-----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, NBcw/BP/xXFo/QX9y9R0qtXeSWsTNk1swOFZmuE/U/r5X+gAaY/tZemKIT+/i5kV bnSxFxYbuLLbhCTpzPAcBQ== 0000905148-01-500883.txt : 20010724 0000905148-01-500883.hdr.sgml : 20010724 ACCESSION NUMBER: 0000905148-01-500883 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20010723 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH FUNDAMENTAL GROWTH FUND INC CENTRAL INDEX KEY: 0000887509 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NJ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-14 SEC ACT: SEC FILE NUMBER: 333-65644 FILM NUMBER: 1686288 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: P.O. BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-14 1 efc1-0730_830897n14.txt As filed with the Securities and Exchange Commission on July 23, 2001 Securities Act File No. 333-__________ Investment Company Act File No. 811-6669 =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ----------------- FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- [_] Pre-Effective Amendment No. [_] Post-Effective Amendment No. (Check appropriate box or boxes) ----------------- Merrill Lynch Fundamental Growth Fund, Inc. (Exact Name of Registrant as Specified in its Charter) ----------------- (609) 282-2800 (Area Code and Telephone Number) ----------------- 800 Scudders Mill Road Plainsboro, New Jersey 08536 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) ----------------- Terry K. Glenn Merrill Lynch Fundamental Growth Fund, Inc. 800 Scudders Mill Road, Plainsboro, New Jersey 08536 Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011 (Name and Address of Agent for Service) ----------------- Copies to: Frank P. Bruno, Esq. Michael J. Hennewinkel, Esq. SIDLEY AUSTIN BROWN & WOOD LLP Merrill Lynch investment Managers, L.P. One World Trade Center 800 Scudders Mill Road New York, New York 10048-0557 Plainsboro, New Jersey 08536 ----------------- It is proposed that this filing will become effective on August 22, 2001 pursuant to Rule 488. Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933. Title of Securities Being Registered: Common Stock, Par Value $.10 per share. No filing fee is required because of reliance on Section 24(f) under the Investment Company Act of 1940, as amended. ================================================================================ MERRILL LYNCH GROWTH FUND P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 ----------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS ----------------- To Be Held On October 15, 2001 TO THE SHAREHOLDERS OF MERRILL LYNCH GROWTH FUND: NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Meeting") of Merrill Lynch Growth Fund ("Growth Fund") will be held at the offices of Merrill Lynch Investment Managers, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on October 15, 2001 at 10:00 a.m., Eastern time, for the following purposes: (1) To approve or disapprove an Agreement and Plan of Reorganization (the "Agreement and Plan") providing for the acquisition by Merrill Lynch Fundamental Growth Fund, Inc. ("Fundamental Growth") of substantially all of the assets, and the assumption by Fundamental Growth of substantially all of the liabilities, of Growth Fund, in return solely for an equal aggregate value of newly-issued shares of common stock of Fundamental Growth. The Agreement and Plan also provides for distribution of such shares of common stock of Fundamental Growth to shareholders of Growth Fund in liquidation of Growth Fund. A vote in favor of the approval of the Agreement and Plan will constitute a vote in favor of the liquidation and dissolution of Growth Fund under the laws of the Commonwealth of Massachusetts and the termination of Growth Fund's registration under the Investment Company Act of 1940, as amended; and (2) To transact such other business as properly may come before the Meeting or any adjournment thereof. Shareholders of Growth Fund are not entitled to appraisal rights in connection with the transaction. The Board of Trustees of Growth Fund has fixed the close of business on August 17, 2001 as the record date for the determination of shareholders of Growth Fund entitled to notice of, and to vote at, the Meeting or any adjournment thereof. A complete list of the shareholders of Growth Fund entitled to vote at the Meeting will be available and open to the examination of any shareholder of Growth Fund for any purpose germane to the Meeting during ordinary business hours from and after October 1, 2001 at the offices of Growth Fund, 800 Scudders Mill Road, Plainsboro, New Jersey. You are cordially invited to attend the Meeting. Shareholders of Growth Fund who do not expect to attend the Meeting in person are requested to complete, date and sign the enclosed form of proxy and return it promptly in the envelope provided for that purpose. If you have been provided with the opportunity on your proxy card or voting instruction form to provide voting instructions via telephone or the internet, please take advantage of these prompt and efficient voting options. The enclosed proxy is being solicited on behalf of the Board of Trustees of Growth Fund. [If you have any questions regarding the enclosed proxy material or need assistance in voting your shares, please contact our proxy solicitor, Georgeson Shareholder Communications Inc., at 1-___-___-____.] By Order of the Board of Trustees, LORI A. MARTIN Secretary Merrill Lynch Growth Fund Plainsboro, New Jersey Dated: August __, 2001 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED JULY 23, 2001 PROXY STATEMENT OF MERRILL LYNCH GROWTH FUND FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS To Be Held On October 15, 2001 --------------------- PROSPECTUS OF MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (609) 282-2800 --------------------- This Proxy Statement and Prospectus is furnished in connection with the solicitation of proxies on behalf of the Board of Trustees of Merrill Lynch Growth Fund, a Massachusetts business trust ("Growth Fund"), for use at the Special Meeting of Shareholders of Growth Fund (the "Meeting") called to approve or disapprove the proposed reorganization whereby Merrill Lynch Fundamental Growth Fund, Inc., a Maryland corporation ("Fundamental Growth"), will acquire substantially all of the assets, and will assume substantially all of the liabilities, of Growth Fund, in return solely for an equal aggregate value of newly-issued shares of common stock of Fundamental Growth (the "Reorganization"). Immediately upon the acquisition by Fundamental Growth of the assets of Growth Fund and the assumption by Fundamental Growth of the liabilities of Growth Fund, Growth Fund will distribute the shares of common stock of Fundamental Growth received in the Reorganization to the shareholders of Growth Fund. Thereafter, Growth Fund will terminate its registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and will be terminated in accordance with the laws of the Commonwealth of Massachusetts. Holders of shares of beneficial interest of Growth Fund will receive that class of shares of common stock of Fundamental Growth having the same letter designation (i.e., Class A, Class B, Class C or Class D) and the same distribution fees, account maintenance fees, and sales charges (including contingent deferred sales charges ("CDSCs")), if any (the "Corresponding Shares"), as the shares of beneficial interest of Growth Fund held by them immediately prior to the Reorganization. The aggregate net asset value of the Corresponding Shares of Fundamental Growth to be issued to the shareholders of Growth Fund will equal the aggregate net asset value of the outstanding shares of beneficial interest of Growth Fund as set forth in the Agreement and Plan of Reorganization. Growth Fund and Fundamental Growth sometimes are referred to in this Proxy Statement and Prospectus collectively as the "Funds" and individually as a "Fund," as the context requires. The fund resulting from the Reorganization is sometimes referred to in this Proxy Statement and Prospectus as the "Combined Fund." This Proxy Statement and Prospectus serves as a prospectus of Fundamental Growth under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the issuance of shares of Fundamental Growth to Growth Fund pursuant to the terms of the Reorganization. (continued on next page) --------------------- The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Proxy Statement and Prospectus. Any representation to the contrary is a criminal offense. --------------------- The date of this Proxy Statement and Prospectus is August __, 2001 Both Growth Fund and Fundamental Growth are open-end management investment companies that seek to provide shareholders with growth of capital. The investment objective of Fundamental Growth is to seek long-term growth of capital. Fundamental Growth tries to achieve its investment objective by investing primarily in a portfolio of common stocks of U.S. companies that Fundamental Growth management believes have shown above-average rates of earnings growth over the long-term. The investment objective of Growth Fund is to seek growth of capital and, secondarily, income. Growth Fund invests primarily in common stock of companies that Growth Fund management believes have the potential to achieve above average growth rates in earnings, revenues, cash flow or earnings before interest, taxes, depreciation and amortization. No assurance can be given that the Combined Fund will achieve its investment objective after the Reorganization. This Proxy Statement and Prospectus sets forth concisely the information about Fundamental Growth that shareholders of Growth Fund should know as they consider the Reorganization and should be retained for future reference. Growth Fund authorized the solicitation of proxies in connection with the Reorganization solely on the basis of this Proxy Statement and Prospectus and the accompanying documents. The Board of Trustees of Growth Fund has fixed the close of business on August 17, 2001 as the record date (the "Record Date") for the determination of shareholders of Growth Fund entitled to notice of and to vote at the Meeting and at any adjournment thereof. Each shareholder of Growth Fund on the Record Date will be entitled to one vote for each share of Growth Fund held, with no share having cumulative voting rights. As of the Record Date, Growth Fund had ___________ shares outstanding. The current prospectus relating to Fundamental Growth, dated December 11, 2000, as amended and supplemented to date (the "Fundamental Growth Prospectus"), accompanies this Proxy Statement and Prospectus and is incorporated herein by reference. The Annual Report to Stockholders of Fundamental Growth for the fiscal year ended August 31, 2000 and the Semi-Annual Report to Stockholders of Fundamental Growth for the six months ended February 28, 2001 also accompany this Proxy Statement and Prospectus. A statement of additional information relating to Fundamental Growth, dated December 11, 2000, as amended and supplemented to date (the "Fundamental Growth Statement"), a prospectus relating to Growth Fund, dated February 16, 2001 (the "Growth Fund Prospectus"), and a statement of additional information relating to Growth Fund, dated February 16, 2001 (the "Growth Fund Statement"), have been filed with the Securities and Exchange Commission (the "Commission"). Such documents may be obtained, without charge, by writing either Growth Fund or Fundamental Growth at the address above, or by calling 1-800-456-4587, ext. 123. The Growth Fund Prospectus, as amended and supplemented to date, is incorporated herein by reference. TABLE OF CONTENTS Page INTRODUCTION.................................................................1 SUMMARY......................................................................1 The Reorganization.......................................................1 What Shareholders of Growth Fund Will Receive in the Reorganization...........................................................2 Reasons for the Reorganization...........................................2 Fee Tables...............................................................3 RISK FACTORS AND SPECIAL CONSIDERATIONS.....................................13 COMPARISON OF THE FUNDS.....................................................18 Financial Highlights....................................................18 Investment Objectives...................................................26 Investment Policies.....................................................26 Other Investment Policies...............................................27 Information Regarding Options, Futures and Foreign Exchange Transactions............................................................29 Investment Restrictions.................................................29 Management..............................................................29 Purchase of Shares......................................................31 Redemption of Shares....................................................31 Performance.............................................................31 Code of Ethics..........................................................32 Shareholder Rights......................................................32 Dividends...............................................................33 Automatic Dividend Reinvestment Plan....................................33 Tax Information.........................................................33 Portfolio Transactions..................................................33 Portfolio Turnover......................................................33 Additional Information..................................................34 THE REORGANIZATION..........................................................35 General.................................................................35 Procedure...............................................................35 Terms of the Agreement and Plan.........................................36 Potential Benefits to Shareholders as a Result of the Reorganization.......................................................37 Tax Consequences of the Reorganization..................................38 Appraisal Rights........................................................39 Capitalization..........................................................39 INFORMATION CONCERNING THE MEETING..........................................40 Date, Time and Place of Meeting.........................................40 Solicitation, Revocation and Use of Proxies.............................40 Record Date and Outstanding Shares......................................40 Security Ownership of Certain Beneficial and Registered Owners and Management of Growth Fund and Fundamental Growth...............................................................40 Voting Rights and Required Vote.........................................40 ADDITIONAL INFORMATION......................................................41 LEGAL PROCEEDINGS...........................................................41 LEGAL OPINIONS..............................................................42 EXPERTS.....................................................................42 EXHIBIT I - AGREEMENT AND PLAN OF REORGANIZATION...........................I-1 EXHIBIT II - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND REGISTERED OWNERS OF SHARES OF FUNDAMENTAL GROWTH AND GROWTH FUND.....II-1 INTRODUCTION This Proxy Statement and Prospectus is furnished in connection with the solicitation of proxies on behalf of the Board of Trustees of Growth Fund for use at the Meeting to be held at the offices of Merrill Lynch Investment Managers, L.P. ("MLIM"), 800 Scudders Mill Road, Plainsboro, New Jersey on October 15, 2001, at 10:00 a.m., Eastern time. The mailing address for Growth Fund is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy Statement and Prospectus is August 31, 2001. Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation of such proxy to the Secretary of Growth Fund at the address indicated above or by voting in person at the Meeting. All properly executed proxies received prior to the Meeting will be voted at the Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, properly executed proxies will be voted "FOR" the proposal to approve the Agreement and Plan of Reorganization between Growth Fund and Fundamental Growth (the "Agreement and Plan"). Approval of the Agreement and Plan will require the affirmative vote of Growth Fund shareholders representing not less than two-thirds of the total number of votes entitled to be cast thereon. Shareholders of Growth Fund will vote as a single class on the proposal to approve the Agreement and Plan. See "Information Concerning the Meeting." Fundamental Growth is incorporated as a Maryland corporation while Growth Fund is organized as a Massachusetts business trust. In each jurisdiction, nomenclature varies. For ease of reference and clarity of presentation, shares of beneficial interest of Growth Fund and shares of common stock of Fundamental Growth are each referred to herein as "shares"; holders of shares are referred to herein as "shareholders"; the Trustees of Growth Fund and the Directors of Fundamental Growth are each referred to herein as "Board Members"; the Board of Trustees of Growth Fund and the Board of Directors of Fundamental Growth are each referred to herein as a "Board" and collectively as the "Boards"; the Declaration of Trust of Growth Fund and the Articles of Incorporation of Fundamental Growth, each as amended and supplemented, are each referred to herein as a "Charter"; MLIM, in its capacity as Investment Adviser for Growth Fund and in its capacity as Manager for Fundamental Growth, is referred to herein as the "Investment Adviser"; and the Investment Advisory Agreement for Growth Fund and the Management Agreement for Fundamental Growth, each as amended, are each referred to herein as an "Investment Advisory Agreement." The Board of Growth Fund knows of no business other than that discussed above that will be presented for consideration at the Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment. This Proxy Statement and Prospectus serves as a prospectus of Fundamental Growth under the Securities Act in connection with the issuance of shares of Fundamental Growth to Growth Fund pursuant to the terms of the Agreement and Plan. SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement and Prospectus (including documents incorporated by reference) and is qualified in its entirety by reference to the more complete information contained in this Proxy Statement and Prospectus and in the Agreement and Plan, attached hereto as Exhibit I. The Reorganization At a meeting of the Board of Growth Fund held on June 20, 2001 and a meeting of the Board of Fundamental Growth held on July 11, 2001, the Boards approved the proposal pursuant to which Fundamental Growth would acquire substantially all of the assets of Growth Fund and assume substantially all of the liabilities of Growth Fund in return for newly issued shares of Fundamental Growth to be distributed to the shareholders of Growth Fund in proportion to such shareholders' interest in Growth Fund in liquidation of Growth Fund. What Shareholders of Growth Fund Will Receive in the Reorganization If the Agreement and Plan is approved and the Reorganization is consummated: o Fundamental Growth will acquire the assets and assume the liabilities of Growth Fund; o You will become a shareholder of Fundamental Growth; and o You will receive Corresponding Shares that have the same aggregate net asset value as the shares of Growth Fund held by you immediately prior to the Reorganization. You should consult your tax advisors regarding the effect of the Reorganization in light of your individual circumstances. Reasons for the Reorganization The Board of Growth Fund has approved the Agreement and Plan and recommends that you vote to approve the Agreement and Plan. The Board of Growth Fund has determined that Growth Fund shareholders are likely to benefit from the Reorganization and believe that the Reorganization is in the best interests of Growth Fund and its shareholders and that the interests of Growth Fund shareholders will not be diluted as a result of the Reorganization. In reaching their conclusion, the Board of Growth Fund considered a number of factors, including the following: o After the Reorganization, it is expected that Growth Fund shareholders will be invested in a substantially larger open-end fund (for example, as of February 28, 2001, the net assets of Growth Fund were $1.8 billion while the net assets of the Combined Fund would have been approximately $7.7 billion on a pro forma basis); o After the Reorganization, it is expected that Growth Fund shareholders will experience a lower operating expense ratio on a pro forma basis; o After the Reorganization, it is expected that Growth Fund shareholders will experience improved economies of scale; o After the Reorganization, it is expected that Growth Fund shareholders will benefit from greater flexibility in portfolio management; o After the Reorganization, Growth Fund shareholders will be invested in a diversified fund; o After the Reorganization, it is expected that Fundamental Growth will not sell or otherwise dispose of any of the assets of Growth Fund acquired in the Reorganization, except for dispositions made in the ordinary course of business, because the securities currently held in the portfolio of Growth Fund are consistent with the investment objective and policies of Fundamental Growth and are not prohibited by the investment restrictions of Fundamental Growth; and o After the Reorganization, Growth Fund shareholders can still redeem their shares or exchange them into certain other Merrill Lynch mutual funds. See "Fee Tables" below and "The Reorganization--Potential Benefits to Shareholders as a Result of the Reorganization." If all of the required approvals are obtained, it is anticipated that the Reorganization will occur as soon as practicable thereafter, provided that Growth Fund and Fundamental Growth have obtained prior to that time an opinion of counsel concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan. See "The Reorganization--Tax Consequences of the Reorganization." The Agreement and Plan may be terminated, and the Reorganization abandoned, whether before or after approval by the shareholders of Growth Fund, at any time prior to the Closing Date (as defined below), (i) by mutual consent of the Board of Growth Fund and the Board of Fundamental Growth; (ii) by Growth Fund if any condition to Growth Fund's obligations has not been fulfilled or waived by such Fund; or (iii) by Fundamental Growth if any condition to Fundamental Growth's obligations has not been fulfilled or waived by such Fund. Fee Tables The fee tables set forth below provide information about the fees and expenses attributable to shares of each class of Growth Fund and Fundamental Growth as of February 28, 2001 and, assuming the Reorganization had taken place on February 28, 2001, the estimated pro forma annualized fees and expenses attributable to shares of each class of the Combined Fund. Future fees and expenses may be greater or less than those indicated below.
Fee Table for Class A and Class B Shareholders of Growth Fund, Fundamental Growth and the Combined Fund* as of February 28, 2001 (Unaudited) Class A Shares Class B Shares (b) ---------------------------------- ----------------------------------- Actual Pro Forma Actual Pro Forma ---------------------- --------- ---------------------- --------- Growth Fundamental Combined Growth Fundamental Combined Fund Growth Fund* Fund Growth Fund* ---- ------ ----- ---- ------ ----- Shareholder Fees (fees paid directly from shareholder's investment)(a): Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)...................... 5.25%(c) 5.25%(c) 5.25%(c) None None None Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is lower)............................ None(d) None(d) None(d) 4.00%(c) 4.00%(c) 4.00%(c) Maximum Sales Charge (Load) Imposed on Dividend Reinvestments........................ None None None None None None Redemption Fee......................... None None None None None None Exchange Fee........................... None None None None None None Annual Fund Operating Expenses (expenses that are deducted from fund assets): Investment Advisory Fee................ 0.65%(e) 0.61%(f) 0.60%(g) 0.65%(e) 0.61%(f) 0.60%(g) Distribution and/or Service (12b-1) Fees(h).............................. None None None 1.00% 1.00% 1.00% Other Expenses (including transfer agency fees)(i)...................... 0.36% 0.14% 0.14% 0.36% 0.15% 0.14% ---------- -------------- ---------- --------- ------------- ----------- Total Annual Fund Operating Expenses 1.01% 0.75% 0.74% 2.01% 1.76% 1.74% ========== ============== ========== ========= ============= =========== _______________ Footnotes appear on the next page.
