchase agreements and purchase and sale contracts maturing in more than seven days, if, regarding all such securities, more than 15% of its total assets (or 10% of its total assets as presently required by certain state laws) taken at market value would be invested in such securities. Notwithstanding the foregoing, the Fund may purchase without regard to this limitation securities that are not registered under the Securities Act, but that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Fund's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board has determined that securities which are freely tradeable in their primary market offshore should be deemed liquid. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Lending of Portfolio Securities. The Fund from time to time lends securities (but no more than 20% of its total assets) from its portfolio to approved borrowers and receives therefor collateral in cash or securities issued or guaranteed by the U.S. Government which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. During the period of the loan, the Fund receives the income on both the loaned securities and the collateral, and thereby increases its yield. Writing of Covered Call Options. The Fund may from time to time write (i.e., sell) covered call options on its portfolio securities and enter into closing purchase transactions with respect to certain of such options. A call option is considered covered where the writer of the option owns the underlying securities. By writing a 12 13 covered call option, the Fund, in return for the premium income realized from the sale of the option, may give up the opportunity to profit from a price increase in the underlying security above the option exercise price. In addition, the Fund will not be able to sell the underlying security until the option expires, is exercised or the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. If an option expires unexercised, the writer realizes a gain in the amount of the premium. Such a gain, of course, may be offset by a decline in the market price of the underlying security during the option period. The Fund may not write covered call options on underlying securities exceeding 15% of the value of its total assets. MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Board of Directors of the Fund consists of six individuals, five of whom are not "interested persons" of the Fund, as defined in the Investment Company Act. The Directors of the Fund 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. The Directors of the Fund are: ARTHUR ZEIKEL*--President of the Investment Adviser and FAM; President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML & Co.; Director of the Distributor. DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment partnership). M. COLYER CRUM--James R. Williston Professor of Investment Management, Harvard Business School. EDWARD H. MEYER--Chairman of the Board of Directors, President and Chief Executive Officer of Grey Advertising Inc. JACK B. SUNDERLAND--President and Director of American Independent Oil Company, Inc. (an energy company). J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company (a private investment partnership). - ------------ *Interested person, as defined by the Investment Company Act, of the Fund. MANAGEMENT AND ADVISORY ARRANGEMENTS The Investment Adviser, which is owned and controlled by ML & Co., a financial services holding company and the parent of Merrill Lynch, acts as the investment adviser for the Fund and provides the Fund with management and investment advisory services. The Investment Adviser or its affiliate, FAM, acts as the investment adviser for more than 130 registered investment companies. The Investment Adviser also provides investment advisory services to individual and institutional accounts. As of June 30, 1996, the Investment Adviser and FAM had a total of approximately $206.5 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the Investment Adviser. Achieving the Fund's investment objective depends on informed decisions to buy, sell or hold particular securities. Subject to the direction of the Board of Directors, the Fund's Investment Adviser has created a comprehensive management system that sets objectives and establishes a framework for the selection of particular securities and the distribution of assets. The system appraises economic and other forces affecting 13 14 securities markets and industries, and assesses short- and long-term prospects. The Investment Adviser regularly reviews the research and analysis of other brokerage firms with which the Fund does business. 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, 1996, the Investment Adviser earned a fee of $31,428,894 (based upon average net assets of approximately $7.8 billion) and the effective fee rate was 0.40%. The Investment Adviser is responsible for placing the Fund's brokerage business and for negotiating prices, commissions and the charges for other services. The Investment Adviser is not restricted in its choice of brokers or dealers. It seeks the most favorable rates and services from any number of brokers and dealers, including Merrill Lynch. See "Portfolio Transactions and Brokerage". The Fund pays certain expenses incurred in the operation of the Fund including, among others, taxes, expenses for legal and auditing services, costs of printing proxies and stock certificates, charges of the custodian and transfer agent, expenses of redemption, brokerage costs, Commission fees, all expenses of shareholders' and Directors' meetings and certain of the expenses of printing prospectuses, statements of additional information and reports to shareholders. For the fiscal year ended March 31, 1996, the ratio of total expenses to average net assets was 0.56% for Class A shares, 1.58% for Class B shares, 1.59% for Class C shares and 0.81% for Class D shares. Kurt Schansinger has been the Senior Portfolio Manager of the Fund since April 1996 and Vice President of the Investment Adviser since January 1996. From January 1996 until April 1996, Mr. Schansinger served as Associate Portfolio Manager of the Fund. Walter Cuje is the Associate Portfolio Manager of the Fund. Mr. Cuje has been an Associate Portfolio Manager of the Investment Adviser since October 1993 and a Vice President thereof since July 1991. CODE OF ETHICS The Board of Directors of the Fund has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act which incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on Fund investment personnel. The Codes require that all employees of the Investment Adviser preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser 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 which 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 Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Fund within periods of trading by the Fund in the same (or equivalent) security (15 or 30 days depending upon the transaction). 14 15 TRANSFER AGENCY SERVICES Merrill Lynch Financial Data Services, Inc. (formerly called Financial Data Services, Inc.) (the "Transfer Agent"), which is a wholly-owned 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 Fund pays the Transfer Agent a fee of $11.00 per Class A or Class D shareholder account and $14.00 per Class B or Class C shareholder account and the Transfer Agent is entitled to reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. For the fiscal year ended March 31, 1996, the Fund paid the Transfer Agent $10,911,584 pursuant to the Transfer Agency Agreement. At June 30, 1996 the Fund had 198,108 Class A shareholder accounts, 347,193 Class B shareholder accounts, 30,751 Class C shareholder accounts and 38,005 Class D shareholder accounts. At this level of accounts, the annual fee payable to the Transfer Agent would aggregate $7,888,459 plus out-of-pocket expenses. PURCHASE OF SHARES The Distributor, an affiliate of the Investment Adviser, FAM and Merrill Lynch, acts as the distributor of shares of the Fund. Shares of the Fund are offered continuously for sale by the Distributor and other eligible securities dealers (including Merrill Lynch). Shares of the Fund may be purchased from securities dealers or by mailing a purchase order directly to the Transfer Agent. The minimum initial purchase is $1,000, and the minimum subsequent purchase is $50, except that for retirement plans, the minimum initial purchase is $100, and the minimum subsequent purchase is $1. The Fund offers its shares in four classes at a public offering price equal to the next determined net asset value per share plus sales charges imposed either at the time of purchase or on a deferred basis depending upon the class of shares selected by the investor under the Merrill Lynch Select Pricing(SM) System, as described below. The applicable offering price for purchase orders is based on 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., New York time) which includes orders received after the close of business on the previous day, the applicable offering price will be based on the net asset value determined as of 15 minutes after the close of business on the NYSE on that day, provided 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 by the Distributor prior to 30 minutes after the close of business on the NYSE, such orders shall be deemed received on the next business day. The Fund or the Distributor may suspend the continuous offering of the Fund's shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Distributor or the Fund. Neither the Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a sale of shares to such customers. Purchases directly through the Transfer Agent are not subject to the processing fee. The Fund issues four classes of shares under the Merrill Lynch Select Pricing(SM) System, which permits each investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant 15 16 circumstances. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Investors should determine whether under their particular circumstances it is more advantageous to incur an initial sales charge or to have the entire initial purchase price invested in the Fund with the investment thereafter being subject to a CDSC and ongoing distribution fees. A discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM) System" on page 3. Each Class A, Class B, Class C and Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges, distribution and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid. See "Distribution Plans" below. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to Class A and Class D shares are the same as those of the deferred sales charges with respect to Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. Investors are advised that only Class A and Class D shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. The following table sets forth a summary of the distribution arrangements for each class of shares under the Merrill Lynch Select Pricing(SM) System. 16 17 - -------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ACCOUNT MAINTENANCE DISTRIBUTION CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE ------------------------------------------------------------------------------------------------ A Maximum 5.25% initial sales charge(2)(3) No No No ------------------------------------------------------------------------------------------------ B CDSC for a period of 4 years, at a rate of 4.0% during the first year, decreasing B shares convert to 1.0% annually to 0.0% 0.25% 0.75% D shares automatically after approximately eight years(4) ------------------------------------------------------------------------------------------------ C 1.0% CDSC for one year 0.25% 0.75% No ------------------------------------------------------------------------------------------------ D Maximum 5.25% initial sales charge(3) 0.25% No No ------------------------------------------------------------------------------------------------ - --------------------------------------------------------------------------------------------------------
- --------------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Initial Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors". (3) Reduced for purchases of $25,000 or more, and waived for purchases of Class A shares by certain retirement plans in connection with certain investment programs. Class A and Class D share purchases of $1,000,000 or more may not be subject to an initial sales charge but, if the initial sales charge is waived, will be subject to a 1.0% CDSC for one year. (4) The conversion period for dividend reinvestment shares and the conversion and holding periods for certain retirement plans were modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a ten-year conversion period. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES Investors choosing the initial sales charge alternatives who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. 17 18 The public offering price of Class A and Class D shares for purchasers choosing the initial sales charge alternatives is the next determined net asset value plus varying sales charges (i.e., sales loads), as set forth below.
SALES LOAD AS SALES LOAD AS DISCOUNT TO PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS OFFERING THE NET AMOUNT AS PERCENTAGE OF AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE - ------------------------------------------------- ------------- -------------- ------------------ Less than $25,000................................ 5.25% 5.54% 5.00% $25,000 but less than $50,000.................... 4.75 4.99 4.50 $50,000 but less than $100,000................... 4.00 4.17 3.75 $100,000 but less than $250,000.................. 3.00 3.09 2.75 $250,000 but less than $1,000,000................ 2.00 2.04 1.80 $1,000,000 and over**............................ 0.00 0.00 0.00
- --------------- * Rounded to the nearest one-hundredth percent. ** The initial sales charge may be waived on Class A and Class D purchases of $1,000,000 or more, and on Class A share purchases by certain retirement plan investors in connection with certain investment programs, made on or after October 21, 1994. If the sales charge is waived in connection with a purchase of $1,000,000 or more, such purchases will be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. Class A purchases made prior to October 21, 1994 might have been subject to a CDSC if the shares were redeemed within one year of purchase at the following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and 0.25% on purchases of more than $5,000,000, in lieu of paying an initial sales charge. The charge is assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer-sponsored retirement or savings plans. The Distributor may reallow discounts to selected dealers and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act. During the fiscal year ended March 31, 1996, the Fund sold 19,027,848 of its Class A shares for aggregate net proceeds to the Fund of $584,244,547. The gross sales charges for the sale of Class A shares of the Fund for that year were $1,248,807, of which $81,332 and $1,167,475 were received by the Distributor and Merrill Lynch, respectively. For the fiscal year ended March 31, 1996, the Distributor received no CDSCs with respect to redemption within one year after purchase of Class A shares purchased subject to front-end sales charge waivers. During the fiscal year ended March 31, 1996, the Fund sold 10,198,663 of its Class D shares for aggregate net proceeds to the Fund of $303,203,877. The gross sales charges for the sale of Class D shares of the Fund for that period were $3,786,103, of which $247,249 and $3,538,854 were received by the Distributor and Merrill Lynch, respectively. During such period CDSCs received by the Distributor with respect to redemption within one year after purchase of Class D shares purchased subject to front-end sales charge waivers were de minimis. 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 that currently own Class A shares of the Fund in a shareholder account, including participants in the Merrill Lynch Blueprint(SM) Program, are entitled to purchase additional Class A shares of the Fund in that account. Certain employer-sponsored retirement or savings plans, including eligible 401(k) plans, may purchase Class A shares of the Fund at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by MLAM or any of its affiliates. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs provided that the program has $3 million or more initially invested 18 19 in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company serves as trustee and certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser ("MFA") program. 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 MLAM-advised investment companies, including the Fund. Certain persons who acquired shares of certain MLAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions set forth in the Statement of Additional Information are met. In addition, Class A shares of the Fund and certain other MLAM-advised mutual funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set forth in the Statement of Additional Information are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds in shares of the Fund and certain other MLAM-advised mutual funds. Reduced Initial Sales Charges. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Class A and Class D sales charges also may be reduced under a Right of Accumulation and a Letter of Intention. Class A shares are offered at net asset value to certain eligible Class A investors as set forth above under "Eligible Class A Investors". Class A and Class D shares are offered at net asset value to certain employer-sponsored retirement or savings plans and to Employee Access Accounts(SM) available through qualified employers which provide such plans. Class A and Class D shares are offered at net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net proceeds from a sale of certain of their shares of common stock, pursuant to tender offers conducted by those funds. Class D shares are offered at net asset value without sales charge to an investor who has a business relationship with a Merrill Lynch financial consultant, if certain conditions set forth in the Statement of Additional Information are met. Class D shares may be offered at net asset value in connection with the acquisition of assets of other investment companies. Class D shares are offered with reduced sales charges and, in certain circumstances, at net asset value, to participants in the Merrill Lynch Blueprint(SM) Program. Additional information concerning these reduced initial sales charges is set forth in the Statement of Additional Information. DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. As discussed below, Class B shares are subject to a four-year CDSC, while Class C shares 19 20 are subject only to a one-year 1.0% CDSC. On the other hand, approximately eight years after Class B shares are issued, such Class B shares, together with shares issued upon dividend reinvestment with respect to those shares, are automatically converted into Class D shares of the Fund and thereafter will be subject to lower continuing fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B and Class C shares are subject to an account maintenance fee of 0.25% of net assets and a distribution fee of 0.75% of net assets as discussed below under "Distribution Plans". The proceeds from the account maintenance fees are used to compensate Merrill Lynch for providing account maintenance activities. Class B and Class C shares are sold without an initial sales charge so that the Fund will receive the full amount of the investor's purchase payment. Merrill Lynch compensates its financial consultants for selling Class B and Class C shares at the time of purchase from its own funds. See "Distribution Plans" below. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares from the dealer's own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. Approximately eight years after issuance, Class B shares will convert automatically into Class D shares of the Fund, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately ten years. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the NASD asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. The proceeds from the ongoing account maintenance fee are used to compensate Merrill Lynch for providing continuing account maintenance activities. Class B shareholders of the Fund exercising the exchange privilege described under "Shareholder Services--Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Contingent Deferred Sales Charges--Class B Shares. Class B shares which are redeemed within four years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. 20 21 The following table sets forth the rates of the Class B CDSC:
CLASS B CDSC AS A PERCENTAGE OF DOLLAR AMOUNT YEAR SINCE PURCHASE SUBJECT TO PAYMENT MADE CHARGE ------------------- ---------------- 0-1.................................................... 4.00% 1-2.................................................... 3.00 2-3.................................................... 2.00 3-4.................................................... 1.00 4 and thereafter....................................... 0.00
For the fiscal year ended March 31, 1996, the Distributor received CDSCs of $4,025,586 with respect to redemptions of Class B shares, all of which was paid to Merrill Lynch. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the four-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. To provide an example, assume an investor purchases 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares through dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the CDSC because of dividend reinvestment. With respect to the remaining 40 shares, the CDSC is applied only to the original cost of $10 per share and not to the increase in the 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). In the event that Class B shares are exchanged by certain retirement plans for Class A shares in connection with a transfer to the MFA program, the time period that such Class A shares are held in the MFA program will be included in determining the holding period of Class B shares reacquired upon termination of participation in the MFA program (see "Shareholder Services -- Exchange Privilege"). The Class B CDSC is waived on redemptions of shares in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability (as defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The Class B CDSC also is waived on redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and in connection with certain group plans placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived for any Class B shares which are purchased by eligible 401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The Class B CDSC also is waived for any Class B shares which are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in such account at the time of redemption. 21 22 Additional information concerning the waiver of the Class B CDSC is set forth in the Statement of Additional Information. Contingent Deferred Sales Charges--Class C Shares. Class C shares which are redeemed within one year after purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. For the fiscal year ended March 31, 1996, the Distributor received CDSCs of $75,917 with respect to redemptions of Class C shares, all of which was paid to Merrill Lynch. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the one-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. Conversion of Class B Shares to Class D Shares. After approximately eight years (the "Conversion Period"), Class B shares will be converted automatically into Class D shares of the Fund, Class D shares are subject to an ongoing account maintenance fee of 0.25% of net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the "Conversion Date") on the basis of the relative net asset values of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at a Conversion Date the conversion of Class B shares to Class D shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the Fund. Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered. In general, Class B shares of equity MLAM-advised mutual funds will convert approximately eight years after initial purchase, and Class B shares of taxable and tax-exempt fixed income MLAM-advised mutual funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. 22 23 The Conversion Period is modified for shareholders who purchased Class B shares through certain retirement plans which qualified for a waiver of the CDSC normally imposed on purchases of Class B shares ("Class B Retirement Plans"). When the first share of any MLAM-advised mutual fund purchased by a Class B Retirement Plan has been held for ten years (i.e., ten years from the date the relationship between MLAM-advised mutual funds and the Class B Retirement Plan was established), all Class B shares of all MLAM-advised mutual funds held in that Class B Retirement Plan will be converted into Class D shares of the appropriate funds. Subsequent to such conversion, that Class B Retirement Plan will be sold Class D shares of the appropriate fund at net asset value per share. The Conversion Period also is modified for retirement plan investors which participate in the MFA program. While participating in the MFA program, such investors will hold Class A shares. If these Class A shares were acquired through exchange of Class B shares (see "Shareholder Services -- Exchange Privilege"), then the holding period for such Class A shares will be "tacked" to the holding period of the Class B shares originally held for purposes of calculating the Conversion Period on Class B shares acquired upon termination of participation in the MFA program. DISTRIBUTION PLANS The Fund has adopted separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. The Class B and Class C Distribution Plans provide for the payment of account maintenance fees and distribution fees, and the Class D Distribution Plan provides for the payment of account maintenance fees. The Distribution Plans for Class B, Class C and Class D shares each provide that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with account maintenance activities. The Distribution Plans for Class B and Class C shares each provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial consultants for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through dealers without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B and Class C shares. In this regard, the purpose and function of the ongoing distribution fees and CDSC are the same as those of the initial sales charge with respect to the Class A and Class D shares of the Fund in that the deferred sales charges provide for the financing of the distribution of the Fund's Class B and Class C shares. For the fiscal year ended March 31, 1996, the Fund paid the Distributor $43,935,168 pursuant to the Class B Distribution Plan (based on average net assets subject to such Distribution Plan of approximately $4.4 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, 1996, the 23 24 Fund paid the Distributor $1,382,636 pursuant to the Class C Distribution Plan (based on average net assets subject to such Distribution Plan of approximately $139.0 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, 1996, the Fund paid the Distributor $875,288 pursuant to the Class D Distribution Plan (based on average net assets subject to such Distribution Plan of approximately $352.0 million), all of which was paid to Merrill Lynch for providing account maintenance services in connection with Class D shares. At June 30, 1996, the net assets of the Fund subject to the Class B Distribution Plan aggregated approximately $5.0 billion. At this asset level, the annual fee payable pursuant to the Class B Distribution Plan would aggregate approximately $50.5 million. At June 30, 1996, the net assets of the Fund subject to the Class C Distribution Plan aggregated approximately $293.7 million. At this asset level, the annual fee payable pursuant to the Class C Distribution Plan would aggregate approximately $2.9 million. At June 30, 1996, the net assets of the Fund subject to the Class D Distribution Plan aggregated approximately $584.1 million. At this asset level, the annual fee payable pursuant to the Class D Distribution Plan would aggregate approximately $1.5 million. The payments under the Distribution Plans are based upon a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred, and accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans. This information is presented annually as of December 31 of each year on a "fully allocated accrual" basis and quarterly on a "direct 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, 1995, with respect to Class B shares, the fully allocated accrual expenses incurred by the Distributor and Merrill Lynch exceeded fully allocated accrual revenues for such period by approximately $26,356,000 (0.55% of Class B net assets at that date). As of March 31, 1996, with respect to Class B shares direct cash revenues for the period since the commencement of the offering of Class B shares exceeded direct cash expenses by $87,676,632 (1.74% of Class B net assets at that date). Similar fully allocated accrual data for Class C shares is not presented because such revenues and expenses for the period from October 21, 1994 (commencement of operations) to December 31, 1995 are de minimis. As of March 31, 1996, direct cash revenues for the period since the commencement of the offering of Class C shares exceeded direct cash expenses by $378,528 (0.15% of Class C net assets at that date). LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the NASD imposes a limitation on certain asset-based sales charges such as the Fund's distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and 24 25 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 fees and the CDSCs). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. 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 in connection with the 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 Fund has no obligation with respect to distribution and/or account maintenance-related expenses incurred by the Distributor and Merrill Lynch in connection with Class B, Class C and Class D shares, and there is no assurance that the Directors of the Fund will approve the continuance of the Distribution Plans from year to year. However, the Distributor intends to seek annual continuation of the Distribution Plans. In their review of the Distribution Plans, the Directors will be asked to take into consideration expenses incurred in connection with the account maintenance and/or distribution of each class of shares separately. The initial sales charges, the account maintenance fee, the distribution fee and/or the CDSCs received with respect to one class will not be used to subsidize the sale of shares of another class. Payments of the distribution fee on Class B shares will terminate upon conversion of those Class B shares into Class D shares as set forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares". REDEMPTION OF SHARES The Fund is required to redeem for cash all shares of the Fund on receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC which may be applicable, there will be no charge for redemptions if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by the Fund at such time. REDEMPTION A shareholder wishing to redeem shares may do so without charge by tendering the shares directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc., P.O Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. The notice in either event requires the signatures of all persons in whose names the shares are registered, signed exactly as their names appear on the Transfer Agent's register or on the certificate, as the case may be. 25 26 The signature(s) on the redemption request must be guaranteed by an "eligible guarantor institution" (including, for example, Merrill Lynch branch offices and certain other financial institutions) as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. In certain instances, the Transfer Agent may require additional documents, such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. For shareholders redeeming directly with the Transfer Agent, payment will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment. The Fund may delay or cause to be delayed the mailing of a redemption check until such time as good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares. Normally, this delay will not exceed 10 days. REPURCHASE The Fund also will repurchase shares through a shareholder's listed securities dealer. The Fund normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after receipt of the order by the dealer, provided that the request for repurchase is received by the dealer prior to the close of business on the NYSE (generally, 4:00 P.M., New York time) on the day received, and such request is received by the Fund from such dealer not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility to submit 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 which do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a repurchase of shares to such customers. Repurchases directly through the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem shares as set forth above. For a shareholder redeeming through his or her listed securities dealer other than Merrill Lynch, payment will be made to the securities dealer. A shareholder redeeming through Merrill Lynch will receive payment through Merrill Lynch. Redemption payments will be made within seven days of the proper tender of the certificates, if any, and stock power or letter requesting redemption, in each instance with signatures guaranteed as noted above. REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES Shareholders who have redeemed their Class A or Class D shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value 26 27 without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. The reinstatement privilege is a one-time privilege and may be exercised by the Class A or Class D shareholder only the first time such shareholder makes a redemption. 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. SHAREHOLDER SERVICES The Fund offers a number of shareholder services and investment plans designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans described below and instructions as to how to participate in the various 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 or Merrill Lynch. Certain of these services are only available to U.S. investors. Included in the Fund's shareholder services are the following: Investment Account. Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of ordinary income dividends and long-term capital gain distributions. The statements also will show any other activity in the account since the previous statement. Shareholders will receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of ordinary income dividends, and long-term capital gains distributions. Shareholders may make additions to their Investment Account at any time by mailing a check directly to the Transfer Agent. Shareholders also may maintain their accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an Investment Account in the transferring shareholder's name may be opened automatically, without charge, at the Transfer Agent. Shareholders considering transferring their Class A or Class D shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he or she be issued certificates for his or her shares and then must turn the certificates over to the new firm for re- registration as described in the preceding sentence. Shareholders considering transferring a tax-deferred retirement account such as an individual retirement account from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the shares (paying any applicable 27 28 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 MLAM-advised mutual funds. There is currently no limitation on the number of times a shareholder may exercise the exchange privilege. The exchange privilege may be modified or terminated in accordance with the rules of the Commission. Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the second fund in his or her account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Exchanges of Class A and Class D shares are made on the basis of the relative net asset values per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the Class A or Class D shares being exchanged and the sales charge payable at the time of the exchange on the shares being acquired. Class B, Class C and Class D shares are exchangeable with shares of the same class of other MLAM-advised mutual funds. Shares of the Fund which are subject to a CDSC are exchangeable on the basis of relative net asset value per share without the payment of any CDSC that might otherwise be due upon redemption of the shares of the Fund. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is "tacked" to the holding period for the newly acquired shares of the other fund. Class A, Class B, Class C and Class D shares also are exchangeable for shares of certain MLAM-advised money market funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class D shares. The period of time that Class A, Class B, Class C or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the MLAM-advised fund from which the exchange has been made. 28 29 Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes. For further information, see "Shareholder Services-- Exchange Privilege" in the Statement of Additional Information. 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 also is 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 program of Class A or Class D shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other MLAM-advised mutual fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA program. Automatic Reinvestment of Dividends and Capital Gains Distributions. All dividends and capital gains distributions are reinvested automatically in full and fractional shares of the Fund, without sales charge, at the net asset value per share next determined 15 minutes after the close of business on the NYSE on the ex-dividend date of such dividend or distribution. A shareholder may at any time, by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent dividends or both dividends and capital gains distributions paid in cash rather than reinvested, in which event payment will be mailed on or about the payment date. Cash payments can also be made directly to the shareholder's bank account. A shareholder whose account is maintained through Merrill Lynch may at any time, by written notification to Merrill Lynch, elect to have both dividends and capital gains distributions paid in cash rather than reinvested. No CDSC will be imposed on redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to receive systematic withdrawal payments from his or her Investment Account in the form of payments by check or through automatic payment by direct deposit to the investor's bank account on either a monthly or quarterly basis. A Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic Redemption Program, subject to certain conditions. Automatic Investment Plans. Regular additions of Class A, Class B, Class C and Class D shares may be made to an investor's Investment Account by prearranged charges of $50 or more to his or her regular bank account. Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or more ($1 for retirement plans) through the CMA(R) or CBA(R) Automated Investment Program. 29 30 PORTFOLIO TRANSACTIONS AND BROKERAGE The Investment Adviser is responsible for making the Fund's portfolio decisions, placing the Fund's brokerage business, evaluating the reasonableness of brokerage commissions and negotiating the amount of any commissions paid, subject to policies established by the Fund's Board of Directors and officers. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities. Orders for transactions in portfolio securities are placed for the Fund with a number of brokers and dealers, including Merrill Lynch. In placing orders, it is the policy of the Fund to obtain the most favorable net results, taking into account various factors, including price, commission, if any, size of the transaction and difficulty of execution. Where practicable, the Investment Adviser surveys a number of brokers and dealers in connection with proposed portfolio transactions and selects the broker or dealer which offers the Fund best price and execution or other services which are of benefit to the Fund. Merrill Lynch has advised the Fund that, in transactions with Merrill Lynch, the Fund receives a commission rate at least as favorable as the rate Merrill Lynch charges its other customers in similar transactions. The Fund does not use any particular broker or dealer, and brokers who provide supplemental investment research 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. If in the judgment of the Investment Adviser the Fund will be benefited by supplemental research services, the Investment Adviser is authorized to pay brokerage commissions to a broker furnishing such services which are in excess of commissions which another broker may have charged for effecting the same transaction. The expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. The Investment Adviser may use such information in servicing its other accounts. PERFORMANCE DATA From time to time the Fund may include its average annual total return for various specified time periods in advertisements or information furnished to present or prospective shareholders. Average annual total return is computed separately for Class A, Class B, Class C and Class D shares in accordance with a formula specified by the Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including any CDSC that would be applicable to a complete redemption of the investment at the end of the specified period such as in the case of Class B and Class C shares, and the maximum sales charge in the case of Class A and Class D shares. Dividends paid by the Fund with respect to all shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that account maintenance fees, distribution charges and any incremental transfer agency costs relating to each class of shares will be borne exclusively by that class. The Fund will include performance data for all classes of shares of the Fund in any advertisement or information including performance data of the Fund. 30 31 The Fund also may quote total return and aggregate total return performance data for various specified time periods. Such data will be calculated substantially as described above, except that (1) the rates of return calculated will not be average annual rates, but rather, actual annual, annualized or aggregate rates of return and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average annual rates of return reflect compounding; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. In advertisements directed to investors whose purchases are subject to reduced sales charges in the case of Class A and Class D shares or waiver of the CDSC in the case of Class B and Class C shares (such as investors in certain retirement plans), performance data 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 waiver of the CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares". The Fund's total return may be expressed either as a percentage or as a dollar amount in order to illustrate the effect of such total return on a hypothetical $1,000 investment in the Fund at the beginning of each specified period. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. On occasion, the Fund may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine or other industry publications. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. In addition, from time to time the Fund may include its risk- adjusted performance ratings assigned by Morningstar Publications, Inc. in advertising or supplemental sales literature. ADDITIONAL INFORMATION DIVIDENDS AND DISTRIBUTIONS It is the Fund's intention to distribute all of its net investment income, if any. Dividends from such net investment income are paid semi-annually. All net realized long- or short-term capital gains, if any, will be distributed to the Fund's shareholders at least annually. The per share dividends and distributions on each class of shares will be reduced as a result of any account maintenance, distribution and transfer agency fees applicable with respect to that class. See "Determination of Net Asset Value" below. Dividends and distributions may be reinvested automatically in shares of the Fund at the net asset value without a sales charge. Shareholders may elect in writing to receive any such dividends or distributions, or both, in cash. Dividends and distributions are taxable to shareholders as discussed below whether they are reinvested in shares of the Fund or received in cash. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with a Federal tax requirement that certain percentages of its ordinary income and capital gains be distributed during the calendar year. 31 32 DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of the Fund is determined once daily, 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New York time), on each day during which the NYSE is open for trading. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The net asset value per share is computed by adding the total value of all securities held by the Fund plus cash, interest and dividends accrued minus liabilities, including accrued expenses, and this amount is divided by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment Adviser and any account maintenance and/or distribution fees payable to the Distributor, are accrued daily. The Fund employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the Investment Adviser, to provide certain securities prices for the Fund. During the fiscal year ended March 31, 1996, the Fund paid $7,714 to MLSPS for such service. The per share net asset value of Class A shares generally will be higher than the per share net asset value of the shares of the other classes, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares and the daily expense accruals of the account maintenance fees applicable with respect to Class D shares; moreover, the per share net asset value of Class D shares generally will be higher than the per share net asset value of Class B and Class C shares, reflecting the daily expense accruals of the distribution and higher transfer agency fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the classes will tend to converge (although not necessarily meet) immediately after the payment of dividends or distributions which will differ by approximately the amount of the expense accrual differentials between the classes. Portfolio securities which are traded on stock exchanges are valued at the last sale price (regular way) on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities traded in the over-the-counter ("OTC") market are valued at the last available bid price in the OTC market prior to the time of valuation. Securities which are traded both in the OTC market and on a stock exchange will be 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. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Board of Directors of the Fund. TAXES The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary 32 33 income and net realized capital gains which it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). The Fund intends to distribute substantially all of such income. Dividends paid by the Fund from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from an excess of net long-term capital gains over net short-term capital losses (including gains or losses from certain transactions in 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, however, 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). Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. If the Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. Under Code Section 988, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from futures contracts that are not "regulated futures contracts" and from unlisted options generally will be treated as ordinary income or loss. Such Code Section 988 gains or losses will generally increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary income dividend distributions, and all or a portion of distributions made before the losses were realized but in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing the basis of each 33 34 shareholder's Fund shares and resulting in a capital gain for any shareholder who received a distribution greater than the shareholder's tax basis in Fund shares (assuming the shares were held as a capital asset). No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period for the converted Class B shares. 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. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively. Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on U.S. Government obligations. State law varies as to whether dividend income attributable to U.S. Government obligations is exempt from state income tax. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. ORGANIZATION OF THE FUND The Fund, a diversified, open-end investment company, was organized in Maryland on July 29, 1987 and is a successor to a Delaware corporation that was organized 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. It has an authorized capital of 1,000,000,000 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 and Class B each consists of 300,000,000 shares and Class C and Class D each consists 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 are identical in all respects except that Class B, Class C and Class D shares bear certain expenses related to the account maintenance associated with such shares and Class B and Class C shares bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to account maintenance and distribution expenditures, as applicable. See "Purchase of Shares". The Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. 34 35 Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act on any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Shares have the conversion rights described in the Prospectus. Each share of Common Stock is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities except, as noted above, the Class B, Class C and Class D shares bear certain additional expenses. SHAREHOLDER REPORTS Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate copies of each report and communication for each of the shareholder's related accounts, the shareholder should notify in writing: Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, FL 32232-5289 The written notification should include the shareholder's name, address, tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or mutual fund account numbers. If you have any questions regarding this please call your Merrill Lynch financial consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863. SHAREHOLDER INQUIRIES Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Prospectus. 35 36 [This page is intentionally left blank.] 37 MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 1) - -------------------------------------------------------------------------------- NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH BLUEPRINT(SM) Program. You may request a Merrill Lynch Blueprint(SM) Program application by calling (800) 637-3766. - -------------------------------------------------------------------------------- 1. SHARE PURCHASE APPLICATION I, being of legal age, wish to purchase: (choose one) / / Class A shares / / Class B shares / / Class C shares / / Class D shares of Merrill Lynch Capital Fund, Inc. and establish an Investment Account as described in the Prospectus. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. Basis for establishing an Investment Account: A. I enclose a check for $.......... payable to Merrill Lynch Financial Data Services, Inc. as an initial investment (minimum $1,000). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the Right of Accumulation as outlined in the Statement of Additional Information: (Please list all funds. Use a separate sheet of paper if necessary.) 1. .......................................................... 4. .......................................................... 2. .......................................................... 5. .......................................................... 3. .......................................................... 6. .......................................................... Name............................................................................ First Name Initial Last Name Name of Co-Owner (if any)....................................................... First Name Initial Last Name Address......................................................................... ......................................................................................... Date... (Zip Code)
Occupation ......................................... Name and Address of Employer................................................. ............................................................................. ............................................................................. ................................................... ............................................................................. Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.) - -------------------------------------------------------------------------------- 2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS Ordinary Income Dividends Long-Term Capital Gains --------------------------------- --------------------------------- SELECT / / Reinvest SELECT / / Reinvest ONE: / / Cash ONE: / / Cash --------------------------------- ---------------------------------
If no election is made, dividends and capital gains will be automatically reinvested at net asset value without a sales charge. IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check or / / Direct Deposit to bank account IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW: I hereby authorize payment of dividend and capital gain distributions by direct deposit to my bank account and, if necessary, debit entries and adjustments for any credit entries made to my account in accordance with the terms I have selected on the Merrill Lynch Capital Fund, Inc. Authorization Form. SPECIFY TYPE OF ACCOUNT (check one): / / checking / / savings Name on your account............................................................ Bank Name....................................................................... Bank Number ................................................... Account Number.......................................................................... Bank Address.................................................................... I agree that this authorization will remain in effect until I provide written notification to Merrill Lynch Financial Data Services, Inc. amending or terminating this service. Signature of Depositor.......................................................... Signature of Depositor ...................................................... Date............................................................................ (if joint account, both must sign) NOTE: If direct deposit to bank account is selected, your blank, unsigned check marked "VOID" or a deposit slip from your savings account should accompany this application. A-1 38 MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED) - -------------------------------------------------------------------------------- NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM) PROGRAM APPLICATION BY CALLING (800) 637-3766. - -------------------------------------------------------------------------------- 3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER Social Security Number or Taxpayer Identification Number Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security Number or Taxpayer Identification Number and (2) that I am not subject to backup withholding (as discussed under "Additional Information--Taxes") either because I have not been notified that I am subject thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS. ............................................................. ............................................................ Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------- 4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (See terms and conditions in the Statement of Additional Information) ......................, 19 . . . . Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Capital Fund, Inc. or any other investment company with an initial sales charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13 month period which will equal or exceed: / / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000 Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Merrill Lynch Capital Fund, Inc. Prospectus. I agree to the terms and conditions of this Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Capital Fund, Inc. held as security. By:.............................................................. ............................................................... Signature of Owner Signature of Co-Owner (If registered in joint names, both must sign)
In making purchases under this letter, the following are the related accounts on which reduced offering prices are to apply: (1) Name ................................................... (2) Name.................................................... Account Number ............................................ Account Number..............................................
- -------------------------------------------------------------------------------- 5. FOR DEALER ONLY Branch Office, Address, Stamp This form when completed should be mailed to: Merrill Lynch Capital Fund, Inc. c/o Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in connection with transactions under this authorization form and agree to notify the Distributor of any purchases or sales made under a Letter of Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the Shareholder's signature. ............................................................... Dealer Name and Address By ............................................................................. Authorized Signature of Dealer - --------- ------------ .............................. - --------- ------------ Branch-Code F/C No. F/C Last Name - --------- --------------- - --------- --------------- Dealer's Customer A/C No.
A-2 39 MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 2) - -------------------------------------------------------------------------------- NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE AUTOMATIC INVESTMENT PLAN ONLY. - -------------------------------------------------------------------------------- 1. ACCOUNT REGISTRATION (PLEASE PRINT) ------------------------------------ Name................................................................................ First Name Initial Last Name ------------------------------------ Social Security No. or Taxpayer Identification No. Name of Co-Owner (if any)........................................................... First Name Initial Last Name Address............................................................................. .................................................................................... Account Number........................... (Zip Code) (if existing account)
- -------------------------------------------------------------------------------- 2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND CLASS D SHARES ONLY (See terms and conditions in the Statement of Additional Information) MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly, of / / Class A or / / Class D shares in Merrill Lynch Capital Fund, Inc. at cost or current offering price. Withdrawals to be made either (check one) / / Monthly on the 24th day of each month, or / / Quarterly on the 24th day of March, June, September and December. If the 24th falls on a weekend or holiday, the next succeeding business day will be utilized. Begin systematic withdrawals on ________________ or as soon as possible thereafter. (month) SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $________ or / / ____% of the current value of / / Class A or / / Class D shares in the account. SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account (check one and complete part (a) or (b) below): DRAW CHECKS PAYABLE (CHECK ONE) (a) I hereby authorize payment by check / / as indicated in Item 1. / / to the order of.......................................................... Mail to (check one) / / the address indicated in Item 1. / / Name (please print)...................................................... Address......................................................................... ........................................................................... Signature of Owner.............................................................. Date............................................................................ Signature of Co-Owner (if any).................................................. (b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS SERVICE. Specify type of account (check one): / / checking / / savings Name on your Account............................................................ Bank Name....................................................................... Bank Number ............................................................. Account Number.................................................................. Bank Address.................................................................... ...................................................................... Signature of Depositor.......................................................... Date............................................................................ Signature of Depositor.......................................................... (if joint account, both must sign) NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION. A-3 40 MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 2) -- (CONTINUED) - -------------------------------------------------------------------------------- 3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Merrill Lynch Financial Data Services, Inc. draw an automated clearing house ("ACH") debit on my checking account as described below each month to purchase: (choose one) / / Class A shares / / Class B shares / / Class C shares / / Class D shares of Merrill Lynch Capital Fund, Inc. subject to the terms set forth below. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. MERRILL LYNCH FINANCIAL DATA SERVICES, INC. You are hereby authorized to draw an ACH debit each month on my bank account for investment in Merrill Lynch Capital Fund, Inc., as indicated below: Amount of each ACH debit $................................................... Account No................................................................... Please date and invest ACH debits on the 20th of each month beginning ________________ or as soon as possible thereafter. (month) I agree that you are drawing these ACH debits voluntarily at my request and that you shall not be liable for any loss arising from any delay in preparing or failure to prepare any such debit. If I change banks or desire to terminate or suspend this program, I agree to notify you promptly in writing. I hereby authorize you to take any action to correct erroneous ACH debits of my bank account or purchases of fund shares including liquidating shares of the Fund and crediting my bank account. I further agree that if a debit is not honored upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to discontinue immediately the Automatic Investment Plan and to liquidate sufficient shares held in my account to offset the purchase made with the dishonored debit. ................. ....................................... Date Signature of Depositor ....................................... Signature of Depositor (If joint account, both must sign) AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC. To..........................................................................Bank (Investor's Bank) Bank Address.................................................................... City .......... State .......... Zip............................................ As a convenience to me, I hereby request and authorize you to pay and charge to my account ACH debits drawn on my account by and payable to Merrill Lynch Financial Data Services, Inc., I agree that your rights in respect to each such debit shall be the same as if it were a check drawn on you and signed personally by me. This authority is to remain in effect until revoked by me in writing. Until you receive such notice, you shall be fully protected in honoring any such debit. I further agree that if any such debit be dishonored, whether with or without cause and whether intentionally or inadvertently, you shall be under no liability. ................. ....................................... Date Signature of Depositor ................. ....................................... Bank Account Signature of Depositor Number (If joint account, both must sign) NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION. A-4 41 [This page is intentionally left blank.] 42 [This page is intentionally left blank.] 43 INVESTMENT ADVISER Merrill Lynch Asset Management Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Mailing Address: P.O. Box 9011 Princeton, New Jersey 08543-9011 DISTRIBUTOR Merrill Lynch Funds Distributor, Inc. Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Mailing Address: P.O. Box 9081 Princeton, New Jersey 08543-9081 CUSTODIAN The Bank of New York 90 Washington Street, 12th Floor New York, New York 10286 TRANSFER AGENT Merrill Lynch Financial Data Services, Inc. Administrative Offices: 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 Mailing Address: P.O. Box 45289 Jacksonville, Florida 32232-5289 INDEPENDENT AUDITORS Deloitte & Touche LLP 117 Campus Drive Princeton, New Jersey 08540-6400 COUNSEL Brown & Wood LLP One World Trade Center New York, New York 10048-0557 44 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. ------------------------- TABLE OF CONTENTS
PAGE ---- Fee Table............................ 2 Merrill Lynch Select Pricing(SM) System............................. 3 Financial Highlights................. 8 Investment Objective and Policies.... 10 Management of the Fund............... 13 Board of Directors................. 13 Management and Advisory Arrangements.................... 13 Code of Ethics..................... 14 Transfer Agency Services........... 15 Purchase of Shares................... 15 Initial Sales Charge Alternatives-- Class A and Class D Shares...... 17 Deferred Sales Charge Alternatives-- Class B and Class C Shares...... 19 Distribution Plans................. 23 Limitations on the Payment of Deferred Sales Charges.......... 24 Redemption of Shares................. 25 Redemption......................... 25 Repurchase......................... 26 Reinstatement Privilege--Class A and Class D Shares.............. 26 Shareholder Services................. 27 Portfolio Transactions and Brokerage.......................... 30 Performance Data..................... 30 Additional Information............... 31 Dividends and Distributions........ 31 Determination of Net Asset Value... 32 Taxes.............................. 32 Organization of the Fund........... 34 Shareholder Reports................ 35 Shareholder Inquiries.............. 35 Authorization Form................... A-1 Code #10044-0796
Merrill Lynch Capital Fund, Inc. PROSPECTUS July 26, 1996 Distributor: Merrill Lynch Funds Distributor, Inc. This Prospectus should be retained for future reference. 45 STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH CAPITAL FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800 ------------------------- Merrill Lynch Capital Fund, Inc. (the "Fund") seeks to achieve the highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. This 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, 1996, approximately 46.7% of the Fund's portfolio was invested in equity securities. 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. ------------------------- 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 26, 1996 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling or by writing the Fund at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. ------------------------- MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR ------------------------- The date of this Statement of Additional Information is July 26, 1996. 46 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to achieve the highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity, debt (including money market) and convertible securities. Reference is made to "Investment Objective and Policies" in the Prospectus for a discussion of the investment objective and policies of the Fund. Portfolio Turnover. The rate of portfolio turnover is not a limiting factor and, given the Fund's investment policies, it is anticipated that there may be periods when high portfolio turnover will exist. The use of covered call options at times when the underlying securities are appreciating in value may result in higher portfolio turnover. The Fund pays brokerage commissions in connection with writing call options and effecting closing purchase transactions, as well as in connection with purchases and sales of portfolio securities. Although the Fund anticipates that its annual portfolio turnover rate should not exceed 100%, the turnover rate may vary greatly from year to year or during periods within a year. A high rate of portfolio turnover results in correspondingly greater brokerage commission expenses. The portfolio turnover rate is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of all securities with maturities at the time of acquisition of one year or less) by the monthly average value of the securities in the portfolio during the year. The portfolio turnover rate for each of the fiscal years ended March 31, 1995 and 1996 was 89% and 84%, respectively. Investment Restrictions. In addition to the investment policies and restrictions set forth in the Prospectus, the Fund has adopted a number of fundamental and non-fundamental investment policies and restrictions. The fundamental policies and restrictions set forth below may not be changed without the approval of the holders of a majority of the Fund's outstanding voting shares, which for this purpose means the lesser of (a) 67% of the shares represented at a meeting where more than 50% of the outstanding shares are represented or (b) more than 50% of the outstanding shares. Unless otherwise provided, all references to the assets of the Fund below are in terms of current market value. The Fund may not: 1. Make any investment inconsistent with the Fund's classification as a diversified company under the Investment Company Act of 1940, as amended (the "Investment Company Act"). 2. Invest more than 25% of its total assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). 3. Make investments for the purpose of exercising control or management. 4. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. 2 47 6. Issue senior securities to the extent such issuance would violate applicable law. 7. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes (currently Ohio regulations prohibit any borrowing in excess of 33 1/3 of the Fund's total assets), (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in its Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 8. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act of 1933, as amended (the "Securities Act") in selling portfolio securities. 9. Purchase or sell commodities or contracts on commodities, except to the extent that the Fund may do so in accordance with applicable law and the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. In addition, the Fund has adopted non-fundamental restrictions which may be changed by the Board of Directors without approval of the Fund's shareholders. Under the non-fundamental investment restrictions, the Fund may not: a. Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund currently does not intend to engage in short sales, except short sales "against the box". c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors of the Fund has otherwise determined to be liquid pursuant to applicable law. Notwithstanding the 15% limitation herein, to the extent the laws of any state in which the Fund's shares are registered or qualified for sale require a lower limitation, the Fund will observe such limitation. As of the date hereof, therefore, the Fund will not invest more than 10% of its total assets in securities which are subject to this investment restriction (c). 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 (c). d. Invest in warrants if, at the time of acquisition, its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Fund's net assets; included within such limitation, but not to exceed 2% of the Fund's net assets, are warrants which are not listed on the New York Stock Exchange 3 48 (the "NYSE") or the American Stock Exchange or a major foreign exchange. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. e. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of the Fund's total assets would be invested in such securities. This restriction shall not apply to mortgage-backed securities, asset-backed securities or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. f. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, the officers and general partner of Merrill Lynch Asset Management, L.P., the investment adviser for the Fund (the "Investment Adviser"), the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one percent of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. g. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or development programs, except that the Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. h. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. i. 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 as a temporary measure for extraordinary or emergency purposes. ------------------------ Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from engaging in certain transactions involving such firm or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions pursuant to a permissive order or otherwise in compliance with the provisions of the Investment Company Act and the rules and regulations thereunder. Included among such restricted transactions are purchases from or sales to Merrill Lynch of securities in transactions in which it acts as principal and purchases of securities from underwriting syndicates of which Merrill Lynch is a member. See "Portfolio Transactions and Brokerage". Lending of Portfolio Securities. Subject to investment restriction (5) above, the Fund from time to time lends securities from its portfolio to approved borrowers and receives therefor collateral in cash or securities issued or guaranteed by the U.S. Government which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The purpose of such loans is to permit the borrower to use such securities for delivery to purchasers when such borrower has sold short. If cash collateral is received by the Fund, it is invested in short-term money market securities, and a portion of the yield received in respect of such investment is retained by the Fund; and if securities are delivered to the Fund as collateral, the Fund and the borrower negotiate a rate for the loan premium to be received by the Fund for lending its portfolio securities. In either event, the total yield on the Fund's portfolio is increased by loans of its portfolio securities. The Fund will have the right to regain record ownership of loaned securities to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. Such loans are terminable at any time. The Fund may pay reasonable finder's administrative and custodian fees in connection with such loans. 4 49 Writing of Covered Call Options. The Fund may from time to time write, i.e., sell, covered call options on its portfolio securities and enter into closing purchase transactions with respect to certain of such options. A call option is considered covered where the writer of the option owns the underlying securities. By writing a covered call option, the Fund, in return for the premium income realized from the sale of the option, may give up the opportunity to profit from a price increase in the underlying security above the option exercise price. In addition, the Fund will not be able to sell the underlying security until the option expires, is exercised or the Fund effects a closing purchase transaction as described below. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. If the option expires unexercised, the Fund realizes a gain in the amount of the premium received for the option which may be offset by a decline in the market price of the underlying security during the option period. The Fund may not write covered options on underlying securities exceeding 15% of the value of its total assets. All options referred to herein and in the Fund's Prospectus are options issued by The Options Clearing Corporation (the "Clearing Corporation") which are currently traded on the Chicago Board Options Exchange, the American Stock Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange or the NYSE. A call option gives the purchaser of an option the right to buy, and obligates the writer (seller) to sell, the underlying security at the exercise price during the option period. The option period normally ranges from three to nine months from the date the option is written. For writing an option, the Fund receives a premium, which is the price of such an option on the exchange on which it is traded. The exercise price of the option may be below, equal to or above the current market value of the underlying security at the time the option is written. The writer may terminate its obligation prior to the expiration date of the option by executing a closing purchase transaction which is effected by purchasing on an exchange an option of the same series (i.e., same underlying security, exercise price and expiration date) as the option previously written. Such a purchase does not result in ownership of an option. A closing purchase transaction ordinarily will be effected to realize a profit on an outstanding call option, to prevent an underlying security from being called, to permit the sale of the underlying security or to permit the writing of a new call option containing different terms on such underlying security. The cost of such a liquidation purchase plus transaction costs may be greater than the premium received on the original option, in which case the Fund will have incurred a loss in the transaction. An option may be closed out only on an exchange which provides a secondary market for an option of the same series and there is no assurance that a secondary market will exist for any particular option. A covered option writer unable to effect a closing purchase transaction will not be able to sell the underlying security until the option expires or the underlying security is delivered upon exercise, with the result that the writer will be subject to the risk of market decline in the underlying security during such period. The Fund will write an option on a particular security only if management believes that a secondary market will exist on an exchange for options of the same series which will permit the Fund to make a closing purchase transaction in order to close out its position. Due to the relatively short time that exchanges have been dealing with options, options involve risks of possible unforeseen events which can be disruptive to the option markets or could result in the institution of certain procedures including restriction of certain types of orders. 