Fee Table for Class C and Class D Shareholders of Growth Fund, Fundamental Growth and the Combined Fund* as of February 28, 2001 (Unaudited) Class C Shares Class D Shares ------------------------------------ ----------------------------------- Actual Pro Forma Actual Pro Forma ---------------------- --------- ---------------------- --------- Growth Fundamental Combined Growth Fundamental Combined Fund Growth Fund* Fund Growth Fund* ---- ------ ----- ---- ------ ----- Shareholder Fees (fees paid directly from shareholder's investment)(a): Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)..................... None None None 5.25%(c) 5.25%(c) 5.25%(c) Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is lower)....... 1.00%(c) 1.00%(c) 1.00%(c) None(d) None(d) None(d) Maximum Sales Charge (Load) Imposed on Dividend Reinvestments....................... None None None None None None Redemption Fee......................... None None None None None None Exchange Fee........................... None None None None None None Annual Fund Operating Expenses (expenses that are deducted from fund assets): Investment Advisory Fee................ 0.65%(e) 0.61%(f) 0.60%(g) 0.65%(e) 0.61%(f) 0.60%(g) Distribution and/or Service (12b-1) Fees(h)............................. 1.00% 1.00% 1.00% 0.25% 0.25% 0.25% Other Expenses (including transfer agency fees)(i)..................... 0.36% 0.16% 0.14% 0.36% 0.13% 0.14% ---------- -------------- ----------- --------- ------------- ----------- Total Annual Fund Operating Expenses... 2.01% 1.77% 1.74% 1.26% 0.99% 0.99% ========== ============== =========== ========= ============= =========== - --------------- * The expenses for the Combined Fund represent the estimated annualized expenses assuming Fundamental Growth had acquired the assets and assumed the liabilities of Growth Fund as of February 28, 2001. (a) In addition, Merrill Lynch, Pierce, Fenner & Smith, Incorporated ("Merrill Lynch") may charge clients a processing fee (currently $5.35) when a client buys or sells shares. (b) Class B shares convert to Class D shares automatically approximately eight years after initial purchase and will no longer be subject to distribution fees. (c) Some investors may qualify for reductions in the sales charge (load). (d) A shareholder may pay a deferred sales charge if such shareholder purchases $1 million or more and redeems within one year. (e) Growth Fund pays MLIM a monthly investment advisory fee at the annual rate of 0.65% of the average daily net assets of Growth Fund. MLIM has voluntarily agreed to reduce its fee as Fund assets grow. The reduced investment advisory fee is equal to 0.65% of the average daily net assets of Growth Fund not exceeding $1.0 billion; 0.625% of the average daily net assets of Growth Fund from $1.0 billion to $1.5 billion; 0.60% of the average daily net assets of Growth Fund from $1.5 billion to $10 billion; and 0.575% of the average daily net assets of Growth Fund in excess of $10 billion. For the fiscal year ended October 31, 2000, MLIM received a monthly investment advisory fee equal to 0.62% of the average daily net assets of Growth Fund. For the six month period ended February 28, 2001, MLIM received a monthly investment advisory fee equal to 0.63% of the average daily net assets of Growth Fund. The Investment Advisory Fee and Total Annual Fund Operating Expenses in the table above have been restated for Growth Fund to assume the absence of such voluntary waiver because MLIM may reduce or discontinue such voluntary waiver of investment advisory fees at any time without notice. After taking such waiver into account, Growth Fund's Total Annual Fund Operating Expenses as of February 28, 2001 are 0.99%, 1.99%, 1.99% and 1.24% for Classes A, B, C and D, respectively. (Footnotes continued on next page) (footnotes continued from preceding page) (f) Fundamental Growth has agreed to pay MLIM a monthly investment advisory fee at the annual rate of 0.65% of the average daily net assets of Fundamental Growth not exceeding $1.0 billion; 0.625% of the average daily net assets of Fundamental Growth from $1.0 billion to $1.5 billion; 0.60% of the average daily net assets of Fundamental Growth from $1.5 billion to $5 billion; 0.575% of the average daily net assets of Fundamental Growth from $5 billion to $7.5 billion; and 0.55% of the average daily net assets of Fundamental Growth in excess of $7.5 billion. For the fiscal year ended August 31, 2000, MLIM received a monthly investment advisory fee equal to 0.61% of the average daily net assets of Fundamental Growth. [For the six month period ended February 28, 2001, MLIM received a monthly investment advisory fee equal to 0.61% of the average daily net assets of Fundamental Growth.] (g) After the Reorganization, the investment advisory fee paid by the Combined Fund will be at Fundamental Growth's contractual rate. Assuming the Reorganization had taken place on February 28, 2001, the Combined Fund would have paid, on a pro forma basis, a monthly investment advisory fee at the annual rate of 0.60% of the average daily net assets of the Combined Fund. (h) The Funds call the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used in the Prospectuses of the Funds and all other Fund materials. If a shareholder holds Class B or Class C shares over time, it may cost that shareholder more in distribution (12b-1) fees than the maximum sales charge that such shareholder would have paid if he or she had bought one of the other classes. (i) Each Fund pays Financial Data Services, Inc. (the "Transfer Agent") $11.00 for each Class A and Class D shareholder account and $14.00 for each Class B and Class C shareholder account and reimburses the Transfer Agent's out-of-pocket expenses. Each Fund pays a 0.10% fee for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor program. Each Fund also pays a $0.20 monthly closed account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the month the account is closed and ends at the end of the calendar year. For the fiscal year ended August 31, 2000, Fundamental Growth paid the Transfer Agent fees totaling $6,266,647. For the fiscal year ended October 31, 2000, Growth Fund paid the Transfer Agent fees totaling $6,983,015.
Examples: These examples assume that you invest $10,000 in the relevant Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES: --- 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------------------------------------------------------------------- Class A - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $623 $830 $1,054 $1,696 Fundamental Growth.............. $598 $752 $920 $1,406 Combined Fund+.................. $597 $749 $915 $1,395 - ---------------------------------------------------------------------------------------------------------------------- Class B - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $604 $931 $1,283 $2,144* Fundamental Growth.............. $579 $854 $1,154 $1,875* Combined Fund+.................. $577 $848 $1,144 $1,853* - ---------------------------------------------------------------------------------------------------------------------- Class C - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $304 $631 $1,083 $2,338 Fundamental Growth.............. $280 $557 $959 $2,084 Combined Fund+.................. $277 $548 $944 $2,052 - ---------------------------------------------------------------------------------------------------------------------- Class D - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $647 $904 $1,180 $1,968 Fundamental Growth.............. $621 $824 $1,043 $1,674 Combined Fund+.................. $621 $824 $1,043 $1,674 - --------------- + Assumes the Reorganization had taken place on February 28, 2001. * Assumes the conversion of Class B shares to Class D shares approximately eight years after initial purchase.
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES: ------- 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------------------------------------------------------------------- Class A - --------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $623 $830 $1,054 $1,696 Fundamental Growth.............. $598 $752 $920 $1,406 Combined Fund+.................. $597 $749 $915 $1,395 - ---------------------------------------------------------------------------------------------------------------------- Class B - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $204 $631 $1,083 $2,144* Fundamental Growth.............. $179 $554 $954 $1,875* Combined Fund+.................. $177 $548 $944 $1,853* - --------------------------------------------------------------------------------------------------------------------- Class C - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $204 $631 $1,083 $2,338 Fundamental Growth.............. $180 $557 $959 $2,084 Combined Fund+.................. $177 $548 $944 $2,052 - ---------------------------------------------------------------------------------------------------------------------- Class D - ---------------------------------------------------------------------------------------------------------------------- Growth Fund..................... $647 $904 $1,180 $1,968 Fundamental Growth.............. $621 $824 $1,043 $1,674 Combined Fund+.................. $621 $824 $1,043 $1,674 - --------------- + Assumes the Reorganization had taken place on February 28, 2001. * Assumes conversion of Class B shares to Class D shares approximately eight years after initial purchase.
The foregoing Fee Tables and Examples are intended to assist investors in understanding the costs and expenses that a Growth Fund or Fundamental Growth shareholder bears directly or indirectly as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The Examples set forth above assume reinvestment of all dividends and utilize a 5% annual rate of return as mandated by Commission regulations. The Examples should not be considered a representation of past or future expenses or annual rates of return, and actual expenses or annual rates of return may be more or less than those assumed for purposes of the Examples. See "Summary," "The Reorganization--Potential Benefits to Shareholders as a Result of the Reorganization" and "Comparison of the Funds--Management," "--Purchase of Shares" and "--Redemption of Shares." Growth Fund............... Growth Fund was organized under the laws of the Commonwealth of Massachusetts on December 11, 1986 under the name Merrill Lynch Retirement Equity Fund. On March 1, 1991, the name of Growth Fund was changed to Merrill Lynch Growth Fund for Investment and Retirement. On June 27, 1996, the name was changed to Merrill Lynch Growth Fund. Growth Fund is a non-diversified, open-end management investment company. As of May 31, 2001, Growth Fund had aggregate net assets of approximately $1.7 billion. Fundamental Growth........ Fundamental Growth was incorporated under the laws of the State of Maryland on April 30, 1992. Fundamental Growth is a diversified, open-end management investment company. As of May 31, 2001, Fundamental Growth had aggregate net assets of approximately $5.9 billion. Comparison of the Funds... Investment Objective and Policies. The Funds have similar, though not identical, investment objectives. The investment objective of Fundamental Growth is to seek long-term growth of capital. The investment objective of Growth Fund is to seek growth of capital and, secondarily, income. Fundamental Growth tries to achieve its investment objective by investing in a diversified portfolio consisting primarily of common stocks. Fundamental Growth will generally invest at least 65% of its total assets in the following equity securities: common stock, convertible preferred stock, securities convertible into common stock, and rights to subscribe to common stock. In selecting securities, Fundamental Growth management emphasizes common stocks of companies that have above-average rates of earnings growth. Some, but not all, of the factors that may cause a company to have an above-average rate of earnings growth include: above average growth rate in sales, improvement in its profit margin, providing proprietary or niche products or services, leading market share, and strong industry growth. Fundamental Growth may invest in companies of any size but emphasizes common stocks of companies having a medium to large stock market capitalization ($500 million or more). Fundamental Growth may also invest up to 10% of its total assets in the securities of foreign companies. Securities of foreign companies may be in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other securities convertible into securities of foreign companies. Fundamental Growth's restriction limiting investments in foreign securities to 10% of its total assets does not include ADRs. Fundamental Growth may use derivatives to hedge its portfolio against market and currency risks and may also lend its portfolio securities. Fundamental Growth will normally invest a portion of its assets in short-term debt securities, such as commercial paper. Fundamental Growth may also invest without limitation in short-term debt securities (including repurchase agreements), non-convertible preferred stocks and bonds or government and money market securities when Fundamental Growth management is unable to find enough attractive equity investments and to reduce exposure to equities when Fundamental Growth management believes it is advisable to do so on a temporary basis. Investment in these securities may also be used to meet redemptions. Fundamental Growth will generally invest in investment grade debt securities. Growth Fund tries to achieve its investment objective by investing primarily in equity securities. Growth Fund will generally invest at least 65% of its total assets in equity securities. Equity securities consist of: common stock, preferred stock, securities convertible into common stock, derivatives the value of which is based on a common stock or group of common stocks. In selecting securities, Growth Fund management emphasizes stocks of companies that it believes have the potential to achieve above average growth rates in earnings, revenues, cash flow or earnings before interest, taxes, depreciation and amortization ("EBITDA"). A company may achieve growth from: introducing promising new products, exploiting new technologies or developing new distribution channels, achieving strong growth in sales of existing products through improved pricing or increasing sales volume, developing operating efficiencies, and increasing market share. Growth Fund employs a fundamental "bottom up" investment style. This means that Growth Fund seeks to identify individual companies with attractive business attributes and does not place substantial weight on other security selection techniques, such as sector allocation or technical market analysis. Growth Fund will focus on investments in common stock of large and mid-size companies having stock market capitalizations of $2 billion or more. Growth Fund invests mainly in U.S. companies, but may invest up to 40% of its total assets in securities of foreign companies. Growth Fund may invest in securities from any country, including emerging market countries. Growth Fund may invest in securities denominated in currencies other than the U.S. dollar. In addition to Growth Fund's principal investment strategies described above, Growth Fund may also use derivatives for hedging purposes, including anticipatory hedges, and may use options on securities to seek increased return. Growth Fund may also invest in when issued securities, delayed delivery securities, forward commitments, restricted and illiquid securities and standby commitment agreements. Under normal market conditions, Growth Fund may invest up to 35% of its assets in debt securities. Growth Fund will normally invest a portion of its assets in short term debt securities, such as commercial paper. Growth Fund invests in short term debt securities when Growth Fund management is unable to find enough attractive long term investments, to reduce exposure to equities when Growth Fund management believes it is advisable to do so or to meet redemptions. As a temporary measure for defensive purposes, Growth Fund may invest more heavily in short term debt securities, without limitation. Growth Fund also may invest up to 5% of its total assets in debt securities rated below investment grade by a nationally recognized rating agency (e.g., rated below Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Services ("S&P")) or in unrated debt securities that, in the judgment of Growth Fund management, possess credit characteristics similar to debt securities rated investment grade or debt securities rated below investment grade (commonly known as "junk bonds"). Growth Fund will not invest in debt securities rated in the lowest rating categories (Ca or lower for Moody's and CC or lower for S&P) unless Growth Fund management believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. Diversification. Growth Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that the Fund is not limited by the Investment Company Act with respect to the proportion of its assets that it may invest in securities of a single issuer. However, in order to qualify as a regulated investment company (a "RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), Growth Fund must limit its investments so that at the close of each quarter of the taxable year (i) not more than 25% of the market value of the Fund's total assets are invested in the securities of a single issuer, or any two or more issuers which are controlled by the Fund and engaged in the same, similar or related businesses, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets are invested in the securities or a single issuer, and the Fund does not own more than 10% of the outstanding voting securities of a single issuer. Fundamental Growth is classified as a diversified fund within the meaning of the Investment Company Act. Accordingly, as a fundamental restriction, with respect to 75% of its assets, Fundamental Growth may invest no more than 5% of its assets in the securities of any one issuer and may not purchase more than 10% of the outstanding voting securities of any one company. Portfolio Management. MLIM serves as the Investment Adviser for each of Fundamental Growth and Growth Fund pursuant to separate Investment Advisory Agreements between each Fund and MLIM. With the exception of fees, the Investment Advisory Agreements are substantially similar. Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-adviser to both Growth Fund and Fundamental Growth. Lawrence R. Fuller has served as portfolio manager of Fundamental Growth since 1993. Stephen I. Silverman has served as portfolio manager of Growth Fund since 1999. After the Reorganization, Mr. Fuller will serve as the portfolio manager of the Combined Fund. Investment Advisory Fees. Pursuant to an Investment Advisory Agreement between Fundamental Growth and MLIM, Fundamental Growth pays MLIM a monthly investment advisory fee at the annual rate of 0.65% of the average daily net assets of Fundamental Growth not exceeding $1.0 billion; 0.625% of the average daily net assets of Fundamental Growth from $1 billion to $1.5 billion; 0.60% of the average daily net assets of Fundamental Growth from $1.5 billion to $5 billion; 0.575% of the average daily net assets of Fundamental Growth from $5.0 billion to $7.5 billion; and 0.55% of the average daily net assets of Fundamental Growth in excess of $7.5 billion. Pursuant to an Investment Advisory Agreement between Growth Fund and MLIM, Growth Fund pays MLIM a monthly investment advisory fee at the annual rate of 0.65% of its average daily net assets. MLIM has voluntarily agreed to reduce its fees as Fund assets grow. The reduced investment advisory fee is equal to 0.65% of the average daily net assets of Growth Fund not exceeding $1.0 billion; 0.625% of the average daily net assets of Growth Fund from $1.0 billion to $1.5 billion; 0.60% of the average daily net assets of Growth Fund from $1.5 billion to $10 billion; and 0.575% of the average daily net assets of Growth Fund in excess of $10 billion. MLIM may reduce or discontinue such voluntary waiver of investment advisory fees at any time without notice. After the Reorganization, the fee paid by the Combined Fund would be at Fundamental Growth's lower contractual rate. MLAM U.K.'s fees are paid by MLIM and not by the Funds. Class Structure. Each Fund uses the Merrill Lynch Select PricingSM System under which four classes of shares are offered with different sales charge arrangements. The Class A, Class B, Class C and Class D shares issued by Fundamental Growth are substantially similar in all material respects to the Class A, Class B, Class C and Class D shares issued by Growth Fund, except that such shares represent ownership interests in a different investment portfolio. See "Comparison of the Funds--Purchase of Shares" and "--Additional Information--Shareholder Services." Overall Operating Expense Ratio. The table below shows the operating expense ratio for each class of shares of Fundamental Growth and Growth Fund as of February 28, 2001 and, assuming the Reorganization had taken place on February 28, 2001, the estimated pro forma annualized expense ratio for each class of shares of the Combined Fund (in each case, including class specific distribution fees and account maintenance fees with respect to Fundamental Growth, Growth Fund and the Combined Fund and excluding any voluntary waiver of investment advisory fees due from the Growth Fund). Overall Operating Expense Ratio ----------------------------------- Actual Pro Forma --------------------- --------- Class of Fundamental Growth Combined Shares Growth Fund Fund ---------- ----------- ------ --------- A......... 0.75% 1.01% 0.74% B......... 1.76% 2.01% 1.74% C......... 1.77% 2.01% 1.74% D......... 0.99% 1.26% 0.99% See "Fee Tables" above. Purchase of Shares. Shares of Fundamental Growth are offered continuously for sale to the public in substantially the same manner as shares of Growth Fund. See "Comparison of the Funds--Purchase of Shares." Redemption of Shares. The redemption procedures for shares of Fundamental Growth are the same as the redemption procedures for shares of Growth Fund. For purposes of computing any CDSC that may be payable upon disposition of Corresponding Shares of Fundamental Growth acquired by shareholders of Growth Fund in the Reorganization, the holding period of Growth Fund shares outstanding on the date the Reorganization takes place will be "tacked" onto the holding period of the Corresponding Shares of Fundamental Growth acquired in the Reorganization. See "Comparison of the Funds--Redemption of Shares." Class B shares of the Combined Fund received in return for Class B shares of Growth Fund purchased prior to June 1, 2001 will continue to be subject to the four-year CDSC schedule in effect prior to June 1, 2001. Class B shares of the Combined Fund received in return for Class B shares of Growth Fund purchased on or after June 1, 2001 will be subject to the six-year CDSC schedule currently in effect. Class B shares of the Combined Fund purchased on or after June 1, 2001 will also be subject to the six-year CDSC schedule currently in effect. See "Your Account--Merrill Lynch Select PricingSM System," "--Participation in Fee Based Programs" and "--How to Buy, Sell, Transfer and Exchange Shares" in the Fundamental Growth Prospectus. Dividends. Growth Fund's policies with respect to dividends are substantially the same as those of Fundamental Growth. See "Comparison of the Funds--Dividends." Net Asset Value. Both Growth Fund and Fundamental Growth determine net asset value of each class of shares once daily as of the close of business on the New York Stock Exchange (the "NYSE") on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Both Funds compute net asset value per share in the same manner. See "Comparison of the Funds--Additional Information--Net Asset Value." Voting Rights. The corresponding voting rights of the holders of shares of each Fund are substantially the same. See "Comparison of the Funds--Additional Information--Capital Stock." Other Significant Considerations. Shareholder services available to Growth Fund shareholders, such as providing the annual and semi-annual reports, are the same as those available to Fundamental Growth shareholders. See "Comparison of the Funds--Additional Information--Shareholder Services." An automatic dividend reinvestment plan is available to shareholders of each Fund. These plans are identical. See "Comparison of the Funds--Automatic Dividend Reinvestment Plan" and "--Additional Information--Shareholder Services." Litigation................ In November, 2000, a putative class action lawsuit was filed in Federal Court in the Middle District of Florida on behalf of Florida investors against Growth Fund, MLIM, certain present and former individual Board Members of Growth Fund and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") seeking damages. The substance of the claims is that Growth Fund and the other defendants misrepresented and omitted material facts regarding the "true nature of the Fund and its holdings." The defendants, including Growth Fund, have filed a motion to dismiss the plaintiffs' complaint for lack of subject matter jurisdiction. There has been no decision yet with respect to this motion. Growth Fund and the other defendants believe that the lawsuit is without merit and intend to defend vigorously against the claims. A second, nearly identical action was filed in Florida state court by one of the original plaintiffs in the federal action. This lawsuit has been removed to federal court. Plaintiffs have made a motion to remand this action to state court, which defendants have opposed. An oral argument in this matter has been scheduled for August 13, 2001. Growth Fund and the other defendants also believe that this second lawsuit is without merit and have moved to have the complaint dismissed. See "Legal Proceedings." Tax Considerations........ Fundamental Growth and Growth Fund will receive an opinion of counsel to the effect that, among other things, neither Fundamental Growth nor Growth Fund will recognize gain or loss in the Reorganization, and Growth Fund shareholders will not recognize gain or loss upon the receipt of shares of Fundamental Growth in the Reorganization. Consummation of the Reorganization is subject to the receipt of such an opinion. The Reorganization will not affect the status of Fundamental Growth as a regulated investment company. As of February 28, 2001, each of Growth Fund and Fundamental Growth had significant net realized capital losses and significant net unrealized capital losses. After the Reorganization, and subject to certain limitations, the shareholders of each Fund may benefit from the ability of the Combined Fund to use such capital losses to offset any realized capital gains. See "The Reorganization--Tax Consequences of the Reorganization." Shareholders of Growth Fund should consult their tax advisors concerning their individual circumstances. RISK FACTORS AND SPECIAL CONSIDERATIONS Many of the investment risks associated with an investment in Fundamental Growth are substantially similar to the investment risks associated with an investment in Growth Fund. The investment risks associated with an investment in Fundamental Growth also will apply to an investment in the Combined Fund after the Reorganization. Such risks include market and selection risk, growth securities risk, foreign market risk, and borrowing and leverage risk. The principal differences in risk between an investment in Growth Fund and an investment in Fundamental Growth are: (i) Fundamental Growth may be more subject to the risks associated with investing in companies with a medium stock market capitalization, (ii) Growth Fund may be more subject to foreign market risks than Fundamental Growth, and (iii) to the extent Growth Fund, as a non-diversified fund, may invest in fewer issuers than Fundamental Growth, as a diversified fund, Growth Fund may be more subject to selection and credit risks associated with a single issuer than Fundamental Growth. The risk factors to which an investment in Fundamental Growth is subject are set forth below and in the Fundamental Growth Prospectus that accompanies this Proxy Statement and Prospectus under the caption "Details about the Fund - Investment Risks." It is expected that the Reorganization itself will not adversely affect the rights of shareholders of any Fund or create additional risks. Except where noted, each Fund is subject to the following risks: Market and Selection Risk. Each Fund is subject to market risk and selection risk. Market risk is the risk that the stock market in one or more countries in which a Fund invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform other funds with similar investment objectives and investment strategies. Because Growth Fund invests in a smaller number of issuers and economic sectors than some other funds, including Fundamental Growth, Growth Fund's selection risk is increased. Growth Securities. As set forth above, the investment objective of Fundamental Growth is to seek long-term growth of capital while the investment objective of Growth Fund is to seek growth of capital and, secondarily, income. In selecting securities, each Fund generally emphasizes common stocks of companies that have above-average rates of earnings growth. These "growth securities" may be particularly sensitive to changes in earnings, interest rate increases or adverse market developments because they typically have relatively high price-to-earnings ratios. Moreover, the growth securities held by each Fund may never reach what Fund management believes their fair value to be and may even decrease in price. Mid-Cap Securities. Fundamental Growth may emphasize common stocks of companies having smaller market capitalizations than companies emphasized by Growth Fund. As a result, Fundamental Growth may be more subject to risks associated with investing in mid-cap securities than Growth Fund. Investments in companies with lower market capitalizations, especially those with market capitalizations under $1 billion, may involve special risks, including limited product lines, market or financial resources or a limited management group. The securities of mid-cap companies generally trade in lower volumes and are generally subject to greater and less predictable price changes than the securities of larger capitalization companies. Non-Diversification Risk. Growth Fund is subject to non-diversification risk. As set forth above, Growth Fund is a non-diversified fund. To the extent Growth Fund may invest in a smaller number of issues, Growth Fund is more exposed to adverse developments affecting a single issuer than is a fund, like Fundamental Growth, that invests more widely. Foreign Market Risks. Since each Fund may invest in foreign securities, they offer the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than securities in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that a Fund will lose money. In particular, investment in foreign securities involves the risks set forth below, which are generally greater for investments in emerging markets. Growth Fund may be more subject to these risks because it may invest up to 40% of its total assets in the securities of foreign companies. By contrast, Fundamental Growth may invest only up to 10% of its total assets in the securities of foreign companies. Securities of foreign companies may be in the form of ADRs, EDRs, or other securities convertible into securities of foreign companies. Fundamental Growth's restriction limiting investments in foreign securities to 10% of its total assets does not include ADRs. o The economies of some foreign markets often do not compare favorably with that of the United States in areas such as growth of gross domestic product, reinvestment of capital, resources and balance of payments. Some of these economies may rely heavily on particular industries or foreign capital. They may be more vulnerable to adverse diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures. o Investments in foreign markets may be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets, or the imposition of punitive taxes. o The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices. They could also impair a Fund's ability to purchase or sell foreign securities or transfer its assets or income back into the United States, or otherwise adversely affect the Fund's operations. o Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts, and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. o Because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may be difficult for a Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States. o Foreign markets may have different clearance and settlement procedures. In certain markets, settlements may be unable to keep pace with the volume of securities transactions. If this occurs, settlement may be delayed and a Fund's assets may be uninvested and not earning returns. A Fund may miss investment opportunities or be unable to dispose of a security because of these delays. Certain Risks of Holding Fund Assets Outside the United States. Each Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on a Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and typically results in a higher operating expense ratio for the Funds than for investment companies invested only in the United States. European Economic and Monetary Union (EMU). A number of European countries entered into EMU in an effort to reduce trade barriers among themselves and eliminate fluctuations in their currencies. EMU established a single European currency (the euro), that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all initial EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro and are traded and make dividend and other payments only in euros. Like other investment companies and business organizations, including the companies in which a Fund invests, a Fund could be adversely affected if the transition to the euro, or EMU as a whole, does not proceed as planned or if a participating country withdraws from EMU. Debt Securities. Each Fund may invest in debt securities, and each Fund is therefore subject to the risks of such securities, including the risks that prices of bonds generally increase when interest rates decline and decrease when interest rates increase and that prices of longer term securities generally change more in response to interest rate changes than prices of shorter term securities (interest rate risk); and that issuers may be unable to pay interest or principal when due (credit risk). Under normal market conditions, Growth Fund may invest up to 35% of its assets in debt securities as part of its investment strategy. Fundamental Growth will normally invest a portion of its assets in short-term debt securities, such as commercial paper. Borrowing and Leverage Risk. Each Fund, as a fundamental restriction, may borrow from banks in an amount up to 33-1/3% of its total assets. As a non-fundamental restriction, each Fund's borrowings are limited to 20% of its total assets. Each Fund may borrow for temporary emergency purposes, including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the return on a Fund's portfolio. Borrowing will cost a Fund interest expense and other fees. The cost of borrowing may reduce a Fund's return. Risks associated with certain types of securities in which each Fund may invest include: Convertibles. Each Fund may invest in convertible securities. Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible's value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risks as the underlying common stock. Derivatives. Each Fund may use derivative instruments including futures, forwards and options. In addition, Fundamental Growth may use indexed securities and inverse securities. Derivatives allow a Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including: Credit risk -- the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund. Currency risk -- the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment. Leverage risk -- the risk, associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments), that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. Liquidity risk -- the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. Each Fund may use derivatives for hedging purposes, including anticipatory hedges. Growth Fund may also use options on securities to seek increased return. Hedging is a strategy in which a Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any losses on the holdings being hedged may not be reduced. No assurance can be given that a Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. Neither Fund is required to use hedging and may choose not to do so. Illiquid Securities. Each Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If a Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value. Restricted Securities. Each Fund may invest in restricted securities. Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that a Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market. Restricted securities may be illiquid. A Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. A Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the security. Rule 144A Securities. Each Fund may also invest in Rule 144A securities. Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue. Securities Lending. Each Fund may lend securities with a value not exceeding 33-1/3% of its total assets to financial institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, a Fund may lose money and there may be a delay in recovering the loaned securities. A Fund could also lose money if it does not recover the securities and the value of the collateral falls. These events could trigger adverse tax consequences to a Fund. An investment in Fundamental Growth is subject to the additional risks described below that are not applicable to an investment in Growth Fund. Indexed and Inverse Floating Rate Securities. Fundamental Growth may invest in securities whose potential returns are directly related to changes in an underlying index or interest rate, known as indexed securities. The return on indexed securities will rise when the underlying index or interest rate rises and fall when the index or interest rate falls. Fundamental Growth may also invest in securities whose return is inversely related to changes in an interest rate (inverse floaters). In general, income on inverse floaters will decrease when interest rates increase and increase when interest rates decrease. Investments in inverse floaters may subject Fundamental Growth to the risks of reduced or eliminated interest payments and losses of principal. In addition, inverse floaters may increase or decrease in value at a greater rate than the underlying interest rate, which effectively leverages Fundamental Growth's investment. Inverse floaters are derivative securities and can be considered speculative. Inverse securities involve credit risk and may involve currency risk, leverage risk and liquidity risk. Warrants. A warrant gives Fundamental Growth the right to buy a quantity of stock. The warrant specifies the amount of underlying stock, the purchase (or "exercise") price, and the date the warrant expires. Fundamental Growth has no obligation to exercise the warrant and buy the stock. A warrant has value only if Fundamental Growth can exercise it before it expires. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and Fundamental Growth loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock. An investment in Growth Fund is subject to the additional risks described below that are not applicable to an investment in Fundamental Growth and will not be applicable to an investment in the Combined Fund. Junk Bonds. As set forth above, junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Growth Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for Growth Fund. The major risks associated with junk bond investments include the following: Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuer's industry and to general economic conditions. Issues of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer development or the unavailability of additional financing. The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The issuer's ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Junk bonds are frequently ranked junior in claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally paid off before the junior obligations. Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems the junk bonds, Growth Fund may have to invest the proceeds in bonds with lower yields and may lose income. Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds than on other higher rated fixed income securities. Junk bonds may be less liquid than higher rated fixed income securities even under normal economic conditions. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of Growth Fund's portfolio securities than in the case of securities trading in a more liquid market. Growth Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer. Standby Commitment Agreements. Growth Fund may enter into standby commitment agreements. Standby commitment agreements involve the risk that the security will lose value prior to its delivery to a Fund. These agreements also involve the risk that if the security goes up in value, the counterparty will decide not to issue the security, in which case a Fund has lost the investment opportunity for assets it had set aside to pay for the security and any gain in the security's price. COMPARISON OF THE FUNDS Financial Highlights Fundamental Growth. The Financial Highlights table is intended to help you understand Fundamental Growth's financial performance for each of its past five fiscal years and for the six months ended February 28, 2001. Certain information reflects financial results for a single Fundamental Growth share. The total returns in the table represent the rate an investor would have earned or lost on an investment in shares of Fundamental Growth (assuming reinvestment of all dividends). The information for each of Fundamental Growth's last five fiscal years has been audited by Ernst & Young LLP whose report, along with Fundamental Growth's financial statements, is included in Fundamental Growth's Annual Report to Shareholders that accompanies this Proxy Statement and Prospectus. The information for the six months ended February 28, 2001 is unaudited. Fundamental Growth's Semi-Annual Report to Shareholders also accompanies this Proxy Statement and Prospectus. The following per share data and ratios have been derived from information provided in the financial statements.
Class A ---------------------------------------------------------------------------- For the Six Months Ended February 28, For the Year Ended August 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $29.98 $21.99 $16.19 $17.37 $13.60 $11.66 ----------- --------- -------- -------- ------- ------- Investment income-- net+............ .07 .02 .13 .07 .07 .07 Realized and unrealized gain (loss) on investments and foreign currency transactions--net....... (7.15) 9.91 6.37 1.09 4.95 2.13 ----------- --------- -------- -------- ------- ------- Total from investment operations.... (7.08) 9.93 6.50 1.16 5.02 2.20 ----------- --------- -------- -------- ------- ------- Less distributions from realized gain on investments-- net (1.96) (1.94) (.70) (2.34) (1.25) (.26) ----------- --------- -------- -------- ------- ------- Net asset value, end of period...... $20.94 $29.98 $21.99 $16.19 $17.37 $13.60 =========== ========= ======== ======== ======= ======= Total Investment Return:* Based on net asset value per share.. (24.10)%** 47.01% 41.08% 6.37% 39.24% 19.02% =========== ========= ======== ======== ======= ======= Ratios to Average Net Assets: Expenses............................ .75%*** .76% .81% .87% .99% 1.12% =========== ========= ======== ======== ======= ======= Investment income-- net............. .60%*** .09% .60% .37% .47% .51% =========== ========= ======== ======== ======= ======= Supplemental Data: Net assets, end of period (in thousands).......................... $1,028,535 $882,072 $472,464 $167,133 $62,049 $47,048 =========== ========= ======== ======== ======= ======= Portfolio turnover.................. 58.06% 98.71% 52.72% 40.27% 94.38% 82.10% =========== ========= ======== ======== ======= =======
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Fundamental Growth -- Financial Highlights (continued) Class B ---------------------------------------------------------------------------- For the Six Months Ended February 28, For the Year Ended August 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $ 28.06 $20.75 $15.39 $16.69 $13.14 $11.40 ------------- --------- ---------- --------- --------- ---------- Investment loss-- net+.............. (.05) (.23) (.08) (.11) (.09) (.07) Realized and unrealized gain (loss) on investments and foreign currency transactions--net....... (6.69) 9.32 6.05 1.05 4.79 2.07 ------------- --------- ---------- --------- --------- ---------- Total from investment operations.... (6.74) 9.09 5.97 .94 4.70 2.00 ------------- --------- ---------- --------- --------- ---------- Less distributions from realized gain on investments-- net (1.74) (1.78) (.61) (2.24) (1.15) (.26) ------------- --------- ---------- --------- --------- ---------- Net asset value, end of period...... $ 19.58 $28.06 $20.75 $15.39 $16.69 $13.14 ============= ========= ========== ========= ========= ========== Total Investment Return:* Based on net asset value per share.. (24.48)%** 45.55% 39.58% 5.21% 37.95% 17.68% ============= ========= ========== ========= ========= ========== Ratios to Average Net Assets: Expenses............................ 1.76%*** 1.77% 1.83% 1.88% 2.02% 2.16% ============= ========= ========== ========= ========= ========== Investment loss-- net............... (.40)%*** (.92)% (.41)% (.64)% (.59)% (.54)% ============= ========= ========== ========= ========= ========== Supplemental Data: Net assets, end of period (in thousands).......................... $2,800,424 $3,411,474 $2,000,535 $641,688 $216,636 $116,641 ============= ========== ========== ========= ========= ========== Portfolio turnover.................. 58.06% 98.71% 52.72% 40.27% 94.38% 82.10% ============= ========== ========== ========= ========= ==========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Fundamental Growth -- Financial Highlights (continued) Class C ---------------------------------------------------------------------------- For the Six Months Ended February 28, For the Year Ended August 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $ 28.26 $20.88 $15.45 $16.72 $13.14 $11.40 ------------- -------- --------- --------- -------- -------- Investment loss-- net+.............. (.05) (.24) (.09) (.11) (.09) (.07) Realized and unrealized gain (loss) on investments and foreign currency transactions--net....... (6.74) 9.39 6.10 1.05 4.79 2.07 ------------- -------- --------- --------- -------- -------- Total from investment operations.... (6.79) 9.15 6.01 .94 4.70 2.00 ------------- -------- --------- --------- -------- -------- Less distributions from realized gain on investments-- net (1.78) (1.77) (.58) (2.21) (1.12) (.26) ------------- -------- --------- --------- -------- -------- Net asset value, end of period...... $ 19.69 $28.26 $20.88 $15.45 $16.72 $13.14 ============= ======== ========= ========= ======== ======== Total Investment Return:* Based on net asset value per share.. (24.51)%** 45.53% 39.65% 5.19% 37.90% 17.68% ============= ======== ========= ========= ======== ======== Ratios to Average Net Assets: Expenses............................ 1.77%*** 1.78% 1.83% 1.89% 2.02% 2.15% ============= ======== ========= ========= ======== ======== Investment loss-- net............... (.41)%*** (.93)% (.43)% (.63)% (.58)% (.57)% ============= ======== ========= ========= ======== ======== Supplemental Data: Net assets, end of period (in thousands).......................... $619,473 $627,021 $307,988 $130,652 $74,732 $54,052 ============= ======== ========= ========= ======== ======== Portfolio turnover.................. 58.06% 98.71% 52.72% 40.27% 94.38% 82.10% ============= ======== ========= ========= ======== ========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Fundamental Growth -- Financial Highlights (continued) Class D ---------------------------------------------------------------------------- For the Six Months Ended February 28, For the Year Ended August 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $ 29.63 $21.77 $16.06 $17.27 $13.54 $11.64 ----------- ---------- -------- -------- -------- -------- Investment income (loss)-- net+..... .04 (.04) .08 .02 .03 .03 Realized and unrealized gain (loss) on investments and foreign currency transactions--net....... (7.07) 9.80 6.31 1.09 4.93 2.13 ----------- ---------- -------- -------- -------- -------- Total from investment operations.... (7.03) 9.76 6.39 1.11 4.96 2.16 ----------- ---------- -------- -------- -------- -------- Less distributions from realized gain on investments-- net (1.91) (1.90) (.68) (2.32) (1.23) (.26) ----------- ---------- -------- -------- -------- -------- Net asset value, end of period...... $ 20.69 $29.63 $21.77 $16.06 $17.27 $13.54 =========== ========== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share.. (24.21)%** 46.67% 40.67% 6.08% 38.90% 18.70% =========== ========== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses............................ .99%*** 1.01% 1.05% 1.11% 1.24% 1.37% =========== ========== ======== ======== ======== ======== Investment income (loss)-- net...... .37%*** (.17)% .36% .12% .17% .24% =========== ========== ======== ======== ======== ======== Supplemental Data: Net assets, end of period (in thousands).......................... $1,472,654 $1,712,701 $795,607 $157,899 $53,101 $22,892 =========== ========== ======== ======== ======== ======== Portfolio turnover.................. 58.06% 98.71% 52.72% 40.27% 94.38% 82.10% =========== ========== ======== ======== ======== ========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding. Growth Fund. The Financial Highlights table is intended to help you understand Growth Fund's financial performance for each of its past five fiscal years and for the six months ended April 30, 2001. Certain information reflects financial results for a single Growth Fund share. The total returns in the table represent the rate an investor would have earned or lost on an investment in shares of Growth Fund (assuming reinvestment of all dividends). The information for each of Growth Fund's last five fiscal years has been audited by Deloitte & Touche LLP whose report, along with Growth Fund's financial statements, is included in Growth Fund's Annual Report which is available upon request. The information for the six months ended April 30, 2001 is unaudited. The following per share data and ratios have been derived from information provided in the financial statements:
Class A ---------------------------------------------------------------------------- For the Six Months Ended April 30, For the Year Ended October 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $26.25 $23.18 $22.71 $33.13 $26.87 $23.13 ----------- --------- -------- ---------- ---------- ---------- Investment income (loss)-- net+...... (.02) (.11) (.01) .46 .53 .31 ----------- --------- -------- ---------- ---------- ---------- Realized and unrealized gain (loss) on investments and foreign currency transactions-- net............... (5.96) 3.18 .69 (8.47) 7.98 5.63 ----------- --------- -------- ---------- ---------- ---------- Total from investment operations.... (5.98) 3.07 .68 (8.01) 8.51 5.94 ----------- --------- -------- ---------- ---------- ---------- Less dividends and distributions: Investment income-- net -- -- -- (.48) (.44) (.35) In excess of investment income-- net -- -- (.21) -- -- -- Realized gain on investments-- net (1.71) -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments-- net -- -- -- (.23) -- -- ----------- --------- -------- ---------- ---------- ---------- Total dividends and distributions... (1.71) -- (.21) (2.41) (2.25) (2.20) ----------- --------- -------- ---------- ---------- ---------- Net asset value, end of period...... $18.56 $26.25 $23.18 $22.71 $33.13 $26.87 =========== ========= ======== ========== ========== ========== Total Investment Return:* Based on net asset value per share.. (23.79)%** 13.24% 3.09% (25.83)% 34.03% 28.15% =========== ========= ======== ========== ========== ========== Ratios to Average Net Assets: Expenses, net of reimbursement...... .96%*** .88% .96% .81% .77% .80% Expenses............................ .98%*** .91% .99% .85% .81% .84% Investment income (loss)-- net...... (.21)%*** (.38)% (.03)% 1.72% 1.84% 1.28% Supplemental Data: Net assets, end of period (in thousands).......................... $467,011 $701,997 $774,287 $1,111,166 $1,769,296 $1,056,870 =========== ========= ======== ========== ========== ========== Portfolio turnover.................. 17.35% 66.49% 101.71% 24.41% 24.75% 30.01% =========== ========= ======== ========== ========== ==========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Growth Fund -- Financial Highlights (continued) Class B ---------------------------------------------------------------------------- For the Six Months Ended April 30, For the Year Ended October 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $23.77 $21.21 $20.88 $30.63 $25.03 $21.60 ----------- ---------- ---------- ----------- ---------- ---------- Investment income (loss)-- net+..... (.11) (.35) (.19) .17 .22 .06 ----------- ---------- ---------- ----------- ---------- ---------- Realized and unrealized gain (loss) on investments and foreign currency transactions-- net............... (5.37) 2.91 .61 (7.80) 7.39 5.26 ----------- ---------- ---------- ----------- ---------- ---------- Total from investment operations.... (5.48) 2.56 .42 (7.63) 7.61 5.32 ----------- ---------- ---------- ----------- ---------- ---------- Less dividends and distributions: Investment income-- net -- -- -- (.19) (.20) (.04) In excess of investment income-- net -- -- (.09) -- -- -- Realized gain on investments-- net (1.71) -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments-- net -- -- -- (.23) -- -- ----------- ---------- ---------- ----------- ---------- ---------- Total dividends and distributions... (1.71) -- (.09) (2.12) (2.01) (1.89) ----------- ---------- ---------- ----------- ---------- ---------- Net asset value, end of period...... $16.58 $23.77 $21.21 $20.88 $30.63 $25.03 =========== ========== ========== =========== ========== ========== Total Investment Return:* Based on net asset value per share.. (24.20)%** 12.07% 2.06% (26.57)% 32.62% 26.84% =========== ========== ========== =========== ========== ========== Ratios to Average Net Assets: Expenses, net of reimbursement...... 1.99%*** 1.90% 1.99% 1.83% 1.79% 1.82% ----------- ---------- ---------- ----------- ---------- ---------- Expenses............................ 2.01%*** 1.93% 2.02% 1.87% 1.83% 1.85% ----------- ---------- ---------- ----------- ---------- ---------- Investment income (loss)-- net...... (1.24)%*** (1.40)% (.98)% .70% .82% .26% ----------- ---------- ---------- ----------- ---------- ---------- Supplemental Data: Net assets, end of period (in thousands).......................... $703,369 $1,052,705 $1,247,547 $2,544,979 $4,687,523 $2,916,507 =========== ========== ========== =========== ========== ========== Portfolio turnover.................. 17.35% 66.49% 101.71% 24.41% 24.75% 30.01% =========== ========== ========== =========== ========== ==========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Growth Fund -- Financial Highlights (continued) Class C ---------------------------------------------------------------------------- For the Six Months Ended April 30, For the Year Ended October 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $23.60 $21.05 $20.72 $30.43 $24.89 $21.59 ----------- -------- --------- -------- -------- -------- Investment income (loss)-- net+..... (.12) (.36) (.18) .17 .22 .06 ----------- -------- --------- -------- -------- -------- Realized and unrealized gain (loss) on investments and foreign currency transactions-- net............... (5.32) 2.91 .59 (7.75) 7.34 5.23 ----------- -------- --------- -------- -------- -------- Total from investment operations.... (5.44) 2.55 .41 (7.58) 7.56 5.29 ----------- -------- --------- -------- -------- -------- Less dividends and distributions: Investment income-- net -- -- -- (.20) (.21) (.14) In excess of investment income-- net -- -- (.08) -- -- -- Realized gain on investments-- net (1.71) -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments-- net -- -- -- (.23) -- -- ----------- -------- --------- -------- -------- -------- Total dividends and distributions... (1.71) -- (.08) (2.13) (2.02) (1.99) ----------- -------- --------- -------- -------- -------- Net asset value, end of period...... $16.45 $23.60 $21.05 $20.72 $30.43 $24.89 =========== ======== ========= ======== ======== ======== Total Investment Return:* Based on net asset value per share.. (24.20)%** 12.11% 2.04% (26.60)% 32.63% 26.84% =========== ======== ========= ======== ======== ======== Ratios to Average Net Assets: Expenses, net of reimbursement...... 2.01%*** 1.92% 2.02% 1.84% 1.80% 1.84% ----------- -------- --------- -------- -------- -------- Expenses............................ 2.03%*** 1.95% 2.05% 1.88% 1.84% 1.87% ----------- -------- --------- -------- -------- -------- Investment income (loss)-- net...... (1.27)%*** (1.42)% (.96)% .68% .81% .25% ----------- -------- --------- -------- -------- -------- Supplemental Data: Net assets, end of period (in thousands).......................... $62,105 $93,549 $106,797 $239,445 $427,377 $187,221 =========== ======== ========= ======== ======== ======== Portfolio turnover.................. 17.35% 66.49% 101.71% 24.41% 24.75% 30.01% =========== ======== ========= ======== ======== ========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding.