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. The Fund is authorized to invest a portion of its debt portfolio in fixed-income securities which are rated below "investment 5 50 grade" by a nationally recognized statistical rating organization. Securities rated below "investment grade" by nationally recognized statistical rating organizations, e.g., below BBB by Standard & Poor's Ratings Group and below Baa by Moody's Investors Service, Inc., and unrated securities of comparable quality in the judgment of the Investment Adviser (such lower rated and unrated securities are sometimes referred to 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 substantial risk such as a greater volatility of price than securities in higher rating categories. See Appendix A to this Statement of Additional Information -- "Ratings of Debt Securities and Preferred Stock" on page 33. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS Information about the Directors and executive officers of the Fund, including their ages and their principal occupations for at least the past five years, is set forth below. Unless otherwise noted, the address of each executive officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011. ARTHUR ZEIKEL (64)--President and Director(1)(2)--President of the Investment Adviser (which term as used herein includes its corporate predecessors) since 1977; President of Fund Asset Management L.P. ("FAM") (which term, as used herein, includes its corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977. DONALD CECIL (69)--Director(2)--1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Partners (an investment partnership) since 1982; Member of Institute of Chartered Financial Analysts; Member and Chairman, Westchester County (N.Y.) Board of Transportation. M. COLYER CRUM (63)--Director(2)--Soldiers Field Road, Boston, Massachusetts 02163. James R. Williston Professor of Investment Management, Harvard Business School, since 1971; Director of Cambridge Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada. EDWARD H. MEYER (69)--Director(2)--777 Third Avenue, New York, New York 10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer since 1970 and Chairman of the Board of Directors since 1972; Director of The May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman International Industries, Inc. and Ethan Allen Interiors, Inc. JACK B. SUNDERLAND (67)--Director(2)--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 (57)--Director(2)--Suite 3405, One Tampa City Center, Tampa, Florida 33602. 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). 6 51 TERRY K. GLENN (55)--Executive Vice President(1)(2)--Executive Vice President of the Investment Adviser and FAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President of the Distributor since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988. NORMAN R. HARVEY (62)--Senior Vice President(1)(2)--Senior Vice President of the Investment Adviser and FAM since 1982; Senior Vice President of Princeton Services since 1993. DONALD C. BURKE (36)--Vice President(1)(2)--Vice President and Director of Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche LLP from 1982 to 1990. WALTER CUJE (37)-- Vice President(1)--Vice President of the Investment Adviser since 1991; Associate Portfolio Manager of the Fund since 1993. KURT SCHANSINGER (36)--Vice President(1)--Vice President of the Investment Adviser since 1996; Senior Portfolio Manager of the Fund since April, 1996 and Associate Portfolio Manager from January, 1996 through April, 1996; Senior Vice President of Oppenheimer Capital L.P. from 1983 to 1996. GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Vice President of the Distributor since 1981 and Treasurer thereof since 1984. MARK B. GOLDFUS (49)--Secretary(1)(2)--Vice President of the Investment Adviser and FAM since 1985. - --------------- (1) Interested person, as defined in the Investment Company Act, of the Fund. (2) Such Director or officer is a director or officer of certain other investment companies for which the Investment Adviser or FAM acts as investment adviser. At June 30, 1996, 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 that date, Mr. Zeikel, an officer and Director of the Fund, and the other officers of the Fund, owned less than 1% of the outstanding Common Stock of ML & Co. COMPENSATION OF DIRECTORS The Investment Adviser pays all compensation of officers and employees of the Fund and all Directors of the Fund who are affiliated persons of ML & Co. or any of its subsidiaries. Each unaffiliated Director is paid an annual fee of $3,500 by the Fund for serving as a Director plus a fee of $500 for each meeting of the Board which he or she attends. The Fund also pays each member of the Audit Committee of the Board of Directors, which consists of all the unaffiliated Directors, an annual fee of $2,500. The Chairman of the Audit Committee receives an additional $1,000 annually. The Fund reimburses each unaffiliated Director for his or her out-of-pocket expenses relating to attendance at Board and Committee meetings. Fees and expenses paid to the Directors aggregated $41,285 for the fiscal year ended March 31, 1996. 7 52 The following table sets forth, for the fiscal year ended March 31, 1996, compensation paid by the Fund to the unaffiliated Directors and for the calendar year ended December 31, 1995, the aggregate compensation paid by all registered investment companies (including the Fund) advised by the Investment Adviser and its affiliate, FAM ("MLAM/FAM-Advised Funds") to the unaffiliated Directors:
AGGREGATE PENSION OR COMPENSATION RETIREMENT FROM FUND AND BENEFIT ACCRUED MLAM/FAM-ADVISED COMPENSATION AS PART OF FUND FUNDS PAID TO DIRECTOR FROM THE FUND EXPENSE DIRECTOR(1) - ------------------------------------------------ ------------- --------------- ---------------- Donald Cecil.................................... $ 9,000 None $271,850 M. Colyer Crum.................................. $ 8,000 None $120,600 Edward H. Meyer................................. $ 8,000 None $239,225 Jack B. Sunderland.............................. $ 8,000 None $134,600 J. Thomas Touchton.............................. $ 8,000 None $134,600
- --------------- (1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr. Cecil (36 registered investment companies consisting of 36 portfolios); Mr. Crum (18 registered investment companies consisting of 18 portfolios); Mr. Meyer (36 registered investment companies consisting of 36 portfolios); Mr. Sunderland (19 registered investment companies consisting of 28 portfolios); and Mr. Touchton (19 registered investment companies consisting of 28 portfolios). MANAGEMENT AND ADVISORY ARRANGEMENTS Reference is made to "Management of the Fund--Management and Advisory Arrangements" in the Prospectus for certain information concerning the management and advisory arrangements of the Fund. Pursuant to the investment advisory agreement with the Investment Adviser (the "Investment Advisory Agreement"), 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 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. For the fiscal years ended March 31, 1994, 1995 and 1996, the advisory fees paid by the Fund to the Investment Adviser totaled $20,844,212, $23,221,209 and $31,428,894, respectively. California imposes limitations on the expenses of the Fund. These expense limitations require that the Investment Adviser reimburse the Fund in an amount necessary to prevent the aggregate ordinary operating expenses (excluding taxes, brokerage fees and commissions, distribution fees and extraordinary charges such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of the remaining average daily net assets. The Investment Adviser's obligation to reimburse the Fund is limited to the amount of the investment advisory fee. No fee payment will be made to the Investment Adviser during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation at the time of such payment. The Fund was not required to be reimbursed by the Investment Adviser pursuant to such operating expense limitations during the last three fiscal years ended March 31, 1996. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser, subject to review by the Board of Directors. The Investment Adviser supplies the portfolio managers for the Fund who consider analyses from various sources, make the necessary investment decisions and place 8 53 transactions accordingly. The Investment Adviser also is obligated to perform certain administrative and management services for the Fund and is required to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Investment Advisory Agreement. Securities held by the Fund also may be held by or be appropriate investments for other funds for which the Investment Adviser or FAM acts as an adviser or by investment advisory clients of the Investment Adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other funds for which the Investment Adviser or FAM acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or FAM during the same period may increase the demand for securities being purchased or the supply of securities being sold there may be an adverse effect on price. The Investment Adviser provides the investment advisory services and pays all of the officers and employees of the Fund, as well as all fees for Directors of the Fund who are connected with the Investment Adviser, the Distributor, Merrill Lynch or ML & Co. The Investment Adviser also provides all office space, facilities, equipment and necessary personnel for portfolio management of the Fund. The Investment Adviser bears the expense of calculating the Fund's net asset value. The Fund pays all other expenses incurred, except for some expenses incurred by the Distributor, in the operation of the Fund including, among others, taxes, expenses for legal and auditing services, costs of printing proxies and stock certificates, charges of the custodian and transfer agent, expenses of redemption, brokerage costs, Commission fees and all expenses of shareholders' and Directors' meetings and certain of the expenses of printing prospectuses, statements of additional information and reports to shareholders. Accounting services are provided for the Fund by the Investment Adviser. The Distributor will pay the promotional expenses incurred in connection with the offering of shares of the Fund. See "Purchase of Shares--Distribution Plans". The Investment Adviser is a limited partnership, the partners of which are ML & Co. 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 its power to exercise a controlling influence over its management or policies. Duration and Termination. Unless earlier terminated as described herein, the Investment Advisory Agreement will remain in effect from year to year if approved annually (a) by the Board of Directors or a majority of the voting securities and (b) by a majority of Directors who are neither parties to such contract nor interested persons (as defined in the Investment Company Act) of any such party. Such contract is not assignable and may be terminated without penalty on 60 days' written notice at the option of either party thereto or by the vote of the shareholders of the Fund. 9 54 PURCHASE OF SHARES Reference is made to "Purchase of Shares" in the Prospectus for certain information as to the purchase of Fund shares. The Fund issues four classes of shares under the Merrill Lynch Select Pricing(SM) System: shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Each Class A, Class B, Class C and Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan pursuant to which the account maintenance and/or distribution fees are paid. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege". The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by the Investment Adviser or FAM which utilize the Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds". The Fund has entered into 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, the 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. INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES During the fiscal year ended March 31, 1996, the Fund sold 19,027,848 of its Class A shares for aggregate net proceeds to the Fund of $584,244,547. The gross sales charges for the sale of Class A shares of the Fund for that year were $1,248,807, of which $81,332 and $1,167,475 were received by the Distributor and Merrill Lynch, respectively. For the fiscal year ended March 31, 1996, the Distributor received no CDSCs with respect to redemption within one year after purchase of Class A shares purchased subject to front-end sales charge waivers. During the fiscal year ended March 31, 1996, the Fund sold 10,198,663 of its Class D shares for aggregate net proceeds to the Fund of $303,203,877. The gross sales charges for the sale of Class D shares of the Fund for that period were $3,786,103, of which $247,249 and $3,538,854 were received by the Distributor and Merrill Lynch, respectively. During such period CDSCs received by the Distributor with respect to redemption within one year after purchase of Class D shares purchased subject to front-end sales charge waivers were de minimis. For information as to brokerage commissions received by Merrill Lynch, see "Portfolio Transactions and Brokerage". The term "purchase" as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his spouse and their children under the age of 21 years purchasing shares for his or their own 10 55 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 which has not been in existence for at least six months or which has no purchase 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. REDUCED INITIAL SALES CHARGES Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of shares of the Fund and of other MLAM-advised mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intention. Reduced sales charges are applicable to purchases aggregating $25,000 or more of the Class A or Class D shares of the Fund, or any other MLAM-advised mutual funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intention in the form provided in the Prospectus. The Letter of Intention is available only to investors whose accounts are maintained at the Fund's transfer agent. The Letter of Intention is not available to employee benefit plans for which Merrill Lynch provides plan-participant, recordkeeping services. The Letter of Intention is not a binding obligation to purchase any amount of Class A or Class D shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent Letter of Intention executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A or Class D shares of the Fund and of other MLAM-advised mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intention, may be included as a credit toward the completion of such Letter but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intention (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to five percent of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the further reduced percentage sales charge, but there will be no retroactive reduction of the sales charges on any 11 56 previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intention will be deducted from the total purchases made under such Letter. An exchange from a MLAM-advised money market fund into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intention from the Fund. Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In addition, participants in Blueprint who own Class A shares of the Fund may purchase additional Class A shares of the Fund through Blueprint. 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 of 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. Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset value to shareholders of certain closed-end funds advised by the Investment Adviser or FAM who purchased such closed-end fund shares prior to October 21, 1994 (the date the Merrill Lynch Select Pricing(SM) System commenced operations) and wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in Eligible Class A or Class D shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to buy Class A shares) or Class D shares of the Fund and other MLAM-advised mutual funds ("Eligible Class D shares"), if the following conditions are met: first, the sale of the closed-end fund shares must be made through Merrill Lynch and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Class D shares; second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering; third, the closed-end fund shares must have been 12 57 continuously maintained in a Merrill Lynch securities account; and fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Shareholders of certain MLAM-advised continuously offered closed-end funds may reinvest at net asset value the net proceeds from a sale of certain shares of common stock of such funds in shares of the Fund. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except that shareholders already owning Class A shares of the Fund will be eligible to purchase additional Class A shares pursuant to this option, if such additional Class A shares will be held in the same account as the existing Class A shares and the other requirements pertaining to the reinvestment privilege are met. In order to exercise this investment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an "eligible fund") must sell his or her shares of common stock of the eligible fund (the "eligible shares") back to the 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. Purchase Privileges of Certain Persons. Directors of the Fund, members of the Boards of other MLAM-advised investment companies, ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with respect to ML & Co., includes the Investment Adviser, 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. Class D shares of the Fund also are offered at net asset value, without a sales charge, to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied: first, the investor must advise Merrill Lynch that he or she will purchase Class D shares of the Fund with proceeds from a redemption of a mutual fund that was sponsored by the financial consultant's previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis; and second, the investor also must establish that such redemption had been made within 60 days prior to the investment in the Fund, and the proceeds from the redemption had been maintained in the interim in cash or a money market fund. Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("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 the other mutual fund and such 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 of termination. Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the 13 58 investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of such shares of the other mutual fund and such shares have been outstanding for a period of no less than six months; and second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund. TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services at net asset value. Employee Access Accounts(SM). Class A or Class D shares are offered at net asset value to Employee Access Accounts(SM) available through qualified employers that provide employer-sponsored retirement or savings plans that are eligible to purchase such shares at net asset value. The initial minimum for such accounts is $500 except that the initial minimum for shares purchased for such accounts pursuant to the Automatic Investment Program is $50. Acquisition of Certain Investment Companies. The public offering price of Class D shares may be reduced to the net asset value per Class D share in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. The value of the assets or company acquired in a tax-free transaction may be adjusted in appropriate cases to reduce possible adverse tax consequences to the Fund which might result from an acquisition of assets having net unrealized appreciation which is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of the Fund. The issuance of Class D shares for consideration other than cash is limited to bona fide reorganizations, statutory mergers or other acquisitions of portfolio securities which (i) meet the investment objectives and policies of the Fund; (ii) are acquired for investment and not for resale (subject to the understanding that the disposition of the Fund's portfolio securities shall at all times remain within its control); and (iii) are liquid securities, the value of which is readily ascertainable, which are not restricted as to transfer either by law or liquidity of market (except that the Fund may acquire through such transactions restricted or illiquid securities to the extent the Fund does not exceed the applicable limits on acquisition of such securities set forth under "Investment Objective and Policies" herein). Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the reduced sales efforts that will be needed in obtaining such investments. 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 of the Fund at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Certain other plans may purchase Class B shares with a waiver of the CDSC upon redemption, based on similar criteria. Such Class B shares will convert into Class D shares approximately eight years after the plan purchases the first share of any MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied for such plans. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at (800) 237-7777. 14 59 DISTRIBUTION PLANS Reference is made to "Purchase of Shares--Distribution Plans" in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. Payments of the account maintenance fees and distribution fees are subject to the provisions of Rule 12b-1 under the Investment Company Act. Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and its related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of Directors who are not "interested persons" of the Fund, as defined in the Investment Company Act (the "Independent Directors"), shall be committed to the discretion of the Independent Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the Independent Directors concluded that there is reasonable likelihood that such Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the Independent Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders, and all material amendments are required to be approved by the vote of Directors, including a majority of the Independent Directors who have no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of each Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place. LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fees and the CDSCs). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. 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 15 60 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, 1996 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 Class B shares, the Distributor's voluntary maximum. DATA CALCULATED AS OF MARCH 31, 1996 (IN THOUSANDS)
ANNUAL DISTRIBUTION CLASS B, FOR THE PERIOD ALLOWABLE AMOUNTS FEE AT OCTOBER 21, 1988 ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT (COMMENCEMENT OF OPERATIONS) GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET TO MARCH 31, 1996: SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) - ------------------------------- ---------- --------- ---------- -------- -------------- --------- ------------ Under NASD Rule as Adopted..... $4,545,462 $284,091 $ 54,277 $338,368 $126,581 $211,787 $ 37,691 Under Distributor's Voluntary Waiver....................... $4,545,462 $284,091 $ 22,727 $306,818 $126,581 $180,237 $ 37,691 CLASS C, FOR THE PERIOD OCTOBER 21, 1994 (COMMENCEMENT OF OPERATIONS) TO MARCH 31, 1996: - ------------------------------- Under NASD Rule as Adopted..... $ 224,863 $ 14,054 $ 794 $14,848 $ 1,184 $ 13,664 $ 1,943
- --------------- (1) Purchase price of all eligible Class B or eligible Class C shares sold during periods indicated other than shares acquired through dividend reinvestment and the exchange privilege. (2) 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. (3) Consists of CDSC payments, distribution fee payments and accruals. Of the distribution fee payments made with respect to Class B shares prior to July 6, 1993 under the distribution plan in effect at that time, at a 1.0% rate, 0.75% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. See "Purchase of Shares -- Distribution Plans" in the Prospectus. (4) 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 NASD maximum or, with respect to the Class B shares, the voluntary maximum. REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption and repurchase of Fund shares. The right to receive payment with respect to any redemption of shares may be suspended by the Fund for a period of up to seven days. Suspensions of more than seven days may not be made except (1) for any period (a) during which the NYSE is closed other than customary weekend and holiday closings or (b) during which trading on the NYSE is restricted; (2) for any period during which an emergency exists as a result of which (a) disposal by the Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for the Fund fairly to determine the value of its net assets; or (3) for such other periods as the Commission may by order permit for the protection of security holders of the Fund. The Commission shall by 16 61 rules and regulations determine the conditions under which (i) trading shall be deemed to be restricted and (ii) an emergency shall be deemed to exist within the meaning of clause (2) above. DEFERRED SALES CHARGE--CLASS B AND CLASS C SHARES As discussed in the Prospectus under "Purchase of Shares--Deferred Sales Charge Alternatives-- Class B and Class C Shares", while Class B shares redeemed within four years are subject to a CDSC under most circumstances, the charge is waived on redemptions of Class B shares in connection with certain post- retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or on redemptions of Class B shares following the death or disability of a Class B shareholder. Redemptions for which the waiver applies are: (a) any partial or complete redemption in connection with a distribution following retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of a series of equal periodic payments (not less frequently than annually) made for the life (or life expectancy) or any redemption resulting from the tax-free return of an excess contribution to an IRA; or (b) any partial or complete redemption following the death or disability (as defined in the Code) of a Class B shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the fiscal years ended March 31, 1994, 1995 and 1996, the Distributor received CDSCs of $3,578,730, $3,965,708 and $4,025,586, respectively, with respect to redemptions of Class B shares, all of which was paid to Merrill Lynch. For the period October 21, 1994 (commencement of operations) to March 31, 1995 and for the fiscal year ended March 31, 1996, the Distributor received CDSCs of $4,929 and $75,917, respectively, with respect to redemptions of Class C shares, all of which was paid to Merrill Lynch. 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. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to the policies established by the Board of Directors of the Fund, the Investment Adviser is responsible for making the Fund's portfolio decisions and placing the Fund's brokerage business, evaluating the reasonableness of brokerage commissions and negotiating the amount of any commissions paid. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities. Orders for transactions in portfolio securities are placed for the Fund with a number of brokers and dealers, including Merrill Lynch. In placing orders, it is the policy of the Fund to obtain the most favorable net results, taking into account various factors, including price, commissions, if any, size of the transaction, and 17 62 difficulty of execution. Where practicable, the Investment Adviser surveys a number of brokers and dealers in connection with proposed portfolio transactions and selects the broker or dealer which offers the Fund the best price and execution or other services which are of benefit to the Fund. Merrill Lynch has advised the Fund that, in transactions with Merrill Lynch, the Fund receives a commission rate at least as favorable as the rate Merrill Lynch charges its other customers in similar transactions. In addition, consistent with the Rules of Fair Practice of the NASD and policies established by the Directors of the Fund, the Investment Adviser may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund. For the fiscal year ended March 31, 1994, the Fund paid brokerage commissions of $8,838,842 of which $255,039, or 2.9% was paid to Merrill Lynch for effecting 2.9% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. For the fiscal year ended March 31, 1995, the Fund paid brokerage commissions of $9,238,987 of which $315,095, or 3.4%, was paid to Merrill Lynch for effecting 2.9% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. For the fiscal year ended March 31, 1996, the Fund paid brokerage commissions of $9,059,719 of which $525,422, or 5.8% was paid to Merrill Lynch for effecting 4.9% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. The Fund does not use any particular broker or dealer, and brokers who provide supplemental investment research to the Investment Adviser (including Merrill Lynch) 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. If in the judgment of the Investment Adviser the Fund will be benefitted by supplemental research services, the Investment Adviser is authorized to pay brokerage commissions to a broker furnishing such services which are in excess of commissions which another broker may have charged for effecting the same transaction. The expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information, and the Investment Adviser may use such information in servicing its other accounts. The Fund invests in securities traded in the over-the-counter ("OTC") market and, where possible, deals directly with the dealers who make a market in the securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund are prohibited from dealing with the Fund as principal in the purchase and sale of securities. Since transactions in the OTC market usually involve transactions with dealers acting as principal for their own accounts, affiliated persons of the Fund, including Merrill Lynch, will not serve as the Fund's dealer in such transactions. See "Investment Objective and Policies--Investment Restrictions". However, affiliated persons of the Fund may serve as its broker in OTC transactions conducted on an agency basis. The Board of Directors of the Fund has considered the possibilities of seeking to recapture for the benefit of the Fund brokerage commissions, dealer spreads and other expenses of possible portfolio transactions, such as underwriting commissions and tender offer solicitation fees, by conducting such portfolio transactions through affiliated entities, including Merrill Lynch. For example, brokerage commissions received by Merrill Lynch could be offset against the advisory fee payable by the Fund to the Investment Adviser. After considering all factors deemed relevant, the Board made a determination not to seek such recapture. The Board will reconsider this matter from time to time. The Investment Adviser has arranged for the Fund's 18 63 custodian to receive any tender offer solicitation fees on behalf of the Fund payable with respect to portfolio securities of the Fund. Section 11(a) of the Securities Exchange Act of 1934, as amended, generally prohibits members of the United States national securities exchanges from executing exchange transactions for their affiliates and institutional accounts which they manage, unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with a statement of 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 the floor of 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. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of the Fund is computed once daily, Monday through Friday, as of 15 minutes after the close of business on the NYSE (generally, 4:00 P.M., New York time), on each day during which the NYSE is open for trading. The NYSE is not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The Fund also will determine its net asset value on any day in which there is sufficient trading in its portfolio securities that the net asset value might be materially affected, but only if on any such day the Fund is required to sell or redeem shares. The net asset value per share is computed by dividing the sum of the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees and any account maintenance and/or distribution fees, 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 Class D shares; moreover the per share net asset value of 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 or distributions, which will differ by approximately the amount of the expense accrual differentials between the classes. Portfolio securities which are traded on stock exchanges are valued at the last sale price (regular way) on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities traded in the OTC market are valued at the last available bid price in the OTC market prior to the time of valuation. When the Fund writes a call option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The 19 64 amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Board of Directors of the Fund. SHAREHOLDER SERVICES The Fund offers a number of shareholder services described below which are designed to facilitate investment in its shares. Certain of such services are not available to investors who place orders for the Fund's shares through Blueprint. Certain of these services are available only to U.S. investors. Full details as to each of such services, copies of the various plans described below and instructions as to how to participate in the various 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 or Merrill Lynch. INVESTMENT ACCOUNT Each shareholder whose account is maintained at Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. The statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of ordinary income dividends and capital gains distributions. The statements also will show any other activity in the account since the previous statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than automatic investment purchases, the reinvestment of ordinary income dividends and long-term capital gains distributions. A shareholder may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. Share certificates are issued only for full shares and only on the specific request of the shareholder. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. Shareholders considering transferring their Class A shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he or she be issued certificates for his or her shares, and then must turn the certificates over to the new firm for re-registration as described in the preceding sentence. Shareholders considering transferring a tax-deferred retirement account such as an individual retirement account from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares (paying any applicable CDSC) so that the 20 65 cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares. AUTOMATIC INVESTMENT PLANS A shareholder may make additions to an Investment Account at any time by purchasing Class A shares (if an eligible Class A investor as described in the Prospectus) or Class B, Class C or Class D shares at the applicable public offering price either through the shareholder's securities dealer or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Automatic Investment Plan whereby the Fund is authorized through pre-authorized checks or automated clearing house debits of $50 or more to charge the regular bank account of the shareholder on a regular basis to provide systematic additions to the Investment Account of such shareholder. For investors who buy shares of the Fund through Blueprint, no minimum charge to the investor's bank account is required. Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated Investment Program. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS Unless specific instructions are given as to the method of payment of dividends and capital gains distributions, dividends and distributions will be reinvested automatically in additional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund as of the close of business on the ex-dividend date of the dividend or distribution. Shareholders may elect in writing to receive either their ordinary income dividends or capital gains distributions, or both, in cash, in which event payment will be mailed or direct deposited on or about the payment date. Shareholders may, at any time, notify the Transfer Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to have their dividends and/or capital gains distributions reinvested in shares of the Fund or vice versa and, commencing ten days after receipt by the Transfer Agent of such notice, those instructions will be effected. SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES A Class A or Class D shareholder may elect to make systematic withdrawals from an Investment Account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Class A or Class D shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with Class A or Class D shares with a value of $10,000 or more. At the time of each withdrawal payment, sufficient Class A or Class D shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify either a dollar amount or a percentage of the value of his or her Class A or Class D shares. Redemptions will be made at net asset value as determined as of 15 minutes after the close of business on the NYSE (generally, 4:00 P.M., New York 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 Class A or Class D shares will be redeemed at 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 for the withdrawal payment 21 66 will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all Class A or Class D shares in the Investment Account are reinvested automatically in Class A or Class D shares, respectively. 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. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional Class A or Class D shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for Class A or Class D shares of the Fund from investors who maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. Alternatively, a Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount redeemable is $25. The proceeds of systematic redemptions will be posted to a shareholder's account five business days after the date the shares are redeemed. Monthly systematic redemptions will be made at net asset value on the first Monday of each month, bimonthly systematic redemptions will be made at net asset value on the first Monday of every other month, and quarterly, semiannual or annual redemptions are made at net asset value on the first Monday of months selected at the shareholder's option. If the first Monday of the month is a holiday, the redemption will be processed at net asset value on the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch financial consultant. RETIREMENT PLANS Self-directed individual retirement accounts and other retirement plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. Merrill Lynch charges an initial establishment fee and an annual custodial fee for each account. Information with respect to these plans is available on request from Merrill Lynch. The minimum initial purchase to establish any such plan is $100 and the minimum subsequent purchase is $1. Capital gains and ordinary income received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. EXCHANGE PRIVILEGE Shareholders of each class of shares of the Fund have an exchange privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange 22 67 Class A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the second fund in his account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second MLAM-advised mutual fund, but the shareholder does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class B, Class C and Class D shares are exchangeable with shares of the same class of other MLAM-advised mutual funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is "tacked" to the holding period for the newly acquired shares of the other fund as more fully described below. Class A, Class B, Class C and Class D shares also are exchangeable for shares of certain MLAM-advised money market funds as follows: Class A shares may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available only for exchanges within certain retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege, and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. Exchanges of Class A or Class D shares outstanding ("outstanding Class A or Class D shares") for Class A or Class D shares of another MLAM-advised mutual fund ("new Class A or Class D shares") are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charge paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A 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 and Class D shares on which the dividend was paid. Based on this formula, Class A or Class D shares generally may be exchanged into the Class A or Class D shares of the other funds or into shares of the Class A and Class D money market funds with a reduced or without a sales charge. In addition, each of the funds with Class B or Class C shares outstanding ("outstanding Class B or Class C shares") offers to exchange its Class B or Class C shares for Class B or Class C shares, respectively, of another MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares 23 68 of the Fund acquired through use of the exchange privilege will be subject to that Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the sales charge that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period for the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for two and a half years. The 2% CDSC that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of Special Value Fund and receive cash. There will be no CDSC due on this redemption, since by "tacking" the two and a half year holding period of Fund Class B shares to the three-year holding period for the Special Value Fund Class B shares, the investor will be deemed to have held the new Special Value Fund Class B shares for more than five years. The exchange privilege is modified with respect to certain retirement plans which participate in the Merrill Lynch Mutual Fund Adviser ("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. Shareholders also may exchange shares of the Fund into shares of a money market fund advised by the Investment Adviser or its affiliates, but the period of time that Class B or Class C shares are held in a money market fund will not count towards satisfaction of the holding period requirement for purposes of reducing the CDSC, or with respect to the Class B shares, towards satisfaction of the conversion period. However, shares of a money market fund which were acquired as a result of an exchange for Class B or Class C shares of the Fund may, in turn, be exchanged back into Class B or Class C shares, respectively, of any fund offering such shares, in which event the holding period for Class B or Class C shares of that fund will be aggregated with previous holding periods for purposes of reducing the CDSC. Thus, for example, an investor may exchange Class B shares of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the Fund Class B shares for two and a half years and three years later decide to redeem the shares of Institutional Fund for cash. At the time of this redemption, the 2% CDSC that would have been due had the Class B shares of the Fund been redeemed for cash rather than exchanged for shares of Institutional Fund will be payable. If, instead of such redemption, the shareholder exchanged such shares for Class B shares of a fund which the shareholder continues to hold for an additional two and a half years, any subsequent redemption would not incur a CDSC. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. To exercise the exchange privilege, shareholders should contact their Merrill Lynch financial consultant, who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other funds described above with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealers. The Fund reserves the right to require a properly completed exchange 24 69 application. This exchange privilege may be modified or terminated at any time in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares at any time and thereafter may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS The Fund intends to distribute all of its net investment income, if any. Dividends from such net investment income will be paid semi-annually. All net realized long- or short-term capital gains, if any, will be distributed to the Fund's shareholders at least annually. See "Shareholder Services--Automatic Reinvestment of Dividends and Capital Gains Distributions" for information concerning the manner in which dividends and distributions may be reinvested automatically in shares of the Fund. Shareholders may elect in writing to receive any such dividends or distributions, or both, in cash. Dividends and distributions are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends and distributions on Class B and Class C shares will be lower than the per share dividends and distributions on Class A and Class D shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends and distributions on Class D shares will be lower than the per share dividends and distributions on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See "Determination of Net Asset Value". TAXES The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). The Fund intends to distribute substantially all of such income. Dividends paid by the Fund from its ordinary income or from an excess of net short-term 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 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, however, 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). Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. A portion of the 25 70 Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction among the Class A, Class B, Class C and Class D shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of stock) that is based on the gross income allocable to Class A, Class B, Class C and Class D shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. If the Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period of the converted Class B shares. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge such shareholder would have owed upon 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. 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 26 71 minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. TAX TREATMENT OF OPTIONS TRANSACTIONS The Fund may write covered call options on its portfolio securities and enter into closing purchase transactions with respect to certain of such options. In general, unless an election is available to the Fund or an exception applies, such options 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 contract will be treated as sold for its fair market value on the last day of the taxable year, and any gain or loss attributable to 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. Code Section 1092, which applies to certain "straddles", may affect the taxation of the Fund's sales of securities and transactions in option 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. One of the requirements for qualification as a RIC is that less than 30% of the Fund's gross income be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Fund may be restricted in effecting closing transactions within three months after entering into an option contract. SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS In general, gains from "foreign currencies" and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, foreign currency futures and forward foreign exchange contracts will be valued for purposes of the RIC diversification requirements applicable to the Fund. Under Code Section 988, special rules are provided for certain transactions in a currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the United States dollar). In general, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from futures contracts that are not "regulated futures contracts" and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment for such transactions. 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 27 72 year generally 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 which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. 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 the formula specified by the Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment, for various periods other than those noted below. Such data will be computed as described above, except that (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 charge, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return 28 73 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 -------------------------- ------------------------- ------------------------- ------------------------- REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE VALUE OF A VALUE OF A VALUE OF A VALUE OF A EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END $1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD - ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- AVERAGE ANNUAL TOTAL RETURN (including maximum applicable sales charges) One Year Ended March 31, 1996...... 17.97% $1,179.70 19.22% $1,192.20 22.25% $1,222.50 17.69% $1,176.90 Five Years Ended March 31, 1996...... 11.65% $1,734.80 11.71% $1,739.30 Ten Years Ended March 31, 1996...... 11.64% $3,008.70 Inception (October 21, 1988) to March 31, 1996*... 12.07% $2,337.00 Inception (October 21, 1994) to March 31, 1996**... 20.39% $1,307.30 16.88% $1,252.50
ANNUAL TOTAL RETURN (excluding maximum applicable sales charges) Year Ended March 31, 1996................ 24.50% $1,245.00 23.22% $1,232.20 23.25% $1,232.50 24.21% $1,242.10 1995................ 10.95% $1,109.50 9.81% $1,098.10 1994................ 5.39% $1,053.90 4.36% $1,043.60 1993................ 11.33% $1,113.30 10.16% $1,101.60 1992................ 12.96% $1,129.60 11.81% $1,118.10 1991................ 15.17% $1,151.70 14.03% $1,140.30 1990................ 14.04% $1,140.40 12.84% $1,128.40 1989................ 13.42% $1,134.20 1988................ (1.69)% $ 983.10 1987................ 18.44% $1,184.40 1986................ 36.77% $ 1,367.70 1985................ 23.16% $ 1,231.60 1984................ 11.81% $1,118.10 1983................ 31.97% $1,319.70 1982................ (2.59)% $ 974.10 1981................ 45.55% $1,455.50 1980................ 9.69% $1,096.90 1979................ 24.89% $1,248.90 1978................ 0.72% $1,007.20 1977................ (9.47)% $ 905.30 1976................ 19.93% $1,199.30 1975................ (2.42)% $ 975.80 Inception (November 8, 1973) to March 31, 1974... (4.60)% $ 954.00 (Table continued on the following page)
29 74
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES -------------------------- ------------------------- ------------------------- ------------------------- REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE VALUE OF A VALUE OF A VALUE OF A VALUE OF A EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END $1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD - ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ ----------- ANNUAL TOTAL RETURN (excluding maximum applicable sales charges) Inception (October 21, 1988) to March 31, 1989*............... 4.42 % $ 1,044.20 Inception (October 21, 1994) to March 31, 1995**... 6.07% $1,060.70 6.42% $1,064.20 AGGREGATE TOTAL RETURN (including maximum applicable sales charges) Inception (November 8, 1973) to March 31, 1996... 1,378.83% $14,788.30 Inception (October 21, 1988) to March 31, 1996*............... 133.70% $2,337.00 Inception (October 21, 1994) to March 31, 1996**... 30.73% $1,307.30 25.25% $1,252.50
- --------------- *Information as to Class B shares is presented only for the period October 21, 1988 to March 31, 1996. Prior to October 21, 1988, no Class B shares were publicly issued. **Information as to Class C and Class D shares is presented only for the period October 21, 1994 to March 31, 1996. Prior to October 21, 1994, no Class C or Class D shares were publicly issued. In order to reflect the reduced sales charges in the case of Class A or Class D shares or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under "Purchase of Shares" and "Redemption of Shares", respectively, the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charge or the waiver of CDSCs, a lower amount of expenses may be deducted. GENERAL INFORMATION DESCRIPTION OF SHARES The Fund 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. The authorized capital stock of the Fund consists of 1,000,000,000 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 and Class B each consists of 300,000,000 shares and Class C and Class D each consists of 200,000,000 shares. Shares of Class A, Class B, Class C and Class D Common Stock represent an interest in the same assets of the Fund and are identical in 30 75 all respects except that the Class B, Class C and Class D shares bear certain expenses related to the account maintenance and/or distribution of such shares and have exclusive voting rights with respect to matters relating to such account maintenance and/or distribution expenditures. The Board of Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act on any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Pursuant to an undertaking to certain state securities commissions, the Fund will call a meeting of shareholders for any purpose on the written request of the holders of at least 10% of the outstanding shares of the Fund. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in the Prospectus. Each share is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities. Stock certificates will be issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case. 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 as of March 31, 1996, is set forth below:
CLASS A CLASS B CLASS C CLASS D -------------- -------------- ------------ ------------ Net Assets........................... $3,225,757,636 $5,025,504,320 $259,131,009 $521,599,329 ============= ============= =========== =========== Number of Shares Outstanding......... 104,401,286 165,840,417 8,614,852 16,903,714 ============= ============= =========== =========== Net Asset Value per Share (net assets divided by number of shares outstanding)....................... $30.90 $30.30 $30.08 $30.86 Sales Charge for Class A and Class D Shares: 5.25% of offering price (5.54% of net amount invested*).... 1.71 ** ** 1.71 ------ ------ ------ ------ Offering Price....................... $32.61 $30.30 $30.08 $32.57 ------ ------ ------ ------ ------ ------ ------ ------
- --------------- *Rounded to the nearest one-hundredth percent; assumes the maximum sales charge is applicable. **Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC upon redemption. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares" herein. INDEPENDENT AUDITORS Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to approval by the 31 76 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, 90 Washington Street, 12th Floor, New York, New York 10286, acts as custodian of the Fund's assets (the "Custodian"). The Custodian is responsible for safeguarding and controlling the Fund's cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund's investments. TRANSFER AGENT Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. 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 and capital gains distributions. ADDITIONAL INFORMATION The Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made. To the knowledge of the Fund, no person or entity owned beneficially 5% or more of the Fund's shares on June 30, 1996. 32 77 APPENDIX A RATINGS OF DEBT SECURITIES AND PREFERRED STOCK DESCRIPTION OF CORPORATE DEBT RATINGS OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt 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 risk appear somewhat larger than the 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 some time 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 repayments 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 investments. Assurance of interest and principal repayments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. 33 78 DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS The term "commercial paper" as used by Moody's means promissory obligations not having an original maturity in excess of nine months. Moody's makes no representations as to whether such commercial paper is by any other definition "commercial paper" or is exempt from registration under the Securities Act of 1933, as amended. Moody's Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act of 1933, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers. Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of short-term promissory 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. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of short-term promissory 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. Issuers rated Not Prime do not fall within any of the Prime rating categories. If an issuer represents to Moody's that its Commercial Paper obligations are supported by the credit of another entity or entities, 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. DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS Because of the fundamental differences between preferred stocks and bonds, a variation of the bond rating symbols is being used in the quality ranking of preferred stocks. The symbols presented below are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks. 34 79 Preferred stock rating symbols and their definitions are as follows: "aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. "aa" An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future. "a" An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset 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 dividend payments. This rating designation does not purport to indicate the future status of payments. "ca" An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments. "c" This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating classification: the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform 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. 35 80 The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher rated categories. Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. BB Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest payments and principal repayments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. CCC Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC The rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. C The rating C typically is applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. CI The rating CI is reserved for income bonds on which no interest is being paid. 36 81 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 Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. c The letter c indicates that the holder's option to tender the security for purchase may be canceled under certain prestated conditions enumerated in the tender option documents. L The letter L indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is federally insured and interest is adequately collateralized. In the case of certificates of deposit, the letter L indicates that the deposit, combined with other deposits being held in the same right and capacity, will be honored for principal and accrued pre-default interest up to the federal insurance limits within 30 days after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity. p The letter p indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. * Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. N.R. 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. In addition, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries generally. DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. 37 82 A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1". A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal repayments 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. DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS A Standard & Poor's preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock dividends and any applicable sinking fund obligations. A preferred stock rating differs from a bond rating inasmuch as it is assigned to an equity issue, which issue is intrinsically different from, and subordinated to, a debt issue. Therefore, to reflect this difference, the preferred stock rating symbol will normally not be higher than the debt rating symbol assigned to, or that would be assigned to, the senior debt of the same issuer. The preferred stock ratings are based on the following considerations: I. Likelihood of payment capacity and willingness of the issuer to meet the timely payment of preferred stock dividends and any applicable sinking fund requirements in accordance with the terms of the obligation. II. Nature of, and provisions of, the issue. III. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations. AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated "AAA". 38 83 A An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this category than for issues in the "A" category. BB B CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as predominately speculative with respect to the issuer's capacity to pay preferred stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the highest degree of speculation. While such issues will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or sinking fund payments but that is currently paying. C A preferred stock rated "C" is a non-paying issue. D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt instruments. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. PLUS (+) OR MINUS (-): To provide more detailed indications of preferred stock quality, the ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. A preferred stock 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. 39 84 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Capital Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch Capital Fund, Inc. as of March 31, 1996, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1996 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Capital Fund, Inc. as of March 31, 1996, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey May 1, 1996 40 85 SCHEDULE OF INVESTMENTS
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Aerospace 178,000 Goodrich (B.F.) Co. $ 9,078,923 $ 14,151,000 0.2% 514,000 Lockheed Martin Corp. (a) 31,379,559 38,999,750 0.4 1,010,000 Rockwell International Corporation 35,951,594 59,463,750 0.7 -------------- -------------- ------ 76,410,076 112,614,500 1.3 Airlines 455,000 KLM Royal Dutch Airlines N.V. 15,454,833 15,847,417 0.2 408,000 KLM Royal Dutch Airlines N.V. (NY Shares) (ADR)* 12,936,844 14,178,000 0.1 -------------- -------------- ------ 28,391,677 30,025,417 0.3 Automobile 944,000 Echlin Inc. 28,954,480 34,220,000 0.4 Equipment Automotive 1,000,000 General Motors Corp. 47,198,920 53,250,000 0.6 Banking 237,000 Banco Bilboa Vizcaya (ADR)* 5,835,430 8,798,625 0.1 1,593,000 Bancorp Hawaii, Inc. 46,046,216 55,954,125 0.6 600,000 Bangkok Bank Company Ltd. 5,935,084 8,085,612 0.1 360,000 BankAmerica Corp. 20,136,956 27,900,000 0.3 360,000 Chemical Banking Corp. 12,987,657 25,380,000 0.3 950,000 NationsBank Corp. 45,495,094 76,118,750 0.8 2,740,000 SouthTrust Corp. 47,579,304 75,692,500 0.8 1,220,000 Union Planters Corp. 17,085,667 36,905,000 0.4 -------------- -------------- ------ 201,101,408 314,834,612 3.4 Beverages 1,600,000 Cadbury Schweppes PLC 11,499,142 12,210,400 0.1 Building Materials 241,000 Medusa Corp. 6,023,782 7,380,625 0.1 Capital Goods 442,000 GATX Corp. 17,933,469 20,332,000 0.2 458,000 Giddings & Lewis, Inc. 7,717,565 8,702,000 0.1 284,000 Kennametal, Inc. 8,803,338 10,259,500 0.1 235,000 United Dominion Industries, Ltd. 5,650,699 5,698,750 0.1 -------------- -------------- ------ 40,105,071 44,992,250 0.5 Chemicals 197,000 Dexter Corporation 4,882,022 5,220,500 0.1 400,000 du Pont (E.I.) de Nemours & Co. 24,194,771 33,200,000 0.3 792,000 Engelhard Corp. 13,001,621 18,513,000 0.2 1,240,000 Imperial Chemical Industries PLC (ADR)* 60,045,532 70,680,000 0.8 -------------- -------------- ------ 102,123,946 127,613,500 1.4 Computer Software 1,025,000 ++Creative Technology, Ltd. 12,833,743 6,150,000 0.1 Diversified 3,500,000 Hanson PLC (Sponsored) (ADR)* 56,409,536 52,500,000 0.6 Companies 10,599,000 Hillsdown Holdings PLC 25,028,158 29,927,919 0.3 743,000 Tenneco, Inc. 30,564,622 41,515,125 0.5 3,900,000 Tomkins PLC 16,271,315 15,060,002 0.1 1,000,000 United Technologies Corp. 59,058,703 112,250,000 1.2 1,240,000 ++Worldtex Inc. (c) 5,964,546 6,045,000 0.1 -------------- -------------- ------ 193,296,880 257,298,046 2.8 Drug Stores 770,000 Rite Aid Corp. 22,045,542 23,773,750 0.3