Growth Fund -- Financial Highlights (continued) Class D ---------------------------------------------------------------------------- For the Six Months Ended April 30, For the Year Ended October 31, 2001 ----------------------------------------------------------- Increase (Decrease) in Net Asset Value: (unaudited) 2000 1999 1998 1997 1996 Per Share Operating Performance: ----------- ---- ---- ---- ---- ---- Net asset value, beginning of period $26.07 $23.07 $22.63 $33.01 $26.79 $23.06 ----------- -------- --------- -------- -------- -------- Investment income (loss)-- net+..... (.05) (.17) (.06) .39 .46 .24 ----------- -------- --------- -------- -------- -------- Realized and unrealized gain (loss) on investments and foreign currency transactions-- net............... (5.92) 3.17 .68 (8.43) 7.95 5.63 ----------- -------- --------- -------- -------- -------- Total from investment operations.... (5.97) 3.00 .62 (8.04) 8.41 5.87 ----------- -------- --------- -------- -------- -------- Less dividends and distributions: Investment income-- net -- -- -- (.41) (.38) (.29) In excess of investment income-- net -- -- (.18) -- -- -- Realized gain on investments-- net (1.71) -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments-- net -- -- -- (.23) -- -- ----------- -------- --------- -------- -------- -------- Total dividends and distributions... (1.71) -- (.18) (2.34) (2.19) (2.14) ----------- -------- --------- -------- -------- -------- Net asset value, end of period...... $18.39 $26.07 $23.07 $22.63 $33.01 $26.79 =========== ======== ========= ======== ======== ======== Total Investment Return:* Based on net asset value per share.. (23.93)%** 13.00% 2.82% (26.00)% 33.67% 27.83% =========== ======== ========= ======== ======== ======== Ratios to Average Net Assets: Expenses, net of reimbursement...... 1.21*** 1.13% 1.21% 1.06% 1.02% 1.05% ----------- -------- --------- -------- -------- -------- Expenses............................ 1.23%*** 1.16% 1.24% 1.10% 1.06% 1.08% ----------- -------- --------- -------- -------- -------- Investment income (loss)-- net...... (.46)%*** (.63)% (.26)% 1.47% 1.59% 1.03% ----------- -------- --------- -------- -------- -------- Supplemental Data: Net assets, end of period (in thousands).......................... $507,955 $732,495 $744,151 $1,082,627 $1,642,665 $932,811 =========== ======== ========= ======== ======== ======== Portfolio turnover.................. 17.35% 66.49% 101.71% 24.41% 24.75% 30.01% =========== ======== ========= ======== ======== ========
- --------------- * Total investment returns exclude the effects of sales charges. ** Aggregate total investment return. *** Annualized. + Based on average shares outstanding. Investment Objectives The Funds have similar, though not identical, investment objectives. The investment objective of Fundamental Growth is to seek long-term growth of capital. The investment objective of Growth Fund is to seek growth of capital and, secondarily, income. The investment objective of each Fund described in this paragraph is a fundamental policy of the applicable Fund and may not be changed without the approval of the holders of a majority of that Fund's outstanding voting securities (which, for this purpose, means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented, or (ii) more than 50% of the outstanding shares). No assurance can be given that the Combined Fund will achieve its investment objective after the Reorganization. Investment Policies General. Fundamental Growth tries to achieve its investment objective by investing in a diversified portfolio consisting primarily of common stocks. Fundamental Growth will generally invest at least 65% of its total assets in the following equity securities: common stock, convertible preferred stock, securities convertible into common stock, and rights to subscribe to common stock. In selecting securities, Fundamental Growth management emphasizes common stocks of companies that have above-average rates of earnings growth. Some, but not all, of the factors that may cause a company to have an above-average rate of earnings growth include: above average growth rate in sales, improvement in its profit margin, providing proprietary or niche products or services, leading market share, and strong industry growth. Fundamental Growth may invest in companies of any size but emphasizes common stocks of companies having a medium to large stock market capitalization ($500 million or more). Growth Fund tries to achieve its investment objective by investing primarily in equity securities. Growth Fund will generally invest at least 65% of its total assets in equity securities. Equity securities consist of: common stock, preferred stock, securities convertible into common stock, derivatives, the value of which is based on a common stock or group of common stocks. In selecting securities, Growth Fund management emphasizes stocks of companies that it believes have the potential to achieve above average growth rates in earnings, revenues, cash flow or EBITDA. A company may achieve growth from: introducing promising new products, exploiting new technologies or developing new distribution channels, achieving strong growth in sales of existing products through improved pricing or increasing sales volume, developing operating efficiencies, and increasing market share. Growth Fund employs a fundamental "bottom up" investment style. This means that Growth Fund seeks to identify individual companies with attractive business attributes and does not place substantial weight on other security selection techniques, such as sector allocation or technical market analysis. Growth Fund will focus on investments in common stock of large and mid-size companies having stock market capitalizations of $2 billion or more. Securities of Foreign Companies and Depositary Receipts. Fundamental Growth may also invest up to 10% of its total assets in the securities of foreign companies. Securities of foreign companies may be in the form of ADRs, EDRs, or other securities convertible into securities of foreign companies. Fundamental Growth's restriction limiting investments in foreign securities to 10% of its total assets does not include ADRs. Growth Fund invests mainly in U.S. companies, but may invest up to 40% of its total assets in securities of foreign companies. Growth Fund may invest in securities from any country, including emerging market countries. Each Fund may invest in securities denominated in currencies other than the U.S. dollar. Debt Securities/Temporary Investments. Fundamental Growth will normally invest a portion of its assets in short-term debt securities, such as commercial paper. Fundamental Growth may also invest without limitation in short-term debt securities (including repurchase agreements), non-convertible preferred stocks and bonds or government and money market securities when Fundamental Growth management is unable to find enough attractive equity investments and to reduce exposure to equities when Fund management believes it is advisable to do so on a temporary basis. Investment in these securities may also be used to meet redemptions. Fundamental Growth may also invest in debt securities rated investment grade by a nationally recognized statistical ratings organization as a defensive measure. Under normal market conditions, Growth Fund may invest up to 35% of its assets in debt securities. Growth Fund will normally invest a portion of its assets in short term debt securities, such as commercial paper. Growth Fund invests in short term debt securities when Growth Fund management is unable to find enough attractive long term investments, to reduce exposure to equities when management believes it is advisable to do so or to meet redemptions. As a temporary measure for defensive purposes, Growth Fund may invest more heavily in short term debt securities, without limitation. Growth Fund may invest up to 5% of its total assets in junk bonds or in unrated debt securities that, in the judgment of Growth Fund management, possess credit characteristics similar to junk bonds. Growth Fund will not invest in debt securities rated in the lowest rating categories (Ca or lower for Moody's and CC or lower for S&P) unless Growth Fund management believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicted by such low ratings. Investment in Other Investment Companies. Each Fund may invest in other investment companies whose investment objectives and policies are consistent with those of each Fund. In accordance with the Investment Company Act, a Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the Investment Company Act, a Fund may not own more than 3% of the total outstanding voting stock of any investment company and not more than 5% of the value of the Fund's total assets may be invested in the securities of any investment company. If a Fund acquires shares in investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including advisory fees) and, indirectly, the expenses of such investment companies (including advisory fees). Investments by a Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other investment companies. Other Investment Policies Fundamental Growth and Growth Fund have adopted certain other investment policies as set forth below: Borrowing and Leverage. Each Fund is subject to a fundamental investment restriction, which provides that each Fund may borrow from banks in amounts up to 33-1/3% of its total assets taken at market value and may borrow an additional 5% of its total assets for temporary purposes. As a non-fundamental restriction, each Fund's borrowings are limited to 20% of its total assets. As a non-fundamental restriction, each Fund is further limited and may not borrow money or pledge its assets, except that either Fund may borrow money from banks as a temporary measure for extraordinary or emergency purposes or to meet redemptions. Hedging Techniques. Both Fundamental Growth and Growth Fund may engage in various portfolio strategies to hedge their respective portfolios against investment, interest rate and currency risks. Growth Fund may also use options on securities to seek increased return. Each Fund is not required to use hedging techniques and may not do so. For a description of hedging instruments and risks associated with investment in such instruments, see "Details About the Fund - Investment Risks - Derivatives" in the Fundamental Growth Prospectus. Standby Commitment Agreements. Growth Fund may enter into standby commitment agreements. These agreements commit Growth Fund, for a stated period of time, to purchase a stated amount of securities which may be issued and sold at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement, Growth Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued. Growth Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to Growth Fund. Growth Fund will not enter into a standby commitment with a remaining term in excess of 90 days and will limit its investment in such commitments so that the aggregate purchase price of securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale that affect their marketability, will not exceed 15% of its net assets taken at the time of the commitment. Growth Fund segregates liquid securities in an aggregate amount equal to the purchase price of the securities underlying the commitment. No assurance can be given that the securities subject to a standby commitment will be issued, and the value of the securities, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, Growth Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security thereafter will be reflected in the calculation of Growth Fund's net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. Repurchase Agreements. Each Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the bank or primary dealer or an affiliate thereof agrees, on entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. Such agreements usually cover short periods, such as under a week. To the extent the repurchase agreement is not denominated in U.S. dollars, a Fund's return may be affected by currency fluctuations. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. A Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of a default by the seller, a Fund ordinarily will retain ownership of the securities underlying the repurchase agreement, and instead of a contractually fixed rate of return, the rate of return to a Fund shall be dependent upon intervening fluctuations of the market value of such securities and the accrued interest on the securities. In such event, a Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. A Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the securities underlying a repurchase agreement in the event of the counterparty's default. Each Fund may not invest more than 15% of its net assets in repurchase agreements maturing in more than seven days, together with all other illiquid securities. Purchase and Sale Contracts. From time to time, Fundamental Growth also may invest in securities pursuant to purchase and sale contracts. While purchase and sale contracts are similar to repurchase agreements, purchase and sale contracts are structured so as to be in substance more like a purchase and sale of the underlying security than is the case with repurchase agreements. When-Issued Securities and Delayed Delivery Transactions. Each Fund may purchase or sell securities on a delayed delivery basis or a when issued basis at fixed purchase terms. These transactions arise when securities are purchased or sold by a Fund with payment and delivery taking place in the future. The purchase will be recorded on the date a Fund enters into the commitment and the value of the obligation will thereafter be reflected in the calculation of the Fund's net asset value. The value of the obligation on the delivery date may be more or less than its purchase price. A separate account of a Fund will be established with its custodian consisting of cash, cash equivalents or high grade, liquid debt securities having a market value at all times at least equal to the amount of the forward commitment. No assurance can be given that a security purchased on a when issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. The value of securities in these transactions on the delivery date may be more or less than a Fund's purchase price. Each Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period. Lending of Portfolio Securities. Each Fund may from time to time lend securities from its portfolio with a value not exceeding 33-1/3% of its total assets to banks, brokers and other financial institutions and receive collateral in cash or securities issued or guaranteed by the U.S. Government. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, that Fund could experience delays and costs in gaining access to the collateral and could suffer a loss to the extent the value of the collateral falls below the market value of the borrowed securities. Non-Diversified Status. Growth Fund is classified as a non-diversified fund under the Investment Company Act, which means that it may invest more of its assets in securities of a single issuer than if it were a diversified fund. If a Fund invests in a smaller number of issuers, the Fund's risk is increased because developments affecting an individual issuer may have a greater impact on the Fund's performance. Fundamental Growth is a diversified fund, which means it is required to invest in a greater number of issuers. This lessens the impact an individual issuer may have on Fundamental Growth's performance. Suitability. The economic benefit of an investment in each Fund depends upon many factors beyond the control of that Fund. Because of each Fund's emphasis on growth securities, the Funds should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in a Fund will depend upon, among other things, investment objectives and an ability to accept the risks associated with investing in growth securities, including the risk of loss of principal. Information Regarding Options, Futures and Foreign Exchange Transactions Each Fund may engage in certain investment practices including the use of options, futures and foreign exchange. Each Fund may utilize these strategies for hedging purposes, including anticipatory hedges. Growth Fund may also use options on securities to seek increased return. Each Fund has authority to write (i.e., sell) put or call options, purchase put or call options on securities and engage in transactions in stock index options, stock index futures and financial futures, and related options on such futures. For a detailed discussion of the Funds' investment policies regarding futures and options, including the risks associated therewith, see "Details About the Fund -- Investment Risks -- Derivatives" in the Fundamental Growth Prospectus. Investment Restrictions Other than as noted above, Fundamental Growth and Growth Fund have substantially similar investment restrictions. Management Board Members. The Board of each of Fundamental Growth and Growth Fund consists of six individuals, five of whom are not "interested persons" of the applicable Fund as defined in the Investment Company Act. One individual, Terry K. Glenn, serves on each Board. After the Reorganization, the Board of Fundamental Growth will serve as the Board of the Combined Fund. The Board Members are responsible for the overall supervision of the operation of their Fund and perform the various duties imposed on the directors/trustees of investment companies by the Investment Company Act. Information about the Board Members and officers of Fundamental Growth, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Board Member and officer is P.O. Box 9011, Princeton, New Jersey 08543-9011. TERRY K. GLENN (60) -- President and Director (1)(2) -- Executive Vice President of MLIM and Fund Asset Management, L.P. ("FAM") (which terms as used herein include their corporate predecessors) since 1983; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. ("FDS") since 1985. JOE GRILLS (66) -- Director (2)(3) -- P.O. Box 98, Rapidan, Virginia 22733. Member of the Committee of Investment of Employee Benefit Assets of the Financial Executives Institute (now associated with the Association of Financial Professionals) ("CIEBA") since 1986; Member of CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation ("IBM") and Chief Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000; Director, Duke Management Company since 1992 and elected Vice Chairman in May 1998; Director, LaSalle Street Fund since 1995; Trustee of Mercury HW Funds, Mercury HW Variable Trust and Fund Asset Management Master Trust and Director of Merrill Lynch Investment Managers Funds, Inc. since 1996; Director, Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998; Director, Montpelier Foundation since December 1998 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000. WALTER MINTZ (72) -- Director (2)(3) -- 1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Associates (investment partnership) since 1982. ROBERT S. SALOMON, JR. (64) -- Director (2)(3) -- 106 Dolphin Cove Quay, Stamford, Connecticut 06902. Principal of STI Management (investment adviser) since 1994; Trustee, Commonfund since 1980; Chairman and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers equity mutual funds from 1992 until 1995; regular columnist with Forbes magazine since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991. MELVIN R. SEIDEN (70) -- Director (2)(3) -- 780 Third Avenue, Suite 2502, New York, New York 10017. Director of Silbanc Properties, Ltd. (real estate, investment and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc (private investment firm) from 1964 to 1987. STEPHEN B. SWENSRUD (67) -- Director (2)(3) -- 88 Broad Street, 2nd floor, Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since 1996; Principal, Fernwood Associates (financial consultant) since 1975; Chairman of RPP Corporation (manufacturing) since 1978; Director of International Mobile Communications, Inc. (telecommunications) since 1998. ROBERT C. DOLL, JR. (46) -- Senior Vice President (1)(2) -- First Vice President of MLIM and FAM since 2000 and Senior Vice President thereof from 1999 to 2000; Senior Vice President of Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999. LAWRENCE R. FULLER (60) -- Senior Vice President and Portfolio Manager (1)(2) -- First Vice President of MLIM since 1997 and Vice President of MLIM from 1992 to 1997. DONALD C. BURKE (40) -- Vice President and Treasurer (1)(2) -- First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; Vice President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM since 1990. ALLAN J. OSTER (37) -- Secretary (1)(2) -- Vice President of MLIM since 2000; Attorney with MLIM from 1999 to 2000; Associate with Drinker, Biddle & Reath LLP from 1996 to 1999; Senior Counsel with the U.S. Securities and Exchange Commission from 1991 to 1996. - --------------- (1) Interested person, as defined in the Investment Company Act, of each Fund. (2) Such Board Member or officer is a director, trustee or officer of certain other investment companies for which MLIM or FAM acts as the investment adviser or manager. (3) Member of each Fund's Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Board Members. Investment Advisory Arrangements. MLIM serves as the Investment Adviser for each Fund. Pursuant to an Investment Advisory Agreement between Fundamental Growth and MLIM, Fundamental Growth pays MLIM a monthly investment advisory fee at an annual rate of 0.65% of the average daily net assets of Fundamental Growth not exceeding $1 billion; 0.625% of the average daily net assets of Fundamental Growth from $1 billion to $1.5 billion; 0.60% of the average daily net assets of Fundamental Growth from $1.5 billion to $5 billion; 0.575% of the average daily net assets of Fundamental Growth from $5 billion to $7.5 billion; and 0.55% of the average daily net assets of Fundamental Growth in excess of $7.5 billion. Pursuant to an Investment Advisory Agreement between Growth Fund and MLIM, Growth Fund pays MLIM a monthly investment advisory fee at an annual rate of 0.65% of the average daily net assets of Growth Fund. MLIM has voluntarily agreed to reduce its investment advisory fee as Fund assets grow. The reduced investment advisory fee is equal to 0.65% of the average daily net assets of Growth Fund not exceeding $1.0 billion; 0.625% of the average daily net assets of Growth Fund from $1.0 billion to $1.5 billion; 0.60% of the average daily net assets of Growth Fund from $1.5 billion to $10 billion; and 0.575% of the average daily net assets of Growth Fund in excess of $10 billion. MLIM may reduce or discontinue or reduce such voluntary waiver of investment advisory fees at any time without notice. MLAM U.K. acts as sub-adviser to both Fundamental Growth and Growth Fund. Pursuant to separate sub-advisory agreements between MLIM and MLAM U.K., MLIM pays MLAM U.K. a fee for providing investment advisory services to MLIM with respect to the Funds, in amounts to be determined from time to time by MLIM and MLAM U.K. but in no event in excess of the amount MLIM actually receives for providing services to the applicable Fund pursuant to its Investment Advisory Agreement. The address of MLAM U.K. is 33 King William Street, London EC4R 9AS, England. Purchase of Shares The class structure and purchase and distribution procedures for shares of Growth Fund are substantially the same as those of Fundamental Growth. For a complete discussion of the four classes of shares and the purchase and distribution procedures related thereto see "Your Account--Merrill Lynch Select PricingSM System," "--Participation in Fee-Based Programs" and "--How to Buy, Sell, Transfer and Exchange Shares" in the Fundamental Growth Prospectus. Redemption of Shares The procedure for redeeming shares of Fundamental Growth is the same as the procedure for redeeming shares of Growth Fund. For purposes of computing any CDSC that may be payable upon disposition of Corresponding Shares of Fundamental Growth acquired by Growth Fund shareholders in the Reorganization, the holding period of Growth Fund shares outstanding on the date the Reorganization takes place will be tacked onto the holding period of the Corresponding Shares of Fundamental Growth acquired in the Reorganization. Class B shares of the Combined Fund received in return for Class B shares of Growth Fund purchased prior to June 1, 2001 will continue to be subject to the four-year CDSC schedule in effect prior to June 1, 2001. Class B shares of the Combined Fund received in return for Class B shares of Growth Fund purchased on or after June 1, 2001 will be subject to the six-year CDSC schedule currently in effect. Class B shares of the Combined Fund purchased on or after June 1, 2001 will also be subject to the six-year CDSC schedule currently in effect. See "Your Account--Merrill Lynch Select PricingSM System," "--Participation in Fee-Based Programs" and "--How to Buy, Sell, Transfer and Exchange Shares" in the Fundamental Growth Prospectus. Performance General. The following tables provide performance information for each class of shares of Fundamental Growth and Growth Fund, including and excluding maximum applicable sales charges, for the periods indicated. Past performance is not indicative of future performance.
Fundamental Growth Average Annual Total Return Class A Shares Class B Shares Class C Shares Class D Shares -------------- -------------- -------------- -------------- With Without With Without With Without With Without Sales Sales Sales Sales Sales Sales Sales Sales Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge - ------ ------- ------ ------- ------ ------- ------ ------- ------ One Year Ended May 31, 2001...... (20.27)% (15.85)% (19.74)% (16.70)% (17.49)% (16.73)% (20.47)% (16.07)% Five Years Ended May 31, 2001.... 16.16% 17.42% 16.21%+ 16.21% 16.20% 16.20% 15.85% 17.11% Inception** through May 31, 2001................... 18.25% 19.22% 18.00% 18.00% 13.64% 13.64% 13.80% 14.53% - --------------- * Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B shares, in effect during the periods, is 4.0% and is reduced to 0% after four years. Class C shares are subject to a 1.0% CDSC for one year. ** Class A and Class B shares commenced operations on October 21, 1994. Class C and Class D shares commenced operations on December 24, 1992. + The CDSC on Class B shares currently in effect is 4.0% and is reduced to 0% after six years. If the six-year CDSC schedule had been in effect for this period, returns would have been lower.
Growth Fund Average Annual Total Return* Class A Shares Class B Shares Class C Shares Class D Shares -------------- -------------- -------------- -------------- With Without With Without With Without With Without Sales Sales Sales Sales Sales Sales Sales Sales Period Charge* Charge Charge* Charge Charge* Charge Charge* Charge - ------ ------- ------ ------- ------ ------- ------ ------- ------ One Year Ended May 31, 2001...... (30.84)% (27.00)% (30.40)% (27.79)% (28.44)% (27.79)% (31.03)% (27.21)% Five Years Ended May 31, 2001.... (2.30)% (1.24)% (2.25)%+ (2.25)% (2.27)% (2.27)% (2.55)% (1.49)% Ten Years Ended May 31, 2001 6.67% 7.25% 6.15% 6.15% --- --- --- --- Inception through May 31, 2001***.......................... --- --- --- --- 4.22% 4.22% 4.20% 5.05% - --------------- * The Average Annual Total Return figures presented have been calculated based on actual sales charge and expense levels for the time periods indicated. MLIM waived a portion of the investment advisory fee due from Growth Fund. ** Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B shares, in effect during the periods, is 4.0% and is reduced to 0% after four years. Class C shares are subject to a 1.0% CDSC for one year. *** Class C and Class D shares commenced operations on October 21, 1994. + The CDSC on Class B shares currently in effect is 4.0% reduced to 0% after six years. If the six-year CDSC schedule had been in effect for this period, the return would have been lower for this period.
Code of Ethics The Boards of Fundamental Growth and Growth Fund have approved the same Code of Ethics (the "Code of Ethics") pursuant to Rule 17j-1 under the Investment Company Act that covers the Funds, MLIM, MLAM U.K. and FAMD. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the respective Fund. Shareholder Rights Shareholders of Fundamental Growth are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Board Members and any other matter submitted to a shareholder vote. Fundamental Growth does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act upon any of the following matters: (i) election of Board Members; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement or plan of distribution; and (iv) ratification of selection of independent auditors. However, Fundamental Growth will be required to call special meetings of shareholders in accordance with the requirements of the Investment Company Act to seek approval of new investment advisory arrangements or of a change in the fundamental investment policies, investment objective or investment restrictions of Fundamental Growth. Fundamental Growth also would be required to hold a shareholders' meeting to elect new Board Members at such time as less than a majority of the Board Members holding office have been elected by shareholders. In addition, Fundamental Growth may hold shareholder meetings for approval of certain other matters as required by the Articles of Incorporation of Fundamental Growth. The by-laws of Fundamental Growth require that a special meeting of shareholders be held on the written request of the holders of at least 10% of the outstanding shares of Fundamental Growth entitled to vote at the meeting, if such request is in compliance with applicable Maryland law. The voting rights for Board Members are not cumulative. Shares of Fundamental Growth to be issued to Growth Fund shareholders in the Reorganization will be fully paid and non-assessable, will have no preemptive rights and will have the conversion rights described in this Prospectus and Proxy Statement and in the Fundamental Growth Prospectus. Each share of Fundamental Growth is entitled to participate equally in dividends declared by Fundamental Growth and in its net assets on liquidation or dissolution after satisfaction of outstanding liabilities, except that Class B, Class C and Class D shares bear certain additional expenses. Rights attributable to shares of Growth Fund are similar to those described above. Dividends The current policy of Growth Fund with respect to dividends is substantially identical to the policy of Fundamental Growth. It is each Fund's intention to distribute substantially all of its net investment income, if any. Dividends from such net investment income will be paid at least annually. In addition, each Fund distributes all net realized capital gains, if any, to shareholders at least annually. Automatic Dividend Reinvestment Plan Each Fund offers its shareholders an Automatic Dividend Reinvestment Plan (each, a "Plan" and collectively, the "Plans") with substantially similar terms. Pursuant to the Plans, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the relevant Fund unless a shareholder has elected to receive such dividends in cash. For further information about the Plans, see "Shareholder Services--Automatic Dividend Reinvestment Plan" in the Fundamental Growth Statement of Additional Information. After the Reorganization, a shareholder of Growth Fund who has elected to receive dividends in cash will receive dividends of the Combined Fund in cash; all other Growth Fund shareholders will have their dividends automatically reinvested in shares of the Combined Fund. However, if a shareholder owns shares of both Funds, after the Reorganization the shareholder's election with respect to the dividends of Fundamental Growth will control unless the shareholder specifically elects a different option at that time. Tax Information The tax consequences associated with an investment in shares of Growth Fund are substantially similar to the tax consequences associated with an investment in shares of Fundamental Growth. See "Dividends and Taxes" in the Fundamental Growth Prospectus. Portfolio Transactions The procedures for engaging in portfolio transactions are generally the same for both Growth Fund and Fundamental Growth. For a discussion of these procedures, see "Portfolio Transactions and Brokerage" in the Fundamental Growth Statement. Each Fund may effect portfolio transactions on foreign securities exchanges and may incur settlement delays on certain of such exchanges. In addition, costs associated with transactions in foreign securities are generally higher than such costs associated with transactions in U.S. securities. Moreover, there generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States. Fundamental Growth's ability and decisions to purchase and sell portfolio securities may be affected by foreign laws and regulations relating to the convertibility and repatriation of assets. Portfolio Turnover Generally, Fundamental Growth does not purchase securities for short-term trading profits. However, either Fund may dispose of securities without regard to the time that they have been held when such action, for defensive or other reasons, appears advisable to MLIM. Neither Fund has any limit on its rate of portfolio turnover. The portfolio turnover rates for Fundamental Growth for the fiscal years ended August 31, 2000, 1999 and 1998 were 98.71%, 52.72% and 40.27%, respectively. The portfolio turnover rates for Growth Fund for its fiscal years ended October 31, 2000, 1999 and 1998 were 66.49%, 101.71% and 24.41%, respectively. A high portfolio turnover involves certain tax consequences such as an increase in capital gain dividends or an increase in ordinary income dividends of accrued market discount, and correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions which are borne directly by the Fund. Additional Information Net Asset Value. Both Fundamental Growth and Growth Fund determine net asset value of each class of its shares once daily as of the close of business on the NYSE on each day during which the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Net asset value is computed by dividing the 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. Shareholder Services. Fundamental Growth offers a number of shareholder services and investment plans designed to facilitate investment in shares of the Fund. In addition, U.S. shareholders of each class of shares of Fundamental Growth have an exchange privilege with certain other funds utilizing the Merrill Lynch Select Pricing SystemSM. Shareholder services available to shareholders of Growth Fund are identical to the shareholder services of Fundamental Growth. For a description of these services, see "Shareholder Services" in the Fundamental Growth Statement. Custodian. State Street Bank and Trust Company ("State Street") acts as custodian of the cash and securities of Growth Fund. The principal business address of State Street in such capacity is One Heritage Drive P2N, North Quincy, Massachusetts 02171. The Chase Manhattan Bank, N.A. acts as custodian of the cash and securities of Fundamental Growth. The principal business address of The Chase Manhattan Bank, N.A., in such capacity is Global Securities Services, Chase MetroTech Center, 18th Floor, Brooklyn, New York 11245. It is presently anticipated that The Chase Manhattan Bank, N.A. will serve as the custodian of the Combined Fund. Accounting Services. Each Fund entered into an agreement with State Street effective January 1, 2001, pursuant to which State Street provides certain accounting services to each Fund. Each Fund pays a fee for these services. Prior to January 1, 2001, MLIM provided accounting services to each Fund and was reimbursed by the Fund at its cost in connection with such services. MLIM continues to provide certain accounting services to each Fund and each Fund reimburses MLIM for the cost of these services. The tables below show the amounts paid by each Fund to State Street and to MLIM for the periods indicated:
Fundamental Growth Growth Fund - ------------------------------------------------------------- ---------------------------------------------------------------- Paid to Paid to Paid to Paid to Period State Street MLIM Period State Street MLIM - --------------------------------- ------------ -------- ---------------------------------- ------------ -------- Fiscal year ended August 31, 1999 N/A $143,457 Fiscal year ended October 31, 1999 N/A $342,943 Fiscal year ended August 31, 2000 N/A $372,148 Fiscal year ended October 31, 2000 N/A $254,181 Six months ended February 28, 2001 $123,883* $240,526 Six months ended April 30, 2001 $129,778* $71,419
- --------------- * Represents payments pursuant to the agreement between the applicable Fund and State Street commencing January 1, 2001. Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent. Financial Data Services, Inc. ("FDS"), 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, an affiliate of MLIM, serves as the transfer agent, dividend disbursing agent and shareholder servicing agent with respect to each Fund (in such capacity, the "Transfer Agent"), at the same fee schedule, pursuant to separate agreements with each Fund. The mailing address for FDS is P.O. Box 45289, Jacksonville, Florida 32232-5289. For the fiscal year ended August 31, 2000, Fundamental Growth paid the Transfer Agent fees totaling $6,266,647. For the fiscal year ended October 31, 2000, Growth Fund paid the Transfer Agent fees totaling $6,983,015. FDS will serve as the transfer agent, dividend disbursing agent and shareholder servicing agent for the Combined Fund. Capital Stock. Fundamental Growth has an authorized capital of 1,000,000,000 shares, par value $.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Class A Common Stock and Class C Common Stock each consist of 100,000,000 shares, Class B Common Stock consists of 500,000,000 shares, and Class D Common Stock consists of 300,000,000 shares. Growth Fund's shares are divided into Class A, Class B, Class C and Class D shares. Under Growth Fund's Charter, the Board Members of Growth Fund have the authority to issue an unlimited number of full and fractional shares of beneficial interest, par value $0.10 per share, of different classes and to divide or combine the shares of each class into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in Growth Fund. The rights, preferences and expenses attributable to the Class A, Class B, Class C and Class D shares of Growth Fund are substantially similar in all material respects to those of the Class A, Class B, Class C and Class D shares of Fundamental Growth. Shareholder Inquiries. Shareholder inquiries with respect to Growth Fund and Fundamental Growth may be addressed to either Fund by telephone at (609) 282-2800 or at the address set forth on the cover page of this Proxy Statement and Prospectus. THE REORGANIZATION General Under the Agreement and Plan (attached hereto as Exhibit I), Fundamental Growth will acquire substantially all of the assets of Growth Fund and assume substantially all of the liabilities of Growth Fund and will simultaneously distribute to Growth Fund shares of Fundamental Growth. Such shares will then be distributed on a proportionate basis to the shareholders of Growth Fund in liquidation of Growth Fund. Generally, the assets transferred by Growth Fund to Fundamental Growth will equal (a) all investments of Growth Fund held in its portfolio as of the Valuation Time (as defined in the Agreement and Plan), and (b) all other assets owned directly or indirectly by Growth Fund as of such time. Growth Fund will distribute the shares of Fundamental Growth received by it pro rata to its shareholders in return for such shareholders' proportional interests in Growth Fund. The shares of Fundamental Growth received by Growth Fund shareholders will be of the same class and have the same aggregate net asset value as each such shareholder's interest in Growth Fund as of the Valuation Time (previously defined as the "Corresponding Shares"). (See "Your Account - How Shares are Priced" in the Fundamental Growth Prospectus for information concerning the calculation of net asset value.) The distribution of the Corresponding Shares will be accomplished by opening new accounts on the books of Fundamental Growth in the names of all shareholders of Growth Fund, including shareholders holding Growth Fund shares in certificate form, and transferring to each shareholder's account the Corresponding Shares of Fundamental Growth representing such shareholder's interest previously credited to the account of Growth Fund. Shareholders holding Growth Fund shares in certificate form may receive certificates representing the Corresponding Shares of Fundamental Growth credited to their account in respect of such Growth Fund shares by sending the certificates to the Transfer Agent accompanied by a written request for such exchange. Since the Corresponding Shares of Fundamental Growth will be issued at net asset value and the shares of Growth Fund will be valued at net asset value for purposes of the Reorganization, the holders of shares of Growth Fund will not be diluted as a result of the Reorganization. However, as a result of the Reorganization, a shareholder of Growth Fund or Fundamental Growth would hold a reduced percentage of ownership in the Combined Fund than he or she did in Growth Fund or Fundamental Growth, respectively, prior to the Reorganization. Procedure On June 20, 2001, the Board of Growth Fund, including all of the Board Members who are not "interested persons" of Growth Fund as defined in the Investment Company Act, approved the Agreement and Plan and the submission of such Agreement and Plan to Growth Fund shareholders for approval. The Board of Fundamental Growth, including all of the Board Members who are not "interested persons" of Fundamental Growth as defined in the Investment Company Act, approved the Agreement and Plan on July 11, 2001. If the shareholders of Growth Fund approve the Reorganization at the Meeting, all required regulatory approvals are obtained and certain conditions are either met or waived, it is presently anticipated that the Reorganization will take place during the fourth calendar quarter of 2001. The Board of Growth Fund recommends that Growth Fund shareholders approve the Agreement and Plan. Terms of the Agreement and Plan The following is a summary of the significant terms of the Agreement and Plan. This summary is qualified in its entirety by reference to the Agreement and Plan, attached hereto as Exhibit I. Valuation of Assets and Liabilities. The respective assets of Growth Fund and Fundamental Growth will be valued as of the Valuation Time. The assets in each Fund will be valued according to the procedures set forth under "Your Account - How Shares are Priced" in the Fundamental Growth Prospectus. Purchase orders for shares of Growth Fund which have not been confirmed as of the Valuation Time will be treated as assets of Growth Fund for purposes of the Reorganization; redemption requests with respect to Growth Fund shares which have not settled as of the Valuation Time will be treated as liabilities of Growth Fund for purposes of the Reorganization. Distribution of Shares of Fundamental Growth. On the next full business day following the Valuation Time (the "Closing Date"), Fundamental Growth will issue to Growth Fund a number of shares the aggregate net asset value of which will equal the aggregate net asset value of shares of Growth Fund as of the Valuation Time. Each holder of Growth Fund shares will receive, in return for his or her proportionate interest in Growth Fund, Corresponding Shares of Fundamental Growth of the same class and having the same aggregate net asset value as the Growth Fund shares held by such shareholder as of the Valuation Time. Expenses. The expenses of the Reorganization that are directly attributable to Growth Fund and the conduct of its business will be deducted from the assets of Growth Fund as of the Valuation Time. These expenses are expected to include the expenses incurred in preparing, printing and mailing the proxy materials to be utilized in connection with the Meeting and the expenses related to the solicitation of proxies to be voted at the Meeting. MLIM has agreed to bear all Reorganization expenses that are directly attributable to Fundamental Growth and the conduct of its business. These expenses are expected to include the costs of printing sufficient copies of its Prospectus and its most recent Annual Report to accompany the Proxy Statement and Prospectus. Certain additional expenses of the Reorganization, including, but not limited to, expenses in connection with obtaining an opinion of counsel with respect to the tax consequences of the Reorganization, the preparation of the Agreement and Plan, legal fees, transfer agent fees, and audit fees, will be borne equally by Growth Fund and MLIM, which has agreed to bear such expenses on behalf of Fundamental Growth. The expenses of the Reorganization attributable to Growth Fund are currently estimated to be $1,835,600 and the expenses of the Reorganization attributable to Fundamental Growth (which will be borne by MLIM) are currently estimated to be $211,200. Required Approvals. Under Growth Fund's Charter, shareholder approval of the Agreement and Plan requires the affirmative vote of Growth Fund shareholders representing not less than two-thirds of the total number of votes entitled to be cast thereon. Deregistration and Dissolution. Following the transfer of the assets and liabilities of Growth Fund to Fundamental Growth, each Growth Fund shareholder will receive Corresponding Shares of Fundamental Growth. In addition, Growth Fund will terminate its registration under the Investment Company Act and its existence as a business trust under Massachusetts law and will withdraw its authority to do business in any state where it is required to do so. Amendments and Conditions. The Agreement and Plan may be amended at any time prior to the Closing Date with respect to any of the terms therein. The obligations of Growth Fund and Fundamental Growth pursuant to the Agreement and Plan are subject to various conditions, including a registration statement on Form N-14 being declared effective by the Commission, approval of the Reorganization by Growth Fund shareholders, an opinion of counsel being received with respect to certain tax matters, opinions of counsel being received with respect to certain securities and other matters and the continuing accuracy of various representations and warranties of Growth Fund and Fundamental Growth being confirmed by the respective parties. Termination, Postponement and Waivers. The Agreement and Plan may be terminated, and the Reorganization abandoned at any time, whether before or after approval thereof by the Growth Fund shareholders, prior to the Closing Date, or the Closing Date may be postponed: (i) by consent of the Boards of Growth Fund and Fundamental Growth; (ii) by Growth Fund if any condition to Growth Fund's obligations has not been fulfilled or waived by such Fund; or (iii) by Fundamental Growth if any condition to Fundamental Growth's obligations has not been fulfilled or waived by such Fund. Potential Benefits to Shareholders as a Result of the Reorganization The Board of Growth Fund believes that shareholders of Growth Fund are likely to benefit from the Reorganization. Following the Reorganization, Growth Fund shareholders will remain invested in an open-end fund that has capital growth as its investment objective and a portfolio of equity securities. In addition, Growth Fund shareholders are likely to experience certain additional benefits, including lower expenses per share, economies of scale and greater flexibility in portfolio management. Specifically, after the Reorganization the pro forma operating expense ratio of the Combined Fund, as a percentage of its net assets, is expected to be lower than the current operating expense ratio for Growth Fund (excluding any voluntary waiver of investment advisory fees due from Growth Fund). See "Summary -- The Reorganization -- Fee Tables." In addition, certain fixed costs, such as costs of printing shareholder reports and proxy statements, legal expenses, audit fees, registration fees, mailing costs and other expenses would be spread across a larger asset base, thereby lowering the operating expense ratio borne by Growth Fund shareholders. To illustrate the economies of scale that may be achieved as a result of the Reorganization, the table below shows the operating expense ratio of each class of shares for Fundamental Growth and Growth Fund as of February 28, 2001 and, assuming the Reorganization had taken place on February 28, 2001, the estimated pro forma operating expense ratio for each class of shares of the Combined Fund (in each case, including class specific distribution fees and account maintenance fees with respect to Fundamental Growth, Growth Fund and the Combined Fund, and excluding any voluntary waiver of investment advisory fees due from Growth Fund). Overall Operating Expense Ratio --------------------------------------------------- Actual Pro Forma ---------------------------- --------- Fundamental Growth Combined Class of Shares Growth Fund Fund ----------- ------ --------- A................... 0.75% 1.01% 0.74% B................... 1.76% 2.01% 1.74% C................... 1.77% 2.01% 1.74% D................... 0.99% 1.26% 0.99% The following table sets forth (i) the net assets of Fundamental Growth as of its last three fiscal year ends and as of May 31, 2001, and (ii) the net assets of Growth Fund as of its last three fiscal year ends and as of May 31, 2001.
Fundamental Growth Growth Fund - ------------------------------------------ ------------------------------------------ Date Net Assets Date Net Assets - --------------------- ---------------- ---------------------- ---------------- As of August 31, 1998 $ 1,097,372,333 As of October 31, 1998 $ 4,978,217,224 As of August 31, 1999 $ 3,576,593,893 As of October 31, 1999 $ 2,872,781,812 As of August 31, 2000 $ 6,633,268,363 As of October 31, 2000 $ 2,580,746,160 As of May 31, 2001 $ 5,865,595,670 As of May 31, 2001 $ 1,673,811,829
- -------------------------------------------------------------------------------- This table illustrates that the net assets of Fundamental Growth have been generally increasing for the period August 31, 1998 through May 31, 2001, while the net assets of Growth Fund have been decreasing for the period October 31, 1998 through May 31, 2001. If these trends were to continue, MLIM anticipates that Fundamental Growth would experience increased economies of scale which, as a result, would reduce Fundamental Growth's overall operating expense ratio, while Growth Fund would experience a higher operating expense ratio due to the continuing reduction in its net assets. No assurance can be given that the foregoing would in fact occur. MLIM believes that the economies of scale that may be realized by the Combined Fund as a result of the Reorganization would be beneficial to Growth Fund shareholders. Based on the foregoing, the Board of Growth Fund concluded that the Reorganization presents no significant risks or costs (including legal, accounting and administrative costs) that would outweigh the benefits discussed above. In approving the Reorganization, the Board of Fundamental Growth and the Board of Growth Fund determined that the interests of the existing shareholders of the applicable Fund would not be diluted as a result of the Reorganization and that the Reorganization was in the best interests of the applicable Fund. Tax Consequences of the Reorganization General. The Reorganization has been structured with the intention that it qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Code. Growth Fund and Fundamental Growth have elected and qualified for the special tax treatment afforded "regulated investment companies" under the Code, and Fundamental Growth intends to continue to so qualify after the Reorganization. Growth Fund and Fundamental Growth shall have received an opinion of Sidley Austin Brown & Wood LLP, counsel to Fundamental Growth and special tax counsel to Growth Fund, to the effect that for Federal income tax purposes: (i) the transfer of all of the assets of Growth Fund to Fundamental Growth in return solely for shares of Fundamental Growth as provided in the Agreement and Plan will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and Growth Fund and Fundamental Growth will each be deemed to be a "party" to the Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to Growth Fund as a result of the asset transfer solely in return for Fundamental Growth shares or on the distribution of the Fundamental Growth stock to Growth Fund shareholders under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to Fundamental Growth on the receipt of assets of Growth Fund in return for Fundamental Growth shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the shareholders of Growth Fund on the receipt of Corresponding Shares of Fundamental Growth in return for their shares of Growth Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of Growth Fund's assets in the hands of Fundamental Growth will be the same as the tax basis of such assets in the hands of Growth Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Fundamental Growth received by the shareholders of Growth Fund in the Reorganization will be equal to the tax basis of the shares of Growth Fund surrendered; (vii) in accordance with Section 1223 of the Code, a shareholder's holding period for the Corresponding Shares of Fundamental Growth will be determined by including the period for which such shareholder held the shares of Growth Fund exchanged therefor provided, that such Growth Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Fundamental Growth's holding period with respect to the Growth Fund assets transferred will include the period for which such assets were held by Growth Fund; and (ix) the taxable year of Growth Fund will end on the effective date of the Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, Fundamental Growth will succeed to and take into account certain tax attributes of Growth Fund, such as earnings and profits, capital loss carryovers and method of accounting. Under Section 381(a) of the Code, Fundamental Growth will succeed to and take into account certain tax attributes of Growth Fund, including but not limited to, earnings and profits, any net operating loss carryovers, any capital loss carryovers and method of accounting. The Code, however, contains special limitations with regard to the use of net operating losses, capital losses and other similar items in the context of certain reorganizations, including a tax-free reorganization pursuant to Section 368(a)(1)(C) of the Code, which would reduce the benefit of these attributes to Fundamental Growth. As of February 28, 2001, each of Growth Fund and Fundamental Growth had significant net realized capital losses and significant net unrealized capital losses. As of such date, the amount of each Fund's net realized capital losses and net unrealized capital losses as a percentage of its net asset value was substantially similar. After the Reorganization, and subject to certain limitations, the shareholders of each Fund may benefit from the ability of the Combined Fund to use such capital losses to offset any realized capital gains. Shareholders should consult their tax advisors regarding the effect of the Reorganization in light of their individual circumstances. As the foregoing relates only to Federal income tax consequences, shareholders also should consult their tax advisors as to the foreign, state and local tax consequences of the Reorganization. Status as a Regulated Investment Company. Both Growth Fund and Fundamental Growth have elected and qualified to be taxed as regulated investment companies under Sections 851-855 of the Code, and after the Reorganization, Fundamental Growth intends to continue to so qualify. Appraisal Rights Shareholders of Growth Fund are not entitled to appraisal rights in connection with the acquisition. Capitalization The following table sets forth as of February 28, 2001, (i) the capitalization of Growth Fund, (ii) the capitalization of Fundamental Growth, and (iii) the pro forma capitalization of the Combined Fund as adjusted to give effect to the Reorganization.
Capitalization of Fundamental Growth and Growth Fund and Pro Forma Capitalization of the Combined Fund as of February 28, 2001 (unaudited) Fundamental Growth Class A Class B Class C Class D -------------- -------------- ------------ -------------- Total Net Assets:.............. $1,028,534,852 $2,800,424,387 $619,472,942 $1,472,654,237 Shares Outstanding............. 49,126,759 143,042,022 31,454,824 71,176,520 Net Asset Value Per Share:.. $20.94 $19.58 $19.69 $20.69 Growth Fund Class A Class B Class C Class D -------------- -------------- ------------ -------------- Total Net Assets:.............. $496,550,053 $733,113,643 $64,708,637 $519,916,886 Shares Outstanding............. 26,840,672 44,277,693 3,940,191 28,346,073 Net Asset Value Per Share:.. $18.50 $16.56 $16.42 $18.34 Combined Fund* Class A Class B Class C Class D -------------- -------------- ------------ -------------- Total Net Assets:.............. $1,498,851,525 $3,479,931,973 $675,130,002 $1,960,511,400 Shares Outstanding............. 72,431,401 179,837,297 34,683,357 95,868,151 Net Asset Value Per Share:.. $20.69 $19.35 $19.47 $20.45 - --------------- * Total Net Assets and Net Asset Value Per Share include the aggregate value of Growth Fund's net assets which would have been transferred to Fundamental Growth had the Reorganization taken place on February 28, 2001. Assumes distribution of undistributed realized capital gains and foreign currency transactions and the charge for estimated Reorganization expenses of $1,835,600 attributable to Growth Fund. No assurance can be given as to how many shares of Fundamental Growth the Growth Fund shareholders will receive on the date the Reorganization takes place, and the foregoing should not be relied upon to reflect the number of shares of Fundamental Growth that actually will be received on or after such date.
INFORMATION CONCERNING THE MEETING Date, Time and Place of Meeting The Meeting will be held on October 15, 2001, at the offices of MLIM, 800 Scudders Mill Road, Plainsboro, New Jersey at 10:00 a.m., Eastern time. Solicitation, Revocation and Use of Proxies A shareholder executing and returning a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a notice of revocation to the Secretary of Growth Fund. Although mere attendance at the Meeting will not revoke a proxy, a shareholder present at the Meeting may withdraw his or her proxy and vote in person. All shares represented by properly executed proxies, unless such proxies previously have been revoked, will be voted at the Meeting in accordance with the directions on the proxies; if no direction is indicated on a properly executed proxy, such shares will be voted "FOR" the approval of the Agreement and Plan. It is not anticipated that any matters other than the adoption of the Agreement and Plan will be brought before the Meeting. If, however, any other business properly is brought before the Meeting, proxies will be voted in accordance with the judgment of the persons designated on such proxies. Record Date and Outstanding Shares Only holders of record of shares of Growth Fund at the close of business on August 17, 2001 (the "Record Date") are entitled to vote at the Meeting or any adjournment thereof. At the close of business on the Record Date, there were _________________ shares of Growth Fund issued and outstanding and entitled to vote. Security Ownership of Certain Beneficial and Registered Owners and Management of Growth Fund and Fundamental Growth To the knowledge of Growth Fund, except as set forth in Exhibit II to this Proxy Statement and Prospectus, no person or entity owned of record or beneficially 5% or more of any class of Growth Fund's outstanding shares as of the Record Date. At the Record Date, the Board Members and officers of Growth Fund as a group (10 persons) owned an aggregate of less than 1% of the outstanding shares of Growth Fund and owned less than 1% of the outstanding shares of common stock of ML & Co. To the knowledge of Fundamental Growth, except as set forth in Exhibit II to this Proxy Statement and Prospectus, no person or entity owned of record or beneficially 5% or more of any class of Fundamental Growth's outstanding shares as of the Record Date. At the Record Date, the Board Members and officers of Fundamental Growth as a group (10 persons) owned an aggregate of less than 1% of the outstanding shares of Fundamental Growth and owned less than 1% of the outstanding shares of common stock of ML & Co. Voting Rights and Required Vote For purposes of this Proxy Statement and Prospectus, each share of each class of Growth Fund is entitled to one vote. Approval of the Agreement and Plan requires the affirmative vote of Growth Fund shareholders representing not less than two-thirds of the total votes entitled to be cast thereon, with all shares voting as a single class. Shareholders of Growth Fund are not entitled to demand the fair value of their shares upon a transfer of assets and will be bound by the terms of the Reorganization if approved at the Meeting. However, any shareholder of Growth Fund may redeem his or her Growth Fund shares prior to the Reorganization. A quorum for purposes of the Meeting consists of one-third of the outstanding shares of Growth Fund, present in person or by proxy, at the Meeting. If, by the time scheduled for the Meeting, a quorum of Growth Fund's shareholders is not present or if a quorum is present but sufficient votes in favor of the Agreement and Plan are not received from the shareholders of Growth Fund, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from shareholders. Any such adjournment will require the affirmative vote of a majority of the shares of Growth Fund present in person or by proxy and entitled to vote at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of any such adjournment if they determine that adjournment and additional solicitation are reasonable and in the interests of the shareholders of Growth Fund. ADDITIONAL INFORMATION The expenses of preparation, printing and mailing of the enclosed form of proxy, the accompanying Notice and this Proxy Statement and Prospectus and the expenses related to solicitation of proxies to be voted at the Meeting will be borne by Growth Fund. Growth Fund will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation materials to the beneficial owners of shares of Growth Fund and will reimburse certain persons that Growth Fund may employ for their reasonable expenses in assisting in the solicitation of proxies from such beneficial owners of shares of Growth Fund. In order to obtain the necessary quorum at the Meeting, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by officers of Growth Fund. [Growth Fund has retained Georgeson Shareholder Communications Inc., 17 State Street, New York, New York 10004, 1-___-___-____, to aid in the solicitation of proxies, at a cost to be borne by Growth Fund of approximately $__________ plus out-of-pocket expenses, which are estimated to be $__________.] Broker-dealer firms, including Merrill Lynch, holding shares of Growth Fund in "street name" for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will not be permitted to vote without instructions with respect to the approval of the Agreement and Plan. Properly executed proxies that are returned but that are marked "abstain" or with respect to which a broker-dealer has received no instructions and therefore has declined to vote on the proposal ("broker non-votes") will be counted as present for the purposes of determining a quorum. However, abstentions and broker non-votes will have the same effect as a vote against approval of the Agreement and Plan. This Proxy Statement and Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto, which Growth Fund and Fundamental Growth, respectively, have filed with the Commission under the Securities Act and the Investment Company Act, to which reference is hereby made. Growth Fund and Fundamental Growth file reports and other information with the Commission. Reports, proxy statements, registration statements and other information filed by Growth Fund, and Fundamental Growth can be inspected and copied at the public reference facilities of the Commission in Washington, D.C. and at the New York Regional Office of the Commission at Seven World Trade Center, New York, New York 10048. Copies of such materials also can be obtained by mail from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains the Fundamental Growth Prospectus, the Fundamental Growth Statement, the Growth Fund Prospectus, the Growth Fund Statement, other material incorporated herein by reference and other information regarding the Funds. LEGAL PROCEEDINGS In November, 2000, a putative class action lawsuit was filed in Federal Court in the Middle District of Florida on behalf of Florida investors against Growth Fund, MLIM, certain present and former individual Board Members of Growth Fund and Merrill Lynch seeking damages. The plaintiffs, who are trustees of and participants in certain 401(k) profit sharing plans, purport to assert claims against the defendants on their own behalf and on behalf of the plans, the plans' participants and all similarly situated shareholders of Growth Fund who invested in Florida. The alleged class consists of "all persons and entities who purchased or sold the Growth Fund in Florida through Merrill Lynch, or any related entity . . . at any time from November 1, 1997, up through and including April 30, 1999." The lawsuit involves two claims based on the Florida Securities and Investor Protection Act and the Florida Deceptive and Unfair Trade Practices Act, respectively. The substance of both claims is that Growth Fund and the other defendants misrepresented and omitted material facts regarding the "true nature of the Fund and its holdings." The defendants, including Growth Fund, have filed a motion to dismiss the plaintiffs' complaint for lack of subject matter jurisdiction. There has been no decision yet with respect to this motion. Growth Fund and the other defendants believe that the lawsuit is without merit and intend to defend vigorously against the claims. A second, nearly identical action was filed in Florida state court by one of the original plaintiffs in the federal action. This lawsuit has been removed under the Securities Litigation Uniform Standards Act to federal court. Plaintiffs have made a motion to remand this action to state court, which defendants have opposed. An oral argument has been scheduled in this matter for August 13, 2001. Growth Fund and the other defendants also believe that this second lawsuit is without merit and have moved to have the complaint dismissed. The two actions have not been consolidated, although both are pending before the same district court judge. There are no material legal proceedings to which Fundamental Growth is a party. LEGAL OPINIONS Certain legal matters in connection with the Reorganization will be passed upon for Fundamental Growth by Sidley Austin Brown & Wood LLP, One World Trade Center, New York, New York 10048. Certain legal matters in connection with the Reorganization will be passed upon for Growth Fund by Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. Shearman & Sterling will rely as to matters of Massachusetts law on the opinion of Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110-1726. Certain tax matters will be passed upon for Growth Fund by Sidley Austin Brown & Wood LLP, special tax counsel to Growth Fund, One World Trade Center, New York, New York 10048. EXPERTS The financial highlights of Growth Fund and Fundamental Growth included in this Proxy Statement and Prospectus have been so included in reliance on the reports of Deloitte & Touche LLP and Ernst & Young LLP, respectively, independent auditors, given on their authority as experts in auditing and accounting. The principal business address of Deloitte & Touche LLP is Two World Financial Center, New York, New York, 10281-1008. The principal address of Ernst & Young LLP is 99 Wood Avenue South, Iselin, New Jersey 08830-0471. Ernst & Young LLP will serve as the independent auditors for the Combined Fund after the Reorganization. SHAREHOLDER PROPOSALS A shareholder proposal intended to be presented at any subsequent meetings of shareholders of Growth Fund must be received by Growth Fund in a reasonable time before the solicitation relating to such meeting is to be made by the Board of Growth Fund in order to be considered in Growth Fund's proxy statement and form of proxy relating to the meeting. Any shareholder of Growth Fund who desires to bring a proposal at any subsequent meeting of the shareholders of Growth Fund without including such proposal in Growth Fund's proxy statement relating to the meeting must deliver notice of such proposal to Growth Fund in a reasonable time before Growth Fund begins to print and mail the proxy solicitation materials to be used in connection with such meeting. By Order of the Board of Trustees, LORI A. MARTIN Secretary, Merrill Lynch Growth Fund EXHIBIT I AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN MERRILL LYNCH GROWTH FUND AND MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. DATED AS OF AUGUST 21, 2001 Table of Contents Page No. 1.Defined Terms; Sections and Exhibits; Miscellaneous Terms................5 a. Definitions........................................................5 b. Use of Defined Terms...............................................7 c. Sections and Exhibits..............................................7 d. Miscellaneous Terms................................................7 2.The Reorganization.......................................................8 a. Transfer of Assets.................................................8 b. Assumption of Liabilities..........................................8 c. Issuance and Valuation of Corresponding Shares in the Reorganization.....................................................8 d. Distribution of Corresponding Shares to Growth Fund Shareholders.......................................................8 e. Interest; Proceeds.................................................8 f. Valuation Time.....................................................8 g. Evidence of Transfer...............................................8 h. Dissolution and Deregistration.....................................8 3.Representations and Warranties of Growth Fund............................8 a. Formation and Qualification........................................8 b. Licenses...........................................................9 c. Authority..........................................................9 d. Financial Statements...............................................9 e. Semi-Annual Report to Shareholders.................................9 f. Prospectus and Statement of Additional Information.................9 g. Litigation.........................................................9 h. Material Contracts.................................................9 i. No Conflict.......................................................10 j. Undisclosed Liabilities...........................................10 k. Taxes.............................................................10 l. Assets............................................................10 m. Consents..........................................................10 n. N-14 Registration Statement.......................................10 o. Capitalization....................................................10 p. Books and Records.................................................11 4.Representations and Warranties of Fundamental Growth....................11 a. Incorporation and Qualification...................................11 b. Licenses..........................................................11 c. Authority.........................................................11 d. Financial Statements..............................................11 e. Semi-Annual Report to Stockholders................................11 f. Prospectus and Statement of Additional Information................12 g. Litigation........................................................12 h. Material Contracts................................................12 i. No Conflict.......................................................12 j. Undisclosed Liabilities...........................................12 k. Taxes.............................................................12 l. Consents..........................................................12 m. N-l4 Registration Statement.......................................12 n. Capitalization....................................................13 o. Corresponding Shares..............................................13 5.Covenants of Growth Fund and Fundamental Growth.........................13 a. Special Shareholders' Meeting.....................................13 b. Unaudited Financial Statements....................................13 c. Share Ledger Records of Fundamental Growth........................14 d. Conduct of Business...............................................14 e. Dissolution and Deregistration of Growth Fund.....................14 f. Filing of N-l4 Registration Statement.............................14 g. Corresponding Shares..............................................14 h. Tax Returns.......................................................14 i. Combined Proxy Statement and Prospectus Mailing...................14 j. Confirmation of Tax Basis.........................................15 k. Shareholder List..................................................15 l. Fundamental Growth's Continued Existence..........................15 6.Closing Date............................................................15 7.Growth Fund Conditions..................................................15 a. Representations and Warranties....................................15 b. Performance.......................................................15 c. Shareholder Approval..............................................15 d. Approval of Board of Directors of Fundamental Growth..............15 e. Deliveries by Fundamental Growth..................................16 f. No Adverse Change.................................................18 g. Absence of Litigation.............................................18 h. Proceedings and Documents.........................................18 i. N-l4 Registration Statement.......................................18 j. Compliance with Laws; No Adverse Action or Decision...............18 k. Commission Orders or Interpretations..............................18 8.Fundamental Growth Conditions...........................................18 a. Representations and Warranties....................................18 b. Performance.......................................................19 c. Shareholder Approval..............................................19 d. Approval of Board of Trustees of Growth Fund......................19 e. Deliveries by Growth Fund.........................................19 f. No Adverse Change.................................................21 g. Absence of Litigation.............................................21 h. Proceedings and Documents.........................................21 i. N-l4 Registration Statement.......................................21 j. Compliance with Laws; No Adverse Action or Decision...............21 k. Commission Orders or Interpretations..............................21 l. Dividends.........................................................21 9.Termination, Postponement and Waivers...................................22 a. Termination of Agreement..........................................22 b. Commission Order..................................................22 c. Effect of Termination.............................................22 d. Waivers; Non-Material Changes.....................................22 10.Survival of Representations and Warranties.............................23 11.Other Matters..........................................................23 a. Legend............................................................23 b. Obligations.......................................................23 c. Further Assurances................................................23 d. Notices...........................................................23 e. Entire Agreement..................................................24 f. Amendment.........................................................24 g. Governing Law.....................................................24 h. Assignment........................................................24 i. Fees and Expenses.................................................24 j. Severability......................................................24 k. Headings..........................................................24 l. Counterparts......................................................24 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of the 21st day of August 2001, by and between MERRILL LYNCH GROWTH FUND, a Massachusetts business trust ("Growth Fund"), and MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., a Maryland corporation ("Fundamental Growth"). PLAN OF REORGANIZATION The reorganization will consist of (i) the acquisition of the Assets (as defined herein), and assumption of the Assumed Liabilities (as defined herein), by Fundamental Growth solely in return for an equal aggregate value of newly issued Corresponding Shares (as defined herein) of Fundamental Growth equal to the net asset value of the Assets (after deducting the Assumed Liabilities) determined in accordance with Section 2(c) hereof, (ii) the subsequent distribution by Growth Fund of the Corresponding Shares to its shareholders in proportion to such shareholders' interest in Growth Fund in liquidation of Growth Fund, and (iii) the dissolution and deregistration of Growth Fund, all upon and subject to the terms hereinafter set forth (the "Reorganization"). In the course of the Reorganization, shares of Fundamental Growth will be distributed to Growth Fund shareholders as follows: each holder of Growth Fund shares will be entitled to receive shares of Fundamental Growth common stock, par value $.10 per share, of the same class (i.e., Class A, Class B, Class C or Class D) (collectively, "Corresponding Shares"), as the shares of Growth Fund owned by such shareholder on the Closing Date (as defined herein). The same distribution fees, account maintenance fees and sales charges (including contingent deferred sales charges), if any, shall apply to the Corresponding Shares as applied to shares of Growth Fund on the Closing Date. The aggregate net asset value of the Corresponding Shares to be received by each shareholder of Growth Fund will equal the aggregate net asset value of the Growth Fund shares owned by such shareholder as of the Valuation Time (as defined herein). It is intended that the Reorganization described herein shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"), and any successor provision. As promptly as practicable after the liquidation of Growth Fund pursuant to the Reorganization, Growth Fund shall be dissolved in accordance with the laws of the Commonwealth of Massachusetts and shall terminate its registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"). AGREEMENT NOW, THEREFORE, in order to consummate the Reorganization and in consideration of the premises and the covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Growth Fund and Fundamental Growth hereby agree as follows: 1. Defined Terms; Sections and Exhibits; Miscellaneous Terms a. Definitions. As used herein the following terms have the following respective meanings (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Agreement" has the meaning ascribed thereto in the introduction hereof. "Assets" has the meaning ascribed thereto in Section 2(a) hereof. "Assumed Liabilities" has the meaning ascribed thereto in Section 2(b) hereof. "Closing Date" has the meaning ascribed thereto in Section 6 hereof. "Code" has the meaning ascribed thereto in the first paragraph under the heading "Plan of Reorganization" hereof. "Commission" shall mean the Securities and Exchange Commission. "Corresponding Shares" has the meaning ascribed thereto in the first paragraph under the heading "Plan of Reorganization" hereof. "Credit Agreement" shall mean the Amended and Restated Credit Agreement dated as of December 1, 2000, as amended or supplemented, by and among Growth Fund, Fundamental Growth, other investment companies, various banks, The Bank of New York, as syndication agent, National Australia Bank Limited, as co-documentation agent, State Street Bank and Trust Company, as co-documentation agent, Bank One, NA, as administrative agent for the Banks, and Banc One Capital Markets, Inc., as Sole Lead Arranger and Sole Book Manager. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fundamental Growth" has the meaning ascribed thereto in the introduction hereof. "Fundamental Growth Articles of Incorporation" shall mean the Articles of Incorporation of Fundamental Growth dated as of April 30, 1992, as amended from time to time. "Fundamental Growth Prospectus" shall mean the prospectus of Fundamental Growth dated as of December 11, 2000, as amended or supplemented. "Fundamental Growth Statement of Additional Information" shall mean the statement of additional information of Fundamental Growth dated as of December 11, 2000, as amended or supplemented. "Governmental Authority" shall mean any governmental or quasi-governmental authority including, without limitation, any federal, state, territorial, country, municipal or other governmental or quasi-governmental agency, board, branch, bureau, commission, court, arbitral body, department or other instrumentality or political unit or subdivision, whether domestic or foreign. "Growth Fund" has the meaning ascribed thereto in the introduction hereof. "Growth Fund Declaration of Trust" shall mean the Declaration of Trust of Growth Fund dated as of December 11, 1986, as amended from time to time. "Growth Fund Prospectus" shall mean the prospectus of Growth Fund dated as of February 16, 2001, as amended or supplemented. "Growth Fund Statement of Additional Information" shall mean the statement of additional information of Growth Fund dated as of February 16, 2001, as amended or supplemented. "Investment Company Act" has the meaning ascribed thereto in the second paragraph under the heading "Plan of Reorganization." "Investments" shall mean, with respect to any Person, (i) the investments of such Person shown on the schedule of its investments as of the date set forth therein, with such additions thereto and deletions therefrom as may have arisen in the course of such Person's business up to such date; and (ii) all other assets owned by such Person or liabilities incurred as of such date. "Licenses" has the meaning ascribed thereto in Section 3(b) hereof. "Lien" shall mean any security agreement, financing statement (whether or not filed), mortgage, lien (statutory or otherwise), charge, pledge, hypothecation, conditional sales agreement, adverse claim, title retention agreement or other security interest, encumbrance, restriction, deed of trust, indenture, option, limitation, exception to or other title defect in or on any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale, lease, consignment or bailment given for security purposes, trust receipt or other title retention agreement with respect to any property or asset of such Person, whether direct, indirect, accrued or contingent. "Material Adverse Effect" shall mean, with respect to any Person, any event, circumstance or condition that, individually or when aggregated with all other similar events, circumstances or conditions could reasonably be expected to have, or has had, a material adverse effect on: (i) the business, property, operations, condition (financial or otherwise), results of operations or prospects of such Person or (ii) the ability of such Person to consummate the transactions contemplated hereunder in the manner contemplated hereby, other than, in each case, any change relating to the economy or securities markets in general. "MLIM" shall mean Merrill Lynch Investment Managers, L.P. "N-l4 Registration Statement" has the meaning ascribed thereto in Section 3(n) hereof. "Permitted Liens" shall mean, with respect to any Person, any Lien arising by reason of (i) taxes, assessments, governmental charges or claims that are either not yet delinquent, or being contested in good faith for which adequate reserves have been recorded, (ii) the Federal or state securities laws, and (iii) imperfections of title or encumbrances as do not materially detract from the value or use of the Assets or materially affect title thereto. "Person" any individual, corporation, limited liability company, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "Reorganization" has the meaning ascribed thereto in the first paragraph under the heading "Plan of Reorganization" hereof. "RICs" has the meaning ascribed thereto in Section 3(b) hereof. "SAB&W" shall mean Sidley Austin Brown & Wood LLP, counsel to Fundamental Growth. "Securities Act" shall mean the Securities Act of 1933, as amended. "S&S" shall mean Shearman & Sterling, counsel to Growth Fund. "Valuation Time" has the meaning ascribed thereto in Section 2(f) hereof. b. Use of Defined Terms. Any defined term used in the plural shall refer to all members of the relevant class, and any defined term used in the singular shall refer to any one or more of the members of the relevant class. The use of any gender shall be applicable to all genders. c. Sections and Exhibits. References in this Agreement to Sections, Exhibits and Schedules are to Sections, Exhibits and Schedules of and to this Agreement. The Exhibits and Schedules to this Agreement are hereby incorporated herein by this reference as if fully set forth herein. d. Miscellaneous Terms. The term "or" shall not be exclusive. The terms "herein," "hereof," "hereto," "hereunder" and other terms similar to such terms shall refer to this Agreement as a whole and not merely to the specific article, section, paragraph or clause where such terms may appear. The term "including" shall mean "including, but not limited to." 2. The Reorganization a. Transfer of Assets. Subject to receiving the requisite approval of the shareholders of Growth Fund, and to the other terms and conditions contained herein, on the Closing Date, Growth Fund shall convey, transfer and deliver to Fundamental Growth, and Fundamental Growth shall purchase, acquire and accept from Growth Fund, free and clear of all Liens (other than Permitted Liens), substantially all of the assets (including interest accrued as of the Valuation Time on debt instruments) of Growth Fund (collectively, the "Assets"). b. Assumption of Liabilities. Subject to receiving the requisite approval of the shareholders of Growth Fund, and to the other terms and conditions contained herein, on the Closing Date, Fundamental Growth will assume and agree to pay, perform and discharge when due substantially all of the obligations and liabilities of Growth Fund then existing, whether absolute, accrued, contingent or otherwise (collectively, the "Assumed Liabilities"). c. Issuance and Valuation of Corresponding Shares in the Reorganization. Full Corresponding Shares, and to the extent necessary, a fractional Corresponding Share, of an aggregate net asset value equal to the net asset value of the Assets (after deducting the Assumed Liabilities) acquired by Fundamental Growth hereunder, determined as hereinafter provided shall be issued by Fundamental Growth to Growth Fund in return for the Assets and assumption of the Assumed Liabilities. The net asset value of each of Growth Fund and Fundamental Growth shall be determined in accordance with the procedures described in the Fundamental Growth Statement of Additional Information as of the Valuation Time. Such valuation and determination shall be made by Fundamental Growth in cooperation with Growth Fund. d. Distribution of Corresponding Shares to Growth Fund Shareholders. Pursuant to this Agreement, as soon as practicable after the Valuation Time, Growth Fund will distribute all Corresponding Shares received by it from Fundamental Growth in connection with the Reorganization to its shareholders in proportion to such shareholders' interest in Growth Fund. Such distribution shall be accomplished by the opening of shareholder accounts on the share ledger records of Fundamental Growth in the amounts due the shareholders of Growth Fund based on their respective holdings in Growth Fund as of the Valuation Time. e. Interest; Proceeds. Growth Fund will pay or cause to be paid to Fundamental Growth any interest or proceeds it receives on or after the Closing Date with respect to the Assets. f. Valuation Time. The Valuation Time shall be 4:00 P.M., New York time, on __________, 2001, or such earlier or later day and time as may be mutually agreed upon in writing between the parties hereto (the "Valuation Time"). g. Evidence of Transfer. Fundamental Growth and Growth Fund will jointly file any instrument as may be required by the State of Maryland and the Commonwealth of Massachusetts to effect the transfer of the Assets to Fundamental Growth. h. Dissolution and Deregistration. Growth Fund will dissolve and terminate its existence as a business trust as soon as practicable following the Closing Date by making any required filings with the Commonwealth of Massachusetts and will terminate its qualification to do business in any other states where it is presently qualified. As soon as practicable following the Closing Date, Growth Fund also will take the steps necessary to terminate its status as a registered investment company under the Investment Company Act and will terminate registration of its securities under the Securities Act. 3. Representations and Warranties of Growth Fund. Growth Fund represents and warrants to Fundamental Growth as follows: a. Formation and Qualification. Growth Fund is a business trust duly organized, validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts, and has all requisite power and authority to own all of its properties or assets and carry on its business as presently conducted, is duly qualified, registered or licensed to do business and is in good standing in each jurisdiction in which the ownership of its properties or assets or the character of its present operations makes such qualification, registration or licensing necessary, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect on Growth Fund. b. Licenses. Growth Fund holds all permits, consents, registrations, certificates, authorizations and other approvals (collectively, "Licenses") required for the conduct of its business as now being conducted; all such Licenses are in full force and effect and no suspension or cancellation of any of them is pending or threatened; and none of such Licenses will be affected by the consummation of the transactions contemplated by this Agreement in a manner that would have a Material Adverse Effect on Growth Fund. Growth Fund is duly registered under the Investment Company Act as a non-diversified, open-end management investment company (File No. 811-4934), and such registration has not been revoked or rescinded and is in full force and effect. Growth Fund has elected and qualified for the special tax treatment afforded regulated investment companies ("RICs") under Sections 851-855 of the Code at all times since its inception and intends to continue to so qualify for its taxable year ending upon the liquidation of Growth Fund. c. Authority. Growth Fund has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Growth Fund and no other proceedings on the part of Growth Fund are necessary to authorize this Agreement or the consummation of the transactions contemplated hereby, except for the approval of Growth Fund shareholders as provided in Section 7(c) hereof. This Agreement has been duly and validly executed by Growth Fund and, subject to receipt of the requisite shareholder approval, this Agreement constitutes a legal, valid and binding obligation of Growth Fund enforceable against Growth Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto and the remedy of specific performance and injunctive and other forms of equitable relief. d. Financial Statements. Fundamental Growth has been furnished with an audited statement of assets and liabilities and a schedule of Investments of Growth Fund, each as of October 31, 2000, said financial statements having been audited by Deloitte & Touche LLP, independent public accountants. Such audited financial statements fairly present in all material respects the financial position of Growth Fund as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. e. Semi-Annual Report to Shareholders. Fundamental Growth has been furnished with Growth Fund's Semi-Annual Report to Shareholders for the six months ended April 30, 2001, and the unaudited financial statements appearing therein fairly present in all material respects the financial position of Growth Fund as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. f. Prospectus and Statement of Additional Information. Fundamental Growth has been furnished with the Growth Fund Prospectus and the Growth Fund Statement of Additional Information, and said Prospectus and Statement of Additional Information do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. g. Litigation. Except as disclosed in the N-14 Registration Statement, there are no material claims, actions, suits or legal, administrative or other proceedings pending or, to the knowledge of Growth Fund, threatened against Growth Fund that could reasonably be expected to have a Material Adverse Effect on Growth Fund. Growth Fund is not charged with or, to its knowledge, threatened with any violation, or investigation of any possible violation, of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business that could reasonably be expected to have a Material Adverse Effect on Growth Fund. h. Material Contracts. There are no material contracts outstanding to which Growth Fund is a party that have not been disclosed in the N-14 Registration Statement, the Growth Fund Prospectus, the Growth Fund Statement of Additional Information or which will not otherwise be disclosed to Fundamental Growth prior to the Valuation Time. i. No Conflict. The execution and delivery of this Agreement by Growth Fund and the consummation of the transactions contemplated hereby will not contravene or constitute a default under or violation of (i) Growth Fund's Declaration of Trust or by-laws, each as amended and in effect as of the date hereof, (ii) any agreement or contract (or require the consent of any Person under any agreement or contract that has not been obtained) to which Growth Fund is a party or to which its assets or properties are subject, or (iii) any judgment, injunction, order or decree, or other instrument binding upon Growth Fund or any of its assets or properties, except where such contravention, default or violation would not have a Material Adverse Effect on Growth Fund. j. Undisclosed Liabilities. Growth Fund has no material liabilities, contingent or otherwise, other than those shown on Growth Fund's statements of assets and liabilities referred to herein, those incurred in the ordinary course of its business as an investment company since April 30, 2001, and those incurred in connection with the Reorganization. k. Taxes. Growth Fund has filed (or caused to be filed), or has obtained extensions to file, all Federal, state and local tax returns which are required to be filed by it, and has paid (or caused to be paid) or has obtained extensions to pay, all taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of Growth Fund have been adequately provided for on its books, and no tax deficiency or liability of Growth Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs. l. Assets. Growth Fund has good and marketable title to the Assets, free and clear of all Liens, except for Permitted Liens. Growth Fund is the direct sole and exclusive owner of the Assets. At the Closing Date, upon consummation of the transactions contemplated hereby, Fundamental Growth will have good and marketable title to the Assets, free and clear of all Liens, except for Permitted Liens. m. Consents. No filing or registration with, or consent, approval, authorization or order of, any Person is required for the consummation by Growth Fund of the Reorganization, except for (i) such as may be required under the Securities Act, the Exchange Act, and the Investment Company Act (including the determinations of the Board of Trustees of Growth Fund as required by Rule 17a-8(a) under the Investment Company Act ("Rule 17a-8(a)")) or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico), (ii) any approval required under the Credit Agreement, (iii) the approval of not less than two-thirds of the total votes entitled to be cast at a meeting of shareholders of Growth Fund by the holders of shares entitled to vote thereon, and (iv) the approval of the Board of Trustees of Growth Fund. n. N-14 Registration Statement. The registration statement filed, or to be filed, by Fundamental Growth on Form N-14 relating to the Corresponding Shares to be issued pursuant to this Agreement, which includes the proxy statement of Growth Fund and the prospectus of Fundamental Growth with respect to the transactions contemplated hereby, and any supplement or amendment thereto or to the documents therein (as amended and supplemented, the "N-14 Registration Statement"), on the effective date of the N-14 Registration Statement, at the time of the shareholders' meeting referred to in Section 5(a) hereof and on the Closing Date, insofar as it relates to Growth Fund (i) complied, or will comply, as the case may be, in all material respects, with the applicable provisions of the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder, and (ii) did not, or will not, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Growth Fund for use in the N-14 Registration Statement as provided in Section 5(f) hereof. o. Capitalization. Under its Declaration of Trust, Growth Fund is authorized to issue an unlimited number of full and fractional shares of beneficial interest, par value $0.10 per share, divided into four classes designated Class A, Class B, Class C and Class D shares. All issued and outstanding shares of Growth Fund are duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights. Except for (i) the right of Class B shares of Growth Fund to automatically convert to Class D shares of Growth Fund approximately eight years after the purchase thereof, or (ii) in connection with any automatic dividend reinvestment plan available to Growth Fund shareholders, there are no options warrants, subscriptions, calls or other rights, agreements or commitments obligating Growth Fund to issue any of its shares or securities convertible into its shares. p. Books and Records. The books and records of Growth Fund made available to Fundamental Growth and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of Growth Fund. 4. Representations and Warranties of Fundamental Growth. Fundamental Growth represents and warrants to Growth Fund as follows: a. Incorporation and Qualification. Fundamental Growth is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has all requisite power and authority to own all of its properties or assets and carry on its business as presently conducted, is duly qualified, registered or licensed as a foreign corporation to do business and is in good standing in each jurisdiction in which the ownership of its properties or assets or the character of its present operations makes such qualification, registration or licensing necessary, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect on Fundamental Growth. b. Licenses. Fundamental Growth holds all Licenses required for the conduct of its business as now being conducted; all such Licenses are in full force and effect and no suspension or cancellation of any of them is pending or threatened; and none of such Licenses will be affected by the consummation of the transactions contemplated by this Agreement in a manner that would have a Material Adverse Effect on Fundamental Growth. Fundamental Growth is duly registered under the Investment Company Act as a diversified, open-end management investment company (File No. 811-6669), and such registration has not been revoked or rescinded and is in full force and effect. Fundamental Growth has elected and qualified for the special tax treatment afforded to RICs under Sections 851-855 of the Code at all times since its inception and intends to continue to so qualify both until consummation of the Reorganization and thereafter. c. Authority. Fundamental Growth has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of Fundamental Growth and no other proceedings on the part of Fundamental Growth are necessary to authorize this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed by Fundamental Growth and constitutes a legal, valid and binding obligation of Fundamental Growth enforceable against Fundamental Growth in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto and the remedy of specific performance and injunctive and other forms of equitable relief. d. Financial Statements. Growth Fund has been furnished with an audited statement of assets and liabilities and a schedule of Investments of Fundamental Growth, each as of August 31, 2000, said financial statements having been audited by Ernst & Young LLP, independent public accountants. Such audited financial statements fairly present in all material respects the financial position of Fundamental Growth as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. e. Semi-Annual Report to Stockholders. Growth Fund has been furnished with Fundamental Growth's Semi-Annual Report to Stockholders for the six months ended February 28, 2001, and the unaudited financial statements appearing therein fairly present in all material respects the financial position of Fundamental Growth as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. f. Prospectus and Statement of Additional Information. Growth Fund has been furnished with the Fundamental Growth Prospectus and the Fundamental Growth Statement of Additional Information, and said Prospectus and Statement of Additional Information do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. g. Litigation. There are no material claims, actions, suits or legal, administrative or other proceedings pending or, to the knowledge of Fundamental Growth, threatened against Fundamental Growth that could reasonably be expected to have a Material Adverse Effect on Fundamental Growth. Fundamental Growth is not charged with or, to its knowledge, threatened with any violation, or investigation of any possible violation, of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business that could reasonably be expected to have a Material Adverse Effect on Fundamental Growth. h. Material Contracts. There are no material contracts outstanding to which Fundamental Growth is a party that have not been disclosed in the N-14 Registration Statement, the Fundamental Growth Prospectus, the Fundamental Growth Statement of Additional Information or which will not otherwise be disclosed to Growth Fund prior to the Valuation Time. i. No Conflict. The execution and delivery of this Agreement by Fundamental Growth and the consummation of the transactions contemplated hereby will not contravene or constitute a default under or violation of (i) Fundamental Growth's Articles of Incorporation or by-laws, each as amended and in effect as of the date hereof, (ii) any agreement or contract (or require the consent of any Person under any agreement or contract that has not been obtained) to which Fundamental Growth is a party or to which its assets or properties are subject, or (iii) any judgment, injunction, order or decree, or other instrument binding upon Fundamental Growth or any of its assets or properties, except where such contravention, default or violation would not have a Material Adverse Effect on Fundamental Growth. j. Undisclosed Liabilities. Fundamental Growth has no material liabilities, contingent or otherwise, other than those shown on Fundamental Growth's statements of assets and liabilities referred to herein, those incurred in the ordinary course of its business as an investment company since February 28, 2001 and those incurred in connection with the Reorganization. k. Taxes. Fundamental Growth has filed (or caused to be filed), or has obtained extensions to file, all Federal, state and local tax returns which are required to be filed by it, and has paid (or caused to be paid) or has obtained extensions to pay, all taxes shown on said returns to be due and owing, and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of Fundamental Growth have been adequately provided for on its books, and no tax deficiency or liability of Fundamental Growth has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs. l. Consents. No filing or registration with, or consent, approval, authorization or order of, any Person is required for the consummation by Fundamental Growth of the Reorganization, except for (i) such as may be required under the Securities Act, the Exchange Act, and the Investment Company Act (including the determinations of the Board of Directors of Fundamental Growth as required by Rule 17a-8(a) thereunder) or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico), (ii) any approval required under the Credit Agreement and (iii) the approval of the Board of Directors of Fundamental Growth. m. N-l4 Registration Statement. The N-14 Registration Statement, on its effective date, at the time of the shareholders' meeting referred to in Section 5(a) hereof and on the Closing Date, insofar as it relates to Fundamental Growth (i) complied, or will comply, as the case may be, in all material respects, with the applicable provisions of the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder, and (ii) did not, or will not, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Fundamental Growth for use in the N-14 Registration Statement as provided in Section 5(f) hereof. n. Capitalization. Fundamental Growth is authorized to issue 1,000,000,000 shares of common stock, par value $0.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Class A Common Stock consists of 100,000,000 authorized shares, Class B Common Stock consists of 500,000,000 authorized shares, Class C Common Stock consists of 100,000,000 authorized shares and Class D Common Stock consists of 300,000,000 authorized shares. All issued and outstanding shares of Fundamental Growth are duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights. Except for (i) the right of Class B shares of Fundamental Growth to automatically convert to Class D shares of Fundamental Growth approximately eight years after the purchase thereof or (ii) in connection with any automatic dividend reinvestment plan available to Fundamental Growth shareholders, there are no options, warrants, subscriptions, calls or other rights, agreements or commitments obligating Fundamental Growth to issue any of its shares or securities convertible into its shares. o. Corresponding Shares. i. The Corresponding Shares to be issued by Fundamental Growth to Growth Fund and subsequently distributed by Growth Fund to its shareholders as provided in this Agreement have been duly and validly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no shareholder of Fundamental Growth will have any preemptive right of subscription or purchase in respect thereof. ii. At or prior to the Closing Date, the Corresponding Shares to be issued by Fundamental Growth to Growth Fund on the Closing Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of Fundamental Growth presently are qualified, and there are a sufficient number of such shares registered under the Securities Act, the Investment Company Act and with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated. 5. Covenants of Growth Fund and Fundamental Growth. a. Special Shareholders' Meeting. Growth Fund agrees to call a special meeting of its shareholders to be held as soon as practicable after the effective date of the N-14 Registration Statement for the purpose of considering the Reorganization as described in this Agreement. b. Unaudited Financial Statements. i. Growth Fund hereby agrees to furnish or cause its agents to furnish to Fundamental Growth, at or prior to the Closing Date, for the purpose of determining the number of Corresponding Shares to be issued by Fundamental Growth to Growth Fund pursuant to Section 2(c) hereof, an accurate, correct and complete unaudited statement of assets and liabilities of Growth Fund with values determined in accordance with Section 2(c) hereof and an unaudited schedule of Investments of Growth Fund (including the respective dates and costs of acquisition thereof), each as of the Valuation Time. Such unaudited financial statements will fairly present in all material respects the financial position of Growth Fund as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. ii. Fundamental Growth hereby agrees to furnish or cause its agents to furnish to Growth Fund, at or prior to the Closing Date, for the purpose of determining the number of Corresponding Shares to be issued by Fundamental Growth to Growth Fund pursuant to Section 2(c) hereof, an accurate, correct and complete unaudited statement of assets and liabilities of Fundamental Growth with values determined in accordance with Section 2(c) hereof and an unaudited schedule of Investments of Fundamental Growth (including the respective dates and costs of acquisition thereof), each as of the Valuation Time. Such unaudited financial statements will fairly present in all material respects the financial position of Fundamental Growth as of the dates and for the periods referred to therein and in conformity with generally accepted accounting principles applied on a consistent basis. c. Share Ledger Records of Fundamental Growth. Fundamental Growth agrees, as soon as practicable after the Valuation Time, to open shareholder accounts on its share ledger records for the shareholders of Growth Fund in connection with the distribution of Corresponding Shares by Growth Fund to such shareholders in accordance with Section 2(d) hereof. d. Conduct of Business. Growth Fund and Fundamental Growth each covenants and agrees to operate its respective business in the ordinary course as presently conducted between the date hereof and the Closing Date. e. Dissolution and Deregistration of Growth Fund. Growth Fund agrees that following the consummation of the Reorganization, (i) it will dissolve and terminate its existence as a business trust in accordance with the laws of the Commonwealth of Massachusetts and any other applicable law; (ii) it will not make any distributions of any Corresponding Shares other than to the shareholders of Growth Fund and without first paying or adequately providing for the payment of all of Growth Fund's liabilities not assumed by Fundamental Growth, if any; (iii) it will file an application pursuant to Section 8(f) of the Investment Company Act for an order declaring that Growth Fund has ceased to be a registered investment company; and (iv) on and after the Closing Date it shall not conduct any business except in connection with its dissolution and deregistration. f. Filing of N-l4 Registration Statement. Fundamental Growth will file or cause its agents to file the N-14 Registration Statement with the Commission and will use its best efforts to cause the N-14 Registration Statement to become effective as promptly as practicable after the filing thereof. Growth Fund and Fundamental Growth agree to cooperate fully with each other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration Statement as required by the Securities Act, the Exchange Act, the Investment Company Act, and the rules and regulations thereunder and the state securities or blue sky laws (if applicable). g. Corresponding Shares. Growth Fund will not sell or otherwise dispose of any of the Corresponding Shares to be received by it from Fundamental Growth in connection with the Reorganization, except in distribution to the shareholders of Growth Fund in accordance with the terms hereof. h. Tax Returns. Growth Fund and Fundamental Growth each agrees that by the Closing Date all of its Federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either shall have been paid or adequate liability reserves shall have been provided for the payment of such taxes. In connection with this provision, Fundamental Growth and Growth Fund agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. Fundamental Growth agrees to retain for a reasonable period following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of Fundamental Growth for its taxable period first ending after the Closing Date and for all prior taxable periods. Any information obtained under this subsection shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Closing Date, Growth Fund shall prepare, or cause its agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by Growth Fund with respect to Growth Fund's final taxable year ending with its complete liquidation and for any prior periods or taxable years and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities. Notwithstanding any of the foregoing, any expenses incurred by Growth Fund (other than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 after the Closing Date shall be borne by Growth Fund to the extent such expenses have been accrued by Growth Fund in the ordinary course of business without regard to the Reorganization; any excess expenses shall be borne by MLIM at the time such tax returns and Forms 1099 are prepared. i. Combined Proxy Statement and Prospectus Mailing. Growth Fund agrees to mail to its shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the Exchange Act and Section 20(a) of the Investment Company Act, and the rules and regulations promulgated thereunder. j. Confirmation of Tax Basis. Growth Fund will deliver to Fundamental Growth on the Closing Date confirmations or other adequate evidence as to the tax basis of each of the Assets delivered to Fundamental Growth hereunder. k. Shareholder List. As soon as practicable after the close of business on the Closing Date, Growth Fund shall deliver to Fundamental Growth a list of the names and addresses of all of the shareholders of record of Growth Fund on the Closing Date and the number of shares of Growth Fund owned by each such shareholder as of such date. l. Fundamental Growth's Continued Existence. Following the consummation of the Reorganization, Fundamental Growth expects, and agrees to use all reasonable efforts, to stay in existence and continue its business as an open-end management investment company registered under the Investment Company Act. Fundamental Growth has no plan or intention to sell or otherwise dispose of the Assets, except for dispositions made in the ordinary course of business. 6. Closing Date. The closing of the transactions contemplated by this Agreement shall be at the offices of ____________________________________ at ______ on the next full business day following the Valuation Time, or at such other place, time and date agreed to by Growth Fund and Fundamental Growth. The date and time upon which such closing is to take place shall be referred to herein as the "Closing Date." To the extent that any Assets, for any reason, are not transferable on the Closing Date, Growth Fund shall cause such Assets to be transferred to Fundamental Growth's custody account with The Chase Manhattan Bank, N.A. at the earliest practicable date thereafter. 7. Growth Fund Conditions. The obligations of Growth Fund hereunder shall be subject to the satisfaction, at or before the Closing Date (or such other date specified herein), of the conditions set forth below. The benefit of these conditions is for Growth Fund only and may be waived, in whole or in part, by Growth Fund at any time in its sole discretion. a. Representations and Warranties. The representations and warranties of Fundamental Growth made in this Agreement shall be true and correct in all material respects when made, as of the Valuation Time and as of the Closing Date all with the same effect as if made at and as of such dates, except that any representations and warranties that relate to a particular date or period shall be true and correct in all material respects as of such date or period. b. Performance. Fundamental Growth shall have performed, satisfied and complied with all covenants, agreements and conditions required to be performed, satisfied or complied with by it under this Agreement at or prior to the Closing Date. c. Shareholder Approval. This Agreement shall have been adopted, and the Reorganization shall have been approved, by the affirmative vote of the holders of not less than two-thirds of the total votes entitled to be cast at a meeting of shareholders of Growth Fund by the holders of shares entitled to vote thereon, voting together as a single class. d. Approval of Board of Directors of Fundamental Growth. This Agreement shall have been adopted and the Reorganization shall have been approved by the Board of Directors of Fundamental Growth, including a majority of the Directors who are not "interested persons" of Fundamental Growth as defined in Section 2(a)(19) of the Investment Company Act, which shall have found, as required by Rule 17a-8(a), that (i) participation in the Reorganization is in the best interests of Fundamental Growth and (ii) the interests of the existing shareholders of Fundamental Growth will not be diluted as a result of the Reorganization. e. Deliveries by Fundamental Growth. At or prior to the Closing Date, Fundamental Growth shall deliver to Growth Fund, against receipt of the Assets in accordance with Section 2(a) hereof, the following: i. a certificate executed by the President (or a Vice President) and the Treasurer of Fundamental Growth, dated as of the Closing Date, certifying that the conditions specified in Sections 7(a), (b), and (f) have been fulfilled; ii. the unaudited financial statements of Fundamental Growth required by Section 5(b)(ii) hereof; iii. an opinion of SAB&W, as counsel to Fundamental Growth, dated as of the Closing Date, in form and substance satisfactory to Growth Fund as to the matters set forth below: (a) Fundamental Growth is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland; (b) the Corresponding Shares to be issued by Fundamental Growth to Growth Fund and subsequently distributed by Growth Fund to its shareholders as provided for by the Agreement have been duly and validly authorized and, when issued and delivered pursuant to the Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no shareholder of Fundamental Growth will have any preemptive right of subscription or purchase in respect thereof (pursuant to Fundamental Growth's Articles of Incorporation, as amended, or the by-laws of Fundamental Growth or, to the best of such counsel's knowledge, otherwise); (c) the execution and delivery of the Agreement and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of Fundamental Growth and no other proceedings on the part of Fundamental Growth are necessary to authorize the Agreement or the consummation of the transactions contemplated thereby; (d) the Agreement has been duly and validly executed by Fundamental Growth and constitutes a legal, valid and binding obligation of Fundamental Growth enforceable against Fundamental Growth in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto; provided, that such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity, or as to the choice of law provisions; (e) the execution and delivery of the Agreement by Fundamental Growth and the consummation of the transactions contemplated thereby will not contravene or constitute a default under or violation of the Articles of Incorporation or by-laws of Fundamental Growth, each as amended and in effect as of the date of the Agreement, or Maryland law; (f) to such counsel's knowledge, no filing or registration with, or consent, approval, authorization or order of, any Person is required for the consummation by Fundamental Growth of the Reorganization, except for such as have been obtained from the Board of Directors of Fundamental Growth and under the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder and any applicable state securities laws, and under the Credit Agreement; (g) the N-14 Registration Statement has become effective under the Securities Act, and, to such counsel's knowledge, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, and the N-14 Registration Statement, as of its effective date, appears on its face in respect of Fundamental Growth to be appropriately responsive in all material respects to the requirements of the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder; (h) such counsel does not know of any federal statutes, legal or governmental proceedings or contracts or other documents related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (i) the execution and delivery of the Agreement by Fundamental Growth and the consummation of the transactions contemplated thereby will not contravene or constitute a default under or violation of any agreement or contract filed as an exhibit to the currently effective registration statement on Form N-1A of Fundamental Growth (or require the consent of any Person under any agreement or contract known to such counsel that has not been obtained), except where such contravention, default or violation would not have a Material Adverse Effect on Fundamental Growth; and (j) such opinion is solely for the benefit of Growth Fund and its Trustees and officers. Such opinion also shall state that (AA) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement, nothing has come to their attention that would lead them to believe that, on its effective date, (1) the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (2) the prospectus included in the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (BB) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data relating to Fundamental Growth contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, SAB&W may state that it is relying on certificates of officers of Fundamental Growth and of MLIM with regard to matters of fact and certain certificates and written statements of government officials with respect to the organization, existence and good standing of Fundamental Growth. iv. an opinion of SAB&W, counsel to Fundamental Growth and special tax counsel to Growth Fund, in form and substance satisfactory to Growth Fund, to the effect that, for Federal income tax purposes, (i) the transfer of the Assets to Fundamental Growth in return solely for the Corresponding Shares and the assumption by Fundamental Growth of the Assumed Liabilities as provided for in the Agreement will constitute a reorganization within the meaning of Section 368(a)(l)(C) of the Code, and Growth Fund and Fundamental Growth will each be deemed to be a "party" to the Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361 of the Code, no gain or loss will be recognized to Growth Fund as a result of the asset transfer solely in return for the Corresponding Shares and the assumption by Fundamental Growth of the Assumed Liabilities or on the distribution of the Corresponding Shares to Growth Fund shareholders as provided for in the Agreement; (iii) under Section 1032 of the Code, no gain or loss will be recognized to Fundamental Growth on the receipt of the Assets in return for the Corresponding Shares and the assumption by Fundamental Growth of the Assumed Liabilities as provided for in the Agreement; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the shareholders of Growth Fund on the receipt of Corresponding Shares in return for their shares of Growth Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of the Assets in the hands of Fundamental Growth will be the same as the tax basis of such Assets in the hands of Growth Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares received by the shareholders of Growth Fund in the Reorganization will be equal, in the aggregate, to the tax basis of the shares of Growth Fund surrendered in return therefore; (vii) in accordance with Section 1223 of the Code, a shareholder's holding period for the Corresponding Shares will be determined by including the period for which such shareholder held the shares of Growth Fund exchanged therefore; provided, that such Growth Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Fundamental Growth's holding period with respect to the Assets acquired by it will include the period for which such Assets were held by Growth Fund; and (ix) the taxable year of Growth Fund will end on the effective date of the Reorganization and pursuant to Section 381(a) of the Code and regulations thereunder, Fundamental Growth will succeed to and take into account certain tax attributes of Growth Fund, such as earnings and profits, capital loss carryovers and method of accounting. v. a letter from Ernst & Young LLP dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Closing Date, in form and substance satisfactory to Growth Fund, to the effect that (i) they are independent public accountants with respect to Fundamental Growth within the meaning of the Securities Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Fundamental Growth included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the published rules and regulations thereunder; and (iii) on the basis of limited procedures agreed upon by Growth Fund and Fundamental Growth and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Fundamental Growth included in the N-14 Registration Statement, and inquiries of certain officials of Fundamental Growth responsible for financial and accounting matters, nothing came to its attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Growth Fund and Fundamental Growth and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Fundamental Growth appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars)(with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Fundamental Growth or from schedules prepared by officials of Fundamental Growth having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. f. No Adverse Change. There shall have occurred no material adverse change in the financial position of Fundamental Growth since February 28, 2001 other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities, each in the ordinary course of business. g. Absence of Litigation. There shall not be pending before any Governmental Authority any material litigation with respect to the matters contemplated by this Agreement. h. Proceedings and Documents. All proceedings contemplated by this Agreement, the Reorganization, and all of the other documents incident thereto, shall be reasonably satisfactory to Growth Fund and its counsel, and Growth Fund and its counsel shall have received all such counterpart originals or certified or other copies of such documents as Growth Fund or its counsel may reasonably request. i. N-l4 Registration Statement. The N-14 Registration Statement shall have become effective under the Securities Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Fundamental Growth or Growth Fund, contemplated by the Commission. j. Compliance with Laws; No Adverse Action or Decision. Since the date hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been promulgated, enacted or entered that restrains, enjoins, prevents, materially delays, prohibits or otherwise makes illegal the performance of this Agreement, the Reorganization or the consummation of any of the transactions contemplated hereby and thereby; (ii) the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the Investment Company Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the Investment Company Act, and (iii) no other legal, administrative or other proceeding shall be instituted or threatened by any Governmental Authority which would materially affect the financial condition of Fundamental Growth or that seeks to restrain, enjoin, prevent, materially delay, prohibit or otherwise make illegal the performance of this Agreement, the Reorganization or the consummation of any of the transactions contemplated hereby or thereby. k. Commission Orders or Interpretations. Growth Fund shall have received from the Commission such orders or interpretations as S&S, as counsel to Growth Fund, deems reasonably necessary or desirable under the Securities Act and the Investment Company Act in connection with the Reorganization; provided, that such counsel shall have requested such orders or interpretations as promptly its practicable, and all such orders shall be in full force and effect. 8. Fundamental Growth Conditions. The obligations of Fundamental Growth hereunder shall be subject to the satisfaction, at or before the Closing Date (or such other date specified herein), of the conditions set forth below. The benefit of these conditions is for Fundamental Growth only and may be waived, in whole or in part, by Fundamental Growth at any time in its sole discretion. a. Representations and Warranties. The representations and warranties of Growth Fund made in this Agreement shall be true and correct in all material respects when made, as of the Valuation Time and as of the Closing Date all with the same effect as if made at and as of such dates, except that any representations and warranties that relate to a particular date or period shall be true and correct in all material respects as of such date or period. b. Performance. Growth Fund shall have performed, satisfied and complied with all covenants, agreements and conditions required to be performed, satisfied or complied with by it under this Agreement at or prior to the Closing Date. c. Shareholder Approval. This Agreement shall have been adopted, and the Reorganization shall have been approved, by the affirmative vote of the holders of not less than two-thirds of the total votes entitled to be cast at a meeting of shareholders of Growth Fund by the holders of shares entitled to vote thereon, voting together as a single class. d. Approval of Board of Trustees of Growth Fund. This Agreement shall have been adopted and the Reorganization shall have been approved by the Board of Trustees of Growth Fund, including a majority of the Trustees who are not "interested persons" of Growth Fund within the meaning of Section 2(a)(19) of the Investment Company Act, which shall have found, as required by Rule 17a-8(a), that (i) participation in the Reorganization is in the best interests of Growth Fund and (ii) the interests of the existing shareholders of Growth Fund will not be diluted as a result of the Reorganization. e. Deliveries by Growth Fund. At or prior to the Closing Date, Growth Fund shall deliver to Fundamental Growth, against the assumption by Fundamental Growth of the Assumed Liabilities and the receipt of the Corresponding Shares in accordance with Sections 2(b) and (c) hereof, respectively, the following: i. a certificate executed by the President (or a Vice President) and the Treasurer of Growth Fund, dated as of the Closing Date, certifying that the conditions specified in Sections 8(a), (b), (c) and (f) have been fulfilled; ii. the unaudited financial statements of Growth Fund required by Section 5(b)(i) hereof; iii. Fundamental Growth shall have received an opinion of S&S, as counsel to Growth Fund, dated as of the Closing Date, in form and substance satisfactory to Fundamental Growth, as to the matters set forth below: (a) to such counsel's knowledge, no filing or registration with, or consent, approval, authorization or order of, any Person is required for the consummation by Growth Fund of the Reorganization, except for such as have been obtained from the Board of Trustees and shareholders of Growth Fund and under the Securities Act, the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder, applicable state securities laws, and under the Credit Agreement; (b) the proxy statement of Growth Fund contained in the N-14 Registration Statement, as of its effective date, appears on its face to be appropriately responsive in all material respects to the requirements of the Exchange Act and the Investment Company Act and the rules and regulations promulgated thereunder; (c) such counsel does not know of any federal statutes, legal or governmental proceedings or contracts or other documents in respect of Growth Fund related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (d) the execution and delivery of the Agreement by Growth Fund and the consummation of the transactions contemplated thereby will not contravene or constitute a default under or violation of any agreement or contract filed as an exhibit to the currently effective registration statement on Form N-1A of Growth Fund (or require the consent of any Person under any agreement or contract known to such counsel that has not been obtained), except where such contravention, default or violation would not have a Material Adverse Effect on Growth Fund; (e) the Agreement constitutes a legal, valid and binding obligation of Growth Fund enforceable against Growth Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto; provided, that such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity, or as to the choice of law provisions; and (f) such opinion is solely for the benefit of Fundamental Growth and its Directors and officers. Such opinion also shall state that (AA) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement, nothing has come to their attention that would lead them to believe that, on the effective date of the N-14 Registration Statement, the proxy statement of Growth Fund contained in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (BB) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data relating to Growth Fund contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, S&S may state that it is relying on certificates of officers of Growth Fund and of MLIM with regard to matters of fact, and that it is not opining as to any matters under Massachusetts law, as to which Bingham Dana LLP shall provide an opinion, and that to the extent the opinion set forth in clause (e) is premised on matters of Massachusetts law, it is relying on such opinion of Bingham Dana LLP. iv. an opinion of Bingham Dana LLP as special Massachusetts counsel to Growth Fund, dated as of the Closing Date, in form and substance satisfactory to Fundamental Growth, as to the matters set forth below: (a) Growth Fund is a trust with transferable shares of beneficial interest validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts; (b) the execution and delivery of the Agreement and the consummation of the transactions contemplated thereby have been duly authorized by Growth Fund; (c) the Agreement has been duly authorized and, to the extent Massachusetts law applies, has been duly executed by Growth Fund; (d) the execution and delivery of the Agreement by Growth Fund and the consummation of the transactions contemplated thereby do not violate Growth Fund's Declaration of Trust or by-laws, each as amended and in effect on the date of the Agreement, or, to the best of such counsel's knowledge, Massachusetts law; (e) to the best of such counsel's knowledge, no filing or registration with, or consent, approval, authorization or order of, any Massachusetts state court or governmental authority, is required under Massachusetts law for the consummation by Growth Fund of the Reorganization, except (i) a filing with the Secretary of the Commonwealth of Massachusetts to terminate Growth Fund, (ii) such as have been obtained from the Board of Trustees and shareholders of Growth Fund and (iii) such as may be required under Massachusetts state securities law, about which we express no opinion; and (f) that such opinion is solely for the benefit of Fundamental Growth and its Directors and officers; provided that S&S shall be permitted to rely on such opinion for purposes of its opinion as set forth in the preceding paragraph. In giving the opinion set forth above, Bingham Dana LLP may state that it is relying on certificates of officers of Growth Fund with regard to matters of fact and certain certificates and written statements of government officials with respect to the organization, existence and good standing of Growth Fund. v. an opinion of SAB&W, as counsel to Fundamental Growth and special tax counsel to Growth Fund, in form and substance satisfactory to Fundamental Growth, with respect to the matters specified in Section 7(e)(iv) hereof. vi. a letter from Deloitte & Touche LLP, dated the Closing Date, stating that such firm has performed a limited review of the Federal, state and local income tax returns of Growth Fund for the period ended October 31, 2000 (which returns originally were prepared and filed by Growth Fund), and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the Federal, state and local income taxes of Growth Fund for the period covered thereby; and that for the period from November 1, 2000, to and including the Closing Date and for any taxable year of Growth Fund ending upon the termination of Growth Fund, such firm has performed a limited review to ascertain the amount of applicable Federal, state and local taxes, and has determined that either such amount has been paid or reserves established for payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of Federal, state and local taxes for the period from November 1, 2000, to and including the Closing Date and for any taxable year of Growth Fund ending upon the termination of Growth Fund or that Growth Fund would not continue to qualify as a regulated investment company for Federal income tax purposes. vii. a letter from Deloitte & Touche LLP dated within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Closing Date, in form and substance satisfactory to Fundamental Growth, to the effect that (i) they are independent public accountants with respect to Growth Fund within the meaning of the Securities Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Growth Fund included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the published rules and regulations thereunder; (iii) on the basis of limited procedures agreed upon by Growth Fund and Fundamental Growth and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Growth Fund included in the N-14 Registration Statement, and inquiries of certain officials of Growth Fund responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Growth Fund and Fundamental Growth and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Growth Fund appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of Growth Fund or from schedules prepared by officials of Growth Fund having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. f. No Adverse Change. There shall have occurred no material adverse change in the financial position of Growth Fund since April 30, 2001 other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities, each in the ordinary course of business. g. Absence of Litigation. There shall not be pending before any Governmental Authority any material litigation with respect to the matters contemplated by this Agreement. h. Proceedings and Documents. All proceedings contemplated by this Agreement, the Reorganization, and all of the other documents incident thereto, shall be reasonably satisfactory to Fundamental Growth and its counsel, and Fundamental Growth and its counsel shall have received all such counterpart originals or certified or other copies of such documents as Fundamental Growth or its counsel may reasonably request. i. N-l4 Registration Statement. The N-14 Registration Statement shall have become effective under the Securities Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Growth Fund or Fundamental Growth, contemplated by the Commission. j. Compliance with Laws; No Adverse Action or Decision. Since the date hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been promulgated, enacted or entered that restrains, enjoins, prevents, materially delays, prohibits or otherwise makes illegal the performance of this Agreement, the Reorganization or the consummation of any of the transactions contemplated hereby and thereby; (ii) the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the Investment Company Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the Investment Company Act, and (iii) no other legal, administrative or other proceeding shall be instituted or threatened by any Governmental Authority which would materially affect the financial condition of Growth Fund or that seeks to restrain, enjoin, prevent, materially delay, prohibit or otherwise make illegal the performance of this Agreement, the Reorganization or the consummation of any of the transactions contemplated hereby or thereby. k. Commission Orders or Interpretations. Fundamental Growth shall have received from the Commission such orders or interpretations as SAB&W, as counsel to Fundamental Growth, deems reasonably necessary or desirable under the Securities Act and the Investment Company Act in connection with the Reorganization; provided, that such counsel shall have requested such orders or interpretations as promptly as practicable, and all such orders shall be in full force and effect. l. Dividends. Prior to the Closing Date, Growth Fund shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its shareholders all of its investment company taxable income as of the Closing Date, if any (computed without regard to any deduction for dividends paid), and all of its net capital gain, if any, realized as of the Closing Date. 9. Termination, Postponement and Waivers. a. Termination of Agreement. Notwithstanding anything contained in this Agreement to the contrary, subject to Section 10 hereof, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after approval thereof by the shareholders of Growth Fund) prior to the Closing Date, or the Closing Date may be postponed, by notice in writing prior to the Closing Date i. by Growth Fund or Fundamental Growth if: (1) the Board of Trustees of Growth Fund and the Board of Directors of Fundamental Growth so mutually agree in writing; (2) a material breach occurs by the other of any representation, warranty or covenant contained herein to be performed at or prior to the Closing Date; or (3) any Governmental Authority of competent jurisdiction shall have issued any judgment, injunction, order, ruling or decree or taken any other action restraining, enjoining or otherwise prohibiting this Agreement, the Reorganization or the consummation of any of the transactions contemplated hereby or thereby and such judgment, injunction, order, ruling, decree or other action becomes final and non-appealable; provided, that the party seeking to terminate this Agreement pursuant to this Section 9(a)(i)(3) shall have used its reasonable best efforts to have such judgment, injunction, order, ruling, decree or other action lifted, vacated or denied. ii. by Growth Fund if any condition of Growth Fund's obligations set forth in Section 7 of this Agreement has not been fulfilled or waived by it; or iii. by Fundamental Growth if any condition of Fundamental Growth's obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by it. b. Commission Order. If any order or orders of the Commission with respect to this Agreement, the Reorganization or any of the transactions contemplated hereby or thereby shall be issued prior to the Closing Date and shall impose any terms or conditions which are determined by action of the Board of Trustees of Growth Fund and Board of Directors of Fundamental Growth to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the shareholders of Growth Fund, unless such terms and conditions shall result in a change in the method of computing the number of Corresponding Shares to be issued by Fundamental Growth to Growth Fund in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the shareholders of Growth Fund prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless Growth Fund promptly shall call a special meeting of shareholders at which such conditions so imposed shall be submitted for approval and the requisite approval of such conditions shall be obtained. c. Effect of Termination. In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become null and void and have no further force or effect, and there shall not be any liability on the part of either Growth Fund or Fundamental Growth or Persons who are their directors, trustees, officers, agents or shareholders in respect of this Agreement. d. Waivers; Non-Material Changes. At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the party that is entitled to the benefit thereof if such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of such party on behalf of which such action is taken. In addition, the Board of Trustees of Growth Fund and the Board of Directors of Fundamental Growth have delegated to MLIM, as the investment adviser to each, the ability to make non-material changes to this Agreement if MLIM deems it to be in the best interests of that Fund to do so. 10. Survival of Representations and Warranties. The respective representations and warranties contained in Sections 3 and 4 hereof shall expire with, and be terminated by, the consummation of the Reorganization, and neither Growth Fund nor Fundamental Growth nor any of their officers or directors, trustee agents or shareholders shall have any liability with respect to such representations or warranties after the Closing Date. This provision shall not protect any officer, director, trustee or agent of Growth Fund or Fundamental Growth against any liability to the entity for which such Person serves in such capacity, or to its shareholders, to which such Person would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office. 11. Other Matters. a. Legend. Pursuant to Rule 145 under the Securities Act, and in connection with the issuance of any shares to any persons who at the time of the Reorganization is, to its knowledge, an affiliate of a party to the Reorganization pursuant to Rule 145(c), Fundamental Growth will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows: THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (i) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (ii) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED. and, further, that stop transfer instructions will be issued to Fundamental Growth's transfer agent with respect to such shares. Growth Fund will provide Fundamental Growth on the Closing Date with the name of any shareholder who is to the knowledge of Growth Fund an affiliate of Growth Fund on such date. b. Obligations. A copy of Growth Fund's Declaration of Trust is on file with the Secretary of State of the Commonwealth of