41 86 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Electrical 266,000 Cooper Industries, Inc. $ 9,655,449 $ 10,374,000 0.1% Equipment 820,000 General Electric Co. 41,535,004 63,857,500 0.7 868,000 Philips Electronics N.V. (ADR)* 21,479,447 31,573,500 0.4 -------------- -------------- ------ 72,669,900 105,805,000 1.2 Financial Services 1,460,000 Federal National Mortgage Association 35,463,490 46,537,500 0.5 4,770,000 Ruam Pattana II Fund (Foreign) 2,849,866 3,072,235 0.0 9,730,000 ++Ruam Pattana II Fund (Local) 6,628,068 6,266,845 0.1 -------------- -------------- ------ 44,941,424 55,876,580 0.6 Food Distribution 13,870,000 Dairy Farm International Holdings Ltd. (Ordinary) 15,534,045 13,107,150 0.1 Foods/Food 1,361,600 Archer-Daniels-Midland Co. 23,758,364 25,019,400 0.3 Processing 14,600 Cultor OY 573,921 662,518 0.0 321,000 Dean Foods Co. 8,659,673 8,025,000 0.1 99,000 Nestle S.A. 103,564,527 111,767,477 1.2 200,000 Thai Theparos Food Product Public Company Limited (Foreign) 880,000 871,978 0.0 359,400 Thai Theparos Food Product Public Company Limited (Local) 1,589,259 1,566,944 0.0 -------------- -------------- ------ 139,025,744 147,913,317 1.6 Footware 28,618,000 Yue Yuen Industrial (Holdings Limited) 7,454,895 6,956,535 0.1 Forest Products 612,000 Weyerhaeuser Co. 27,846,461 28,228,500 0.3 Home Builders 260,000 ++Oriole Homes Corp. (c) 2,394,771 1,950,000 0.0 Hospital 1,900,000 Columbia/HCA Healthcare Corp. 90,574,852 109,725,000 1.2 Management 2,810,000 ++Tenet Healthcare Corp. (b) 36,022,061 59,010,000 0.7 -------------- -------------- ------ 126,596,913 168,735,000 1.9 Household Products 170,000 Armor All Products Corp. 3,045,566 2,677,500 0.0 Insurance 1,800,000 Allstate Corporation 49,201,588 75,825,000 0.8 416,000 American General Corporation 14,956,200 14,352,000 0.2 773,000 American International Group, Inc. 50,408,890 72,372,125 0.8 176,000 American National Insurance Co. 10,182,521 11,880,000 0.1 36,700 Ayudhya Insurance Company, Ltd. (Foreign) 241,496 232,739 0.0 61,200 Ayudhya Insurance Company, Ltd. (Local) 403,981 388,109 0.0 1,080,000 EXEL Ltd. (ADR)* 45,501,718 74,520,000 0.8 600,000 First Colony Holding Corp. 14,962,987 14,325,000 0.2 2,158,000 Fremont General Corp. (c) 29,940,486 50,982,750 0.6 457,000 Horace Mann Educators Corp. 11,386,151 13,938,500 0.1 123,000 Integon Corp. 2,126,783 2,506,125 0.0 2,154,000 Lowndes Lambert Group Holdings PLC 5,366,108 4,799,969 0.1 200,000 Penncorp Financial Group, Inc. 6,372,501 6,300,000 0.1 290,000 Provident Life & Accident Insurance Co. 7,317,251 8,808,750 0.1 1,605,000 Safeco Corp. 42,977,252 53,767,500 0.6 1,170,000 Sphere Drake Holdings Ltd. 15,809,901 11,846,250 0.1 361,000 St. Paul Companies, Inc. 18,451,602 20,035,500 0.2 465,000 TIG Holdings, Inc. 10,689,988 15,112,500 0.2 1,450,000 Travelers Inc. 32,039,038 95,700,000 1.1 275,000 USLIFE Corporation 7,161,900 8,078,125 0.1 -------------- -------------- ------ 375,498,342 555,770,942 6.2
42 87 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Iron & Steel 492,000 Birmingham Steel Corp. $ 10,326,934 $ 7,257,000 0.1% 854,000 Cleveland-Cliffs, Inc. (c) 28,920,123 37,789,500 0.4 -------------- -------------- ------ 39,247,057 45,046,500 0.5 Leisure/Hotels 1,092,000 Carnival Corp. (Class A) 25,400,446 30,030,000 0.3 3,400,000 Mandarin Oriental International Ltd. 3,324,644 4,284,000 0.1 -------------- -------------- ------ 28,725,090 34,314,000 0.4 Manufactured 277,000 Fleetwood Enterprises, Inc. 6,068,949 6,855,750 0.1 Housing Medical Services 442,000 Bumrungrad Hospital Public Company, Ltd. (Foreign) 556,290 499,287 0.0 232,300 Bumrungrad Hospital Public Company, Ltd. (Local) 289,002 262,408 0.0 -------------- -------------- ------ 845,292 761,695 0.0 Metals & Basic 215,000 Cameco Corp. 4,880,067 11,361,468 0.1 Materials 571,000 Minsura Sociedad Limitada S.A. (T Shares) 4,121,560 4,566,057 0.1 -------------- -------------- ------ 9,001,627 15,927,525 0.2 Natural Gas 1,400,000 Coastal Corp. 39,876,060 55,300,000 0.6 Suppliers 320,000 El Paso Natural Gas Co. 8,804,854 11,840,000 0.1 659,000 MetroGas S.A. (ADR)* 7,847,336 6,260,500 0.1 3,684,000 TransCanada Pipelines, Ltd. (ADR)* 54,273,082 51,115,500 0.6 3,760,000 Williams Companies, Inc. 101,147,048 189,410,000 2.1 -------------- -------------- ------ 211,948,380 313,926,000 3.5 Oil & Gas 40,000 ++BELCO Oil & Gas Corporation 882,400 910,000 0.0 Exploration Oil--Integrated 167,000 Mobil Corporation 18,409,272 19,351,125 0.2 2,558,000 Phillips Petroleum Company 88,340,747 101,041,000 1.1 37,000 Repsol, S.A. (ADR)* 1,287,719 1,382,875 0.0 1,240,000 Repsol, S.A. (Ordinary) 37,646,000 46,784,908 0.5 448,000 Texaco Inc. 29,612,871 38,528,000 0.4 3,000,000 TOTAL S.A. (ADR)* 86,214,090 102,000,000 1.2 11,313,000 YPF S.A. (Sponsored) (ADR)* 234,428,432 227,674,125 2.5 -------------- -------------- ------ 495,939,131 536,762,033 5.9 Oil--Refining & 290,000 Ultramar Corp. 7,506,452 8,373,750 0.1 Marketing Oil Service 1,265,000 Dresser Industries, Inc. 28,464,979 38,582,500 0.4 Paper 200,000 ++Jefferson Smurfit Group PLC (ADR)* 6,207,462 5,325,000 0.1 790,000 Temple-Inland, Inc. 36,163,014 37,031,250 0.4 -------------- -------------- ------ 42,370,476 42,356,250 0.5 Pharmaceuticals 503,000 Block Drug, Inc. (Class A) 15,230,004 20,371,500 0.2 3,480,000 Glaxo Holdings PLC (ADR)* 90,665,465 87,435,000 1.0 650,000 Mallinckrodt Group Inc. 20,266,093 24,456,250 0.3 393,000 Merck & Co., Inc. 18,821,304 24,464,250 0.3 2,110,000 Pfizer, Inc. 98,215,361 141,370,000 1.5 200,000 Warner-Lambert Co. 16,152,383 20,650,000 0.2 -------------- -------------- ------ 259,350,610 318,747,000 3.5
43 88 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Photography 290,000 Eastman Kodak Co. $ 16,924,155 $ 20,590,000 0.2% Plastic Recycling 946,000 Wellman Inc. 20,386,872 22,231,000 0.3 Railroads 420,000 Canadian National Railway Co. 6,732,746 7,245,000 0.1 Real Estate 195,000 National Health Investors, Inc. 6,202,950 6,337,500 0.1 Investment Trusts 1,754,000 RFS Hotel Investors, Inc. (c) 26,471,049 29,598,750 0.3 406,000 South West Properties Trust 5,524,272 5,430,250 0.1 1,270,000 Walden Residential Properties, Inc. (c) 23,297,776 27,781,250 0.3 -------------- -------------- ------ 61,496,047 69,147,750 0.8 Retail Trade 1,904,000 Wal-Mart Stores, Inc. 45,929,299 44,030,000 0.5 Savings & Loan 475,000 Ahmanson (H.F.) & Co. 11,043,343 11,518,750 0.1 Associations Services 1,670,000 PHH Corp. (c) 62,537,753 92,893,750 1.0 265,000 Rollins, Inc. 6,535,562 6,194,375 0.1 -------------- -------------- ------ 69,073,315 99,088,125 1.1 Telecommuni- 130,000 Frontier Corporation 3,759,365 4,095,000 0.0 cations 1,818,000 GTE Corp. 58,038,914 79,764,750 0.9 410,000 ++Nokia Corp. (ADR)* (c) 14,103,994 14,042,500 0.2 970,000 ++Telecomunicacoes Brasileiras S.A.-- Telebras (ADR)* 53,263,047 48,257,500 0.5 -------------- -------------- ------ 129,165,320 146,159,750 1.6 Tires & Rubber 2,900,000 The Goodyear Tire & Rubber Co. 114,315,790 147,900,000 1.6 Utilities--Electric, 101,000 Aquarion Co. 2,306,022 2,575,500 0.0 Gas & Water 115,000 Central Hudson Gas & Electric Corp. 3,045,568 3,478,750 0.1 136,000 Energen Corp. 3,115,698 2,975,000 0.0 640,000 Entergy Corp. 15,520,093 17,920,000 0.2 1,050,000 Illinova Corp. 22,555,391 29,531,250 0.3 156,000 Montana Power Co. 3,575,431 3,373,500 0.1 118,000 Northwest Natural Gas Co. 3,862,348 3,746,500 0.1 23,000 NUI Corporation 419,780 428,375 0.0 1,900,000 Pinnacle West Capital Corp. 37,516,110 54,862,500 0.6 160,000 Public Service Company of North Carolina 2,555,808 2,560,000 0.0 288,000 Texas Utilities Co. 11,556,428 11,916,000 0.1 1,400,000 Unicom Corp. 32,447,717 37,800,000 0.4 170,000 United Water Resources, Inc. 2,203,889 2,231,250 0.0 240,000 Washington Water Power Co. 4,030,780 4,590,000 0.1 -------------- -------------- ------ 144,711,063 177,988,625 2.0 Total Common Stocks 3,335,121,121 4,219,845,627 46.7 Face Amount Corporate Bonds Automobile Parts $ 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 19,545,000 0.2 Automotive Hertz Corp.: 15,000,000 6.70% due 6/15/2002 14,982,500 14,916,900 0.2 13,000,000 6% due 1/15/2003 12,891,670 12,371,840 0.1 -------------- -------------- ------ 27,874,170 27,288,740 0.3
44 89 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Banking $ 20,000,000 Banco Rio de la Plata, 8.75% due 12/15/2003 $ 20,060,800 $ 17,200,000 0.2% 25,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 23,519,000 24,203,250 0.3 BankAmerica Corp.: 15,000,000 6.875% due 6/01/2003 14,149,050 14,988,300 0.2 30,000,000 6.75% due 9/15/2005 29,591,750 29,579,100 0.3 10,000,000 Bankers Trust Company, 7.50% due 1/15/2002 9,688,700 10,181,500 0.1 30,000,000 The Chase Manhattan Corp., 6.50% due 8/01/2005 29,105,700 28,953,000 0.3 11,400,000 Chemical Bank, 7% due 6/01/2005 11,191,266 11,370,702 0.1 15,000,000 First Chicago Corp., 6.875% due 6/15/2003 13,963,300 14,939,250 0.2 6,000,000 First Hawaiian, Inc., 6.25% due 8/15/2000 5,841,600 5,895,240 0.1 First Security Corp.: 5,000,000 5.71% due 2/09/1999 5,000,000 4,908,000 0.1 10,000,000 7% due 7/15/2005 9,978,700 9,910,710 0.1 30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 29,326,800 0.3 Great Western Financial Corp.: 13,000,000 6.125% due 6/15/1998 12,244,010 12,985,960 0.1 10,000,000 6.375% due 7/01/2000 9,998,800 9,896,400 0.1 NationsBank Corp.: 10,500,000 5.70% due 9/11/2000 9,545,865 10,163,160 0.1 40,000,000 5.60% due 2/07/2001 40,000,000 38,395,600 0.4 10,000,000 6.20% due 8/15/2003 9,670,360 9,623,100 0.1 25,000,000 6.50% due 8/15/2003 22,104,200 24,336,250 0.3 25,000,000 PNC Funding Corp., 6.125% due 9/01/2003 24,451,000 23,757,000 0.3 Provident Bank: 10,000,000 6.125% due 12/15/2000 10,071,000 9,755,200 0.1 15,000,000 6.375% due 1/15/2004 14,709,250 14,326,650 0.2 20,000,000 Union Planters Corp., 6.25% due 11/01/2003 18,756,100 19,055,600 0.2 20,000,000 Wachovia Corp., 6.605% due 10/01/2025 20,012,500 19,601,600 0.2 -------------- -------------- ------ 393,606,301 393,352,372 4.4 Broadcasting & 30,000,000 News America Holdings, Inc., 7.50% due Publishing 3/01/2000 29,179,330 30,810,600 0.3 Capital Goods 5,000,000 Giddings & Lewis, Inc., 7.50% due 10/01/2005 5,000,000 4,971,800 0.1 Chemicals 16,000,000 Lyondell Petrochemical Company, 6.50% due 2/15/2006 15,228,970 15,234,240 0.2 25,000,000 Union Carbide Corp., 6.79% due 6/01/2025 25,000,000 24,566,000 0.3 -------------- -------------- ------ 40,228,970 39,800,240 0.5 Diversified Grace (W.R.) & Co.: Companies 10,000,000 6.85% due 6/23/1997 9,903,700 10,107,800 0.1 20,000,000 7.40% due 2/01/2000 19,663,100 20,363,400 0.2 Tenneco, Inc.: 15,000,000 7.875% due 10/01/2002 14,619,180 15,683,700 0.2 20,000,000 6.50% due 12/15/2005 19,991,900 19,053,400 0.2 -------------- -------------- ------ 64,177,880 65,208,300 0.7 Electronics 16,000,000 Litton Industries, Inc., 6.98% due 3/15/2006 16,000,000 15,987,808 0.2 Philips Electronics N.V.: 10,000,000 6.75% due 8/15/2003 9,866,300 9,866,300 0.1 10,000,000 7.125% due 5/15/2025 9,972,650 10,107,900 0.1 -------------- -------------- ------ 35,838,950 35,962,008 0.4
45 90 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Finance $ 5,000,000 Caterpillar Financial Services Corp., 5.35% due 11/10/1998 $ 4,924,800 $ 4,896,050 0.1% Chrysler Finance Corp.: 13,000,000 6.50% due 6/15/1998 12,752,820 13,054,990 0.2 12,000,000 5.375% due 10/15/1998 11,439,770 11,752,200 0.1 10,000,000 5.70% due 1/19/1999 10,011,600 9,840,300 0.1 30,000,000 6.20% due 12/06/2000 30,000,000 29,489,400 0.3 Ford Motor Credit Co.: 10,000,000 5.625% due 12/15/1998 9,703,400 9,835,800 0.1 30,000,000 5.75% due 1/25/2001 29,937,200 28,939,800 0.3 40,000,000 ++++GTE Finance Corp., 5.81% due 12/15/1997 40,000,000 39,592,000 0.5 8,000,000 General Electric Capital Corp., 5.13% due 4/01/2004 8,000,000 8,550,936 0.1 General Motors Acceptance Corp.: 25,000,000 5.875% due 1/12/1999 25,044,500 24,728,250 0.3 48,500,000 5.625% due 2/01/1999 47,273,190 47,629,910 0.5 50,000,000 5.625% due 2/15/2001 49,623,200 47,935,000 0.5 30,000,000 6.75% due 6/10/2002 29,520,300 29,826,600 0.3 10,000,000 Greyhound Financial Corp., 6.75% due 3/25/1999 9,694,200 10,014,600 0.1 Household Finance Corp.: 15,000,000 7.125% due 4/30/1999 14,356,800 15,259,350 0.2 10,000,000 7.45% due 4/01/2000 9,958,700 10,296,400 0.1 10,300,000 6.50% due 7/15/2003 10,202,253 10,011,497 0.1 International Lease Finance Corp.: 10,000,000 5.98% due 11/16/1998 9,990,200 9,919,900 0.1 22,500,000 6.05% due 4/30/1999 22,368,375 22,269,375 0.3 20,000,000 5.62% due 2/01/2000 19,876,200 19,368,200 0.2 10,000,000 Margaretten Financial Corp., 6.75% due 6/15/2000 9,621,060 10,037,700 0.1 Sears, Roebuck Acceptance Corp.: 20,000,000 6.50% due 6/15/2000 20,025,000 19,910,200 0.2 25,000,000 5.71% due 2/06/2001 25,000,000 24,017,500 0.3 50,000,000 5.63% due 2/07/2001 49,996,500 48,038,000 0.5 15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,520,000 0.2 -------------- -------------- ------ 524,315,868 519,733,958 5.8 Financial Leasing GATX Corp.: 12,000,000 6.27% due 12/05/2001 11,823,270 11,700,840 0.1 25,000,000 6.69% due 11/30/2005 24,984,750 24,304,250 0.3 XTRA Corp.: 20,000,000 6.79% due 8/01/2001 19,945,800 20,072,400 0.2 20,000,000 6.68% due 11/30/2001 20,000,000 19,918,000 0.2 -------------- -------------- ------ 76,753,820 75,995,490 0.8 Financial Services 10,000,000 American Express Credit Corp., 6.125% due 11/15/2001 9,963,300 9,807,700 0.1 Finova Capital Corp.: 25,000,000 6.45% due 6/01/2000 24,766,550 24,888,750 0.3 15,000,000 5.98% due 2/27/2001 14,968,950 14,590,800 0.2 10,000,000 6.56% due 11/15/2002 10,000,000 9,756,300 0.1 McDonnell Douglas Finance Corp.: 5,000,000 5.48% due 2/08/1999 4,997,600 4,854,250 0.1 10,000,000 6.375% due 7/15/1999 9,864,100 9,935,400 0.1 10,000,000 6.77% due 9/11/2002 9,983,500 10,035,400 0.1 20,000,000 6.965% due 9/12/2005 20,049,200 19,773,400 0.2 Morgan Stanley Group, Inc.: 15,000,000 5.625% due 3/01/1999 14,969,100 14,702,025 0.2 35,000,000 5.75% due 2/15/2001 34,968,150 33,716,550 0.4
46 91 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Financial Services Smith Barney Shearson Holdings, Inc.: (concluded) $ 10,000,000 6% due 3/15/1997 $ 9,902,000 $ 10,010,100 0.1% 20,000,000 5.875% due 2/01/2001 19,936,800 19,359,000 0.2 -------------- -------------- ------ 184,369,250 181,429,675 2.1 Food & Tobacco Nabisco Inc.: 21,000,000 6.70% due 6/15/2002 20,830,000 20,686,260 0.2 20,000,000 6.85% due 6/15/2005 20,000,000 19,419,200 0.2 40,830,000 40,105,460 0.4 Foreign 20,000,000 ++++Province of Buenos Aires, 11.50% due 10/19/1998 20,000,000 20,340,000 0.2 Government Republic of Argentina: Obligations 45,000,000 9.25% due 2/23/2001 44,801,400 41,287,500 0.5 55,000,000 8.375% due 12/20/2003 40,435,000 46,200,000 0.5 74,250,000 6.812% due 3/31/2005 49,722,750 53,367,188 0.6 4,500,000 Republic of Colombia, 7.25% due 2/23/2004 4,145,000 4,140,000 0.1 -------------- -------------- ------ 159,104,150 165,334,688 1.9 Forest Products 20,000,000 Champion International Corp., 6.40% due 2/15/2026 19,863,440 18,894,860 0.2 Hospital Columbia/HCA Healthcare Corp.: 20,000,000 6.125% due 12/15/2000 18,456,800 19,558,800 0.2 20,000,000 6.91% due 6/15/2005 19,919,400 19,934,800 0.2 17,500,000 6.63% due 7/15/2045 17,149,625 17,064,425 0.2 5,000,000 Tenet Healthcare Corp., 9.625% due 9/01/2002 5,000,000 5,362,500 0.1 -------------- -------------- ------ 60,525,825 61,920,525 0.7 Industrial 9,775,000 Crane Co., 7.25% due 6/15/1999 9,619,840 9,888,879 0.1 50,000,000 Williams Holdings of Delaware, Inc., 6.25% due 2/01/2006 49,739,500 47,143,500 0.5 -------------- -------------- ------ 59,359,340 57,032,379 0.6 Insurance 15,125,000 Integon Corp., 8% due 8/15/1999 15,225,519 15,230,724 0.2 10,000,000 NAC Re Corp., 8% due 6/15/1999 10,189,300 10,309,500 0.1 Travelers Inc.: 20,000,000 6.125% due 6/15/2000 18,772,550 19,499,600 0.2 20,000,000 6.875% due 6/01/2025 20,037,200 20,143,800 0.2 -------------- -------------- ------ 64,224,569 65,183,624 0.7 Machinery 15,000,000 Black & Decker Corp., 6.625% due 11/15/2000 14,248,100 14,950,650 0.2 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,080,800 0.2 Harris Corp.: 22,500,000 6.375% due 8/15/2002 22,461,850 21,891,600 0.2 10,000,000 10.375% due 12/01/2018 10,541,400 11,030,900 0.1 10,000,000 TRINOVA Corp., 7.95% due 5/01/1997 9,975,000 10,166,600 0.1 -------------- -------------- ------ 76,167,150 77,120,550 0.8 Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due 6/01/2007 3,000,000 3,015,000 0.0 Housing Natural Gas Coastal Corp.: Suppliers 13,000,000 8.75% due 5/15/1999 13,055,960 13,702,000 0.2 30,000,000 8.125% due 9/15/2002 29,984,410 31,678,800 0.3 15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 15,006,300 0.2 -------------- -------------- ------ 58,135,520 60,387,100 0.7
47 92 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Oil--Integrated Occidental Petroleum Corp.: $ 12,000,000 5.85% due 11/09/1998 $ 11,150,172 $ 11,848,080 0.1% 14,475,000 5.90% due 11/09/1998 14,325,907 14,308,827 0.2 18,375,000 6.24% due 11/24/2000 18,135,306 18,103,234 0.2 Union Texas Petroleum Holdings, Inc.: 10,000,000 6.70% due 11/18/2002 10,000,000 9,764,500 0.1 20,000,000 6.81% due 12/05/2007 20,000,000 19,417,200 0.2 Unocal Corporation: 10,000,000 6.11% due 2/17/2004 10,000,000 9,427,100 0.1 40,000,000 6.23% due 2/15/2005 40,000,000 37,810,800 0.4 25,000,000 YPF S.A., 8% due 2/15/2004 21,533,750 22,187,500 0.3 -------------- -------------- ------ 145,145,135 142,867,241 1.6 Oil--Related 20,000,000 Tosco Corporation, 7% due 7/15/2000 19,894,250 19,600,000 0.2 Railroads 3,000,000 Burlington Northern, Inc., 7.40% due 5/15/1999 2,993,580 3,065,220 0.0 Services 19,375,000 ADT Operations, 8.25% due 8/01/2000 19,511,125 19,907,813 0.2 Steel 20,000,000 USX Corp., 6.375% due 7/15/1998 19,894,000 19,877,000 0.2 Telecommuni- 25,000,000 AT&T Capital Corp., 6.07% due 10/24/1997 25,000,000 25,030,000 0.3 cations 10,000,000 Bell Atlantic Financial Services, Inc., 5.47% due 4/27/1998 10,031,400 9,882,900 0.1 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 9,647,400 0.1 -------------- -------------- ------ 45,031,400 44,560,300 0.5 Transportation 10,000,000 General American Transportation Corp., 6.44% due 11/13/2001 10,000,000 9,801,700 0.1 Utilities--Electric, 10,000,000 Commonwealth Edison Co., 6% due 3/15/1998 10,157,200 9,929,400 0.1 Gas & Water 25,000,000 Enron Corp., 6.75% due 7/01/2005 24,050,050 24,321,250 0.3 5,000,000 Long Island Lighting Co., 7.625% due 4/15/1998 4,986,210 5,029,100 0.0 PECO Energy Co.: 5,000,000 7.50% due 1/15/1999 5,043,600 5,131,700 0.1 20,000,000 5.625% due 11/01/2001 18,908,800 18,830,600 0.2 Texas Utilities Co.: 5,000,000 7.125% due 6/01/1997 4,987,500 5,060,700 0.1 9,500,000 5.75% due 7/01/1998 9,297,135 9,394,075 0.1 United Illuminating Co.: 5,000,000 7.375% due 1/15/1998 5,003,125 5,044,450 0.1 5,000,000 6.20% due 1/15/1999 4,693,050 4,894,950 0.0 87,126,670 87,636,225 1.0 -------------- -------------- ------ Total Corporate Bonds 2,292,079,893 2,290,407,868 25.4 Collateralized Mortgage Obligations Federal Home Loan Mortgage Corp.: 20,000,000 5.80% due 4/15/2006 18,615,625 19,518,600 0.2 14,902,246 6% due 4/15/2006 14,558,214 14,836,974 0.2 13,000,000 6% due 2/15/2011 12,020,937 11,765,000 0.1 Federal National Mortgage Association: 20,000,000 5.10% due 3/25/2002 19,256,250 19,756,200 0.2 12,000,000 6.50% due 1/25/2008 11,608,125 11,553,720 0.1 10,000,000 5% due 4/25/2014 9,756,250 9,853,100 0.1 13,093,229 Prudential Home Mortgage Security Co., 5.25% due 12/25/2000 12,532,675 12,790,383 0.2 Total Collateralized Mortgage Obligations 98,348,076 100,073,977 1.1
48 93 SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of Amount US Government Obligations Cost (Note 1a) Net Assets US Treasury Notes: $110,000,000 5.75% due 10/31/2000 $ 111,273,437 $ 108,401,700 1.2% 130,000,000 6.375% due 8/15/2002 123,911,719 130,751,400 1.4 525,000,000 5.75% due 8/15/2003 512,372,188 507,034,500 5.6 605,000,000 5.875% due 2/15/2004 600,813,281 586,850,000 6.5 345,000,000 5.875% due 11/15/2005 348,964,844 332,493,750 3.7 376,000,000 5.625% due 2/15/2006 375,408,750 356,613,440 4.0 Total US Government Obligations 2,072,744,219 2,022,144,790 22.4 Short-Term Investments Commercial 49,000,000 American Telephone & Telegraph Co., 5.32% Paper** due 4/23/1996 48,826,213 48,826,213 0.5 34,862,000 Associates Corp. of North America, 5.48% due 4/01/1996 34,851,386 34,851,386 0.4 42,000,000 Daimler-Benz AG, 5.14% due 4/03/1996 41,976,013 41,976,013 0.5 50,000,000 Goldman Sachs Group L.P., 5.35% due 4/25/1996 49,806,806 49,806,806 0.6 40,000,000 National Fleet Funding Corp., 5.25% due 5/01/1996 39,813,333 39,813,333 0.4 8,000,000 Schering-Plough Corp., 5.12% due 4/04/1996 7,994,311 7,994,311 0.1 -------------- -------------- ------ 223,268,062 223,268,062 2.5 US Government Federal National Mortgage Association: & Agency 40,000,000 5.17% due 4/16/1996 39,902,344 39,902,344 0.5 Obligations** 40,000,000 5.17% due 4/19/1996 39,885,111 39,885,111 0.4 40,000,000 5.17% due 4/26/1996 39,844,900 39,844,900 0.4 -------------- -------------- ------ 119,632,355 119,632,355 1.3 Total Short-Term Investments 342,900,417 342,900,417 3.8 Total Investments $8,141,193,726 8,975,372,679 99.4 ============== Other Assets Less Liabilities 56,619,615 0.6 -------------- ------ Net Assets $9,031,992,294 100.0% ============== ====== *American Depositary Receipts (ADR). **Commercial Paper and US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. ++Non-income producing security. ++++Restricted security as to resale. The value of the Fund's investments in restricted securities was $59,932,000, representing 0.7% of net assets. Acquisition Value Issue Dates Cost (Note 1a) GTE Finance Corp., 5.81% due 12/15/1997 5/25/1993 $40,000,000 $39,592,000 Province of Buenos Aires, 11.50% due 10/19/1998 10/04/1995 20,000,000 20,340,000 Total $60,000,000 $59,932,000 =========== =========== (a)Formerly Lockheed Corp. (b)Formerly National Medical Enterprises, Inc. (c)Investments in companies 5% or more of whose outstanding securities are held by the Fund (such companies are defined as "Affiliated Companies" in section 2(a)(3) of the Investment Company Act of 1940) are as follows: Net Share Net Dividend Industry Affiliate Activity Cost Income Diversified Worldtex Inc. 250,000 $ 1,155,793 +++ Companies Home Builders Oriole Homes Corp. (10,000) (104,975) +++ Insurance Fremont General Corp. 708,000 (787,434) $1,234,300 Iron & Steel Cleveland--Cliffs, Inc. (205,000) (7,544,226) 1,120,393 Real Estate RFS Hotel Investment Investors, Inc. 654,000 9,351,838 1,869,130 Trusts Real Estate Walden Residential Investment Properties, Inc. 475,000 7,954,221 2,081,130 Trusts Services PHH Corp. -- -- 2,237,800 Telecommuni- cations Nokia Corp. (ADR) 410,000 14,103,994 +++ +++Non-income producing security. See Notes to Financial Statements.
49 94 FINANCIAL INFORMATION
Statement of Assets and Liabilities as of March 31, 1996 Assets: Investments, at value (identified cost--$8,141,193,726) (Note 1a) $8,975,372,679 Cash 3,012,797 Foreign cash (Note 1c) 3,462,743 Receivables: Interest $ 57,826,401 Capital shares sold 28,875,344 Dividends 10,741,685 Securities sold 9,152,874 106,596,304 -------------- Prepaid registration fees and other assets (Note 1f) 135,000 -------------- Total assets 9,088,579,523 -------------- Liabilities: Payables: Capital shares redeemed 24,214,226 Securities purchased 21,961,605 Distributor (Note 2) 4,246,383 Investment adviser (Note 2) 2,864,387 53,286,601 -------------- Accrued expenses and other liabilities 3,300,628 -------------- Total liabilities 56,587,229 -------------- Net Assets: Net assets $9,031,992,294 ============== Net Assets Class A Shares of Common Stock, $0.10 par value, 300,000,000 shares Consist of: authorized $ 10,440,129 Class B Shares of Common Stock, $0.10 par value, 300,000,000 shares authorized 16,584,042 Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 861,485 Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 1,690,371 Paid-in capital in excess of par 7,765,965,408 Undistributed investment income--net 71,862,639 Undistributed realized capital gains on investments and foreign currency transactions--net 330,415,520 Unrealized appreciation on investments and foreign currency transactions--net 834,172,700 -------------- Net assets $9,031,992,294 ============== Net Asset Value: Class A--Based on net assets of $3,225,757,636 and 104,401,286 shares outstanding $ 30.90 ============== Class B--Based on net assets of $5,025,504,320 and 165,840,417 shares outstanding $ 30.30 ============== Class C--Based on net assets of $259,131,009 and 8,614,852 shares outstanding $ 30.08 ============== Class D--Based on net assets of $521,599,329 and 16,903,714 shares outstanding $ 30.86 ============== See Notes to Financial Statements.
50 95 FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended March 31, 1996 Investment Interest and discount earned $ 245,286,391 Income Dividends (net of $2,678,657 foreign withholding tax) 117,437,311 (Notes 1d & 1e): Other 118,038 -------------- Total income 362,841,740 Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 43,935,168 Investment advisory fees (Note 2) 31,428,894 Transfer agent fees--Class B (Note 2) 6,544,983 Transfer agent fees--Class A (Note 2) 3,690,869 Account maintenance and distribution fees--Class C (Note 2) 1,382,636 Account maintenance fees--Class D (Note 2) 875,288 Printing and shareholder reports 782,018 Registration fees (Note 1f) 707,903 Custodian fees 578,365 Transfer agent fees--Class D (Note 2) 452,520 Transfer agent fees--Class C (Note 2) 223,212 Professional fees 108,486 Directors' fees and expenses 41,285 Pricing fees 10,005 Other 117,237 -------------- Total expenses 90,878,869 -------------- Investment income--net 271,962,871 -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net 843,469,459 (Loss) on Foreign currency transactions--net (418,926) 843,050,533 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net Investments--net 481,220,303 (Notes 1b, 1c, Foreign currency transactions--net (4,321) 481,215,982 1e & 3): -------------- -------------- Net realized and unrealized gain on investments and foreign currency transactions 1,324,266,515 -------------- Net Increase in Net Assets Resulting from Operations $1,596,229,386 ============== See Notes to Financial Statements.
51 96 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended March 31, Increase (Decrease) in Net Assets: 1996 1995 Operations: Investment income--net $ 271,962,871 $ 184,513,108 Realized gain on investments and foreign currency transactions--net 843,050,533 229,679,961 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net 481,215,982 156,181,613 -------------- -------------- Net increase in net assets resulting from operations 1,596,229,386 570,374,682 -------------- -------------- Dividends & Investment income--net: Distributions to Class A (107,615,888) (79,657,527) Shareholders Class B (124,808,348) (80,336,105) (Note 1g): Class C (4,109,418) (186,349) Class D (12,210,426) (1,531,830) Realized gain on investments--net: Class A (215,994,688) (132,046,243) Class B (336,099,182) (188,065,461) Class C (11,431,655) (321,434) Class D (27,764,995) (2,472,719) -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (840,034,600) (484,617,668) -------------- -------------- Capital Share Net increase in net assets derived from capital share transactions 1,885,677,575 987,538,601 Transactions -------------- -------------- (Note 4): Net Assets: Total increase in net assets 2,641,872,361 1,073,295,615 Beginning of year 6,390,119,933 5,316,824,318 -------------- -------------- End of year* $9,031,992,294 $6,390,119,933 ============== ============== *Undistributed investment income--net (Note 1h) $ 71,862,639 $ 61,422,496 ============== ============== See Notes to Financial Statements.
52 97 FINANCIAL INFORMATION (continued) Financial Highlights
The following per share data and ratiois have been derived Class A from informatioon provided in the financial statements. For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 Per Share Net asset value, beginning of year $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net 1.21 1.01 .97 .87 1.02 Realized and unrealized gain on investments and foreign currency transactions--net 5.41 1.77 .50 1.99 2.12 ---------- ---------- ---------- ---------- ---------- Total from investment operations 6.62 2.78 1.47 2.86 3.14 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (1.16) (.94) (.95) (.87) (1.02) Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (3.46) (2.50) (1.90) (1.87) (1.62) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 24.50% 10.95% 5.39% 11.33% 12.96% Return:* ========== ========== ========== ========== ========== Ratios to Expenses .56% .57% .53% .55% .56% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 4.09% 3.81% 3.52% 3.56% 4.21% ========== ========== ========== ========== ========== Supplemental Net assets, end of year (in thousands) $3,225,758 $2,507,767 $2,237,492 $2,056,023 $1,533,530 Data: ========== ========== ========== ========== ========== Portfolio turnover 84% 89% 86% 55% 59% ========== ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++ ========== ========== ========== ========== ========== The following per share data and ratiois have been derived Class B from informatioon provided in the financial statements. For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 Per Share Net asset value, beginning of year $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .90 .74 .70 .65 .80 Realized and unrealized gain on investments and foreign currency transactions--net 5.29 1.72 .48 1.89 2.05 ---------- ---------- ---------- ---------- ---------- Total from investment operations 6.19 2.46 1.18 2.54 2.85 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.87) (.66) (.68) (.63) (.81) Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (3.17) (2.22) (1.63) (1.63) (1.41) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 23.22% 9.81% 4.36% 10.16% 11.81% Return:* ========== ========== ========== ========== ========== Ratios to Expenses 1.58% 1.59% 1.55% 1.56% 1.58% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 3.07% 2.79% 2.50% 2.53% 3.14% ========== ========== ========== ========== ========== Supplemental Net assets, end of year (in thousands) $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065 Data: ========== ========== ========== ========== ========== Portfolio turnover 84% 89% 86% 55% 59% ========== ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++ ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales loads. ++Data not required for the period. See Notes to Financial Statements.
53 98 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class C Class D For the For the For the Period For the Period The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21, from information provided in the financial statements. Ended 1994++ to Ended 1994++ to March 31, March 31, March 31, March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 27.17 $ 26.81 $ 27.72 $ 27.27 Operating ---------- ---------- ---------- ---------- Performance: Investment income--net .92 .49 1.16 .48 Realized and unrealized gain on investments and foreign currency transactions--net 5.24 1.03 5.38 1.15 ---------- ---------- ---------- ---------- Total from investment operations 6.16 1.52 6.54 1.63 ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.95) (.43) (1.10) (.45) Realized gain on investments--net (2.30) (.73) (2.30) (.73) ---------- ---------- ---------- ---------- Total dividends and distributions (3.25) (1.16) (3.40) (1.18) ---------- ---------- ---------- ---------- Net asset value, end of period $ 30.08 $ 27.17 $ 30.86 $ 27.72 ========== ========== ========== ========== Total Investment Based on net asset value per share 23.25% 6.07%+++ 24.21% 6.42%+++ Return:** ========== ========== ========== ========== Ratios to Average Expenses 1.59% 1.64%* .81% .87%* Net Assets: ========== ========== ========== ========== Investment income--net 3.08% 3.22%* 3.84% 3.94%* ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $ 259,131 $ 46,902 $ 521,599 $ 171,201 Data: ========== ========== ========== ========== Portfolio turnover 84% 89% 84% 89% ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++++$ .0382 -- ++++ ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effect of sales loads. ++Commencement of Operations. ++++Data not required for the period. +++Aggregate total investment return. See Notes to Financial Statements.
54 99 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Capital Fund, Inc. (the "Fund") is regis- tered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a con- tingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has ex- clusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities which are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Securities traded in the over-the- counter market are valued at the last available bid price prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representa- tive market. Options written are valued at the last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last asked price. Options purchased are valued at the last sale price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the last bid price. Short-term securities are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not available are valued at fair value as determined in good faith by or under the direction of the Fund's Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the equity, debt and currency markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Options--The Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing trans- action), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income pro- ducing investments. (c) Foreign currency transactions--Transactions denomi- nated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unreal- ized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax pro- vision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income-- Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Interest 55 100 income (including amortization of discount) is recog- nized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Reclassification--Generally accepted accounting principles require that certain components of net assets be reclassified to reflect permanent differences between financial reporting and tax purposes. Accordingly, current year's permanent book/tax differences of $12,778,648 have been reclassified from undistributed net investment income to accumulated net realized capital losses. These reclassifications have no effect on net assets or net asset value per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned sub- sidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facili- ties, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee based upon the average daily value of the Fund's net assets at the following annual rates: 0.50% of the Fund's average daily net assets not exceeding $250 million; 0.45% of average daily net assets in excess of $250 million but not exceeding $300 million; 0.425% of average daily net assets in excess of $300 million but not exceeding $400 million; and 0.40% of average daily net assets in excess of $400 million. The Investment Advisory Agreement obligates MLAM to reimburse the Fund to the extent the Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the Fund's next $70 million of average daily net assets, and 1.5% of the average daily net assets in excess thereof. No fee payment will be made to MLAM during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation at the time of such payment. Pursuant to the distribution plans (the "Distribution Plans") adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Distribution Maintenance Fee Fee Class B 0.25% 0.75% Class C 0.25% 0.75% Class D 0.25% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account main- tenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Dis- tributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Dis- tributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended March 31, 1996, MLFD earned under- writing discounts and commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: MLFD MLPF&S Class A $ 81,332 $1,167,475 Class D $247,249 $3,538,854 For the year ended March 31, 1996, MLPF&S received contingent deferred sales charges of $4,025,586 and $75,917 relating to transactions in Class B and Class C Shares, respectively. In addition, MLPF&S received $525,422 in commissions on the execution of portfolio security transactions for the year ended March 31, 1996. 56 101 NOTES TO FINANCIAL STATEMENTS (concluded) Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. During the year ended March 31, 1996, Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, received $7,714 for security price quotations to compute the net asset value of the Fund. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short- term securities, for the year ended March 31, 1996 were $7,446,853,963 and $6,285,139,919, respectively. Net realized and unrealized gains (losses) as of March 31, 1996 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) Long-term investments $843,151,299 $834,178,953 Short-term investments (22,268) -- Paydowns 340,428 -- Foreign currency transactions (418,926) (6,253) ------------ ------------ Total $843,050,533 $834,172,700 ============ ============ As of March 31, 1996, net unrealized appreciation for Federal income tax purposes aggregated $830,016,332, of which $982,470,622 related to appreciated securities and $152,454,290 related to depreciated securities. At March 31, 1996, the aggregate cost of investments for Federal income tax purposes was $8,145,356,347. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $1,885,677,575 and $987,538,601 for the years ended March 31, 1996 and March 31, 1995, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 19,027,848 $ 584,244,547 Shares issued to shareholders in reinvestment of dividends & distributions 9,847,092 289,450,802 -------------- -------------- Total issued 28,874,940 873,695,349 Shares redeemed (14,880,078) (451,792,754) -------------- -------------- Net increase 13,994,862 $ 421,902,595 ============== ============== Class A Shares for the Year Dollar Ended March 31, 1995 Shares Amount Shares sold 17,286,503 $ 471,481,609 Shares issued to shareholders in reinvestment of dividends & distributions 7,424,496 192,734,824 -------------- -------------- Total issued 24,710,999 664,216,433 Shares redeemed (15,776,697) (427,291,645) -------------- -------------- Net increase 8,934,302 $ 236,924,788 ============== ============== Class B Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 45,146,025 $1,369,296,478 Shares issued to shareholders in reinvestment of dividends & distributions 13,896,514 386,369,306 -------------- -------------- Total issued 59,042,539 1,755,665,784 Shares redeemed (25,082,439) (748,567,202) Automatic conversion of shares (2,447,861) (71,651,206) -------------- -------------- Net increase 31,512,239 $ 935,447,376 ============== ============== Class B Shares for the Year Dollar Ended March 31, 1995 Shares Amount Shares sold 35,795,347 $ 958,699,323 Shares issued to shareholders in reinvestment of dividends & distributions 9,333,565 239,011,925 -------------- -------------- Total issued 45,128,912 1,197,711,248 Shares redeemed (20,872,708) (557,090,978) Automatic conversion of shares (3,804,492) (100,075,150) -------------- -------------- Net increase 20,451,712 $ 540,545,120 ============== ============== Class C Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 7,451,321 $ 221,649,300 Shares issued to shareholders in reinvestment of dividends & distributions 474,830 13,924,668 -------------- -------------- Total issued 7,926,151 235,573,968 Shares redeemed (1,037,499) (31,045,232) -------------- -------------- Net increase 6,888,652 $ 204,528,736 ============== ============== Class C Shares for the Period Dollar Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount Shares sold 1,868,357 $ 49,114,822 Shares issued to shareholders in reinvestment of dividends & distributions 18,191 452,606 -------------- -------------- Total issued 1,886,548 49,567,428 Shares redeemed (160,348) (4,186,298) -------------- -------------- Net increase 1,726,200 $ 45,381,130 ============== ============== [FN] ++Commencement of Operations. 57 102 Class D Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 10,198,663 $ 303,203,877 Automatic conversion of shares 2,406,94 71,651,206 Shares issued to shareholders in reinvestment of dividends & distributions 1,173,178 35,170,384 -------------- -------------- Total issued 13,778,786 410,025,467 Shares redeemed (3,050,741) (86,226,599) -------------- -------------- Net increase 10,728,045 $ 323,798,868 ============== ============== Class D Shares for the Period Dollar Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount Shares sold 2,621,771 $ 69,784,869 Automatic conversion of shares 3,740,107 100,075,150 Shares issued to shareholders in reinvestment of dividends & distributions 140,100 3,548,731 -------------- -------------- Total issued 6,501,978 173,408,750 Shares redeemed (326,309) (8,721,187) -------------- -------------- Net increase 6,175,669 $ 164,687,563 ============== ============== [FN] ++Commencement of Operations. 5. Commitments: At March 31, 1996, the Fund had entered into forward exchange contracts under which it had agreed to buy and sell various foreign currencies with a value of $317,838 and 696,025, respectively. 58 103 TABLE OF CONTENTS
PAGE ---- Investment Objective and Policies......................... 2 Management of the Fund............. 6 Directors and Officers........... 6 Compensation of Directors........ 7 Management and Advisory Arrangements.................. 8 Purchase of Shares................. 10 Initial Sales Charge Alternatives -- Class A and Class D Shares.... 10 Reduced Initial Sales Charges.... 11 Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements............ 14 Distribution Plans............... 15 Limitations on the Payment of Deferred Sales Charges........ 15 Redemption of Shares............... 16 Deferred Sales Charge -- Class B and Class C Shares.... 17 Portfolio Transactions and Brokerage........................ 17 Determination of Net Asset Value... 19 Shareholder Services............... 20 Investment Account............... 20 Automatic Investment Plans....... 21 Automatic Reinvestment of Dividends and Capital Gains Distributions................. 21 Systematic Withdrawal Plans -- Class A and Class D Shares.... 21 Retirement Plans................. 22 Exchange Privilege............... 22 Dividends, Distributions and Taxes............................ 25 Dividends and Distributions...... 25 Taxes............................ 25 Tax Treatment of Options Transactions.................. 27 Special Rules for Certain Foreign Currency Transactions......... 27 Performance Data................... 28 General Information................ 30 Description of Shares............ 30 Computation of Offering Price per Share..................... 31 Independent Auditors............. 31 Custodian........................ 32 Transfer Agent................... 32 Legal Counsel.................... 32 Reports to Shareholders.......... 32 Additional Information........... 32 Appendix A......................... 33 Independent Auditors' Report....... 40 Financial Statements............... 41 Code #10257-0796
Merrill Lynch Capital Fund, Inc. STATEMENT OF ADDITIONAL INFORMATION July 26, 1996 Distributor: Merrill Lynch Funds Distributor, Inc. 104 APPENDIX FOR GRAPHIC AND IMAGE MATERIAL Pursuant to Rule 304 of Regulation S-T, the following table presents fair and accurate narrative descriptions of graphic and image material omitted from this EDGAR Submission File due to ASCII-incompatibility and cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC GRAPHIC OR IMAGE OR IMAGE IN TEXT - ---------------------- ------------------- Compass plate, circular Back cover of Prospectus and graph paper and Merrill Lynch back cover of Statement of logo including stylized market Additional Information bull.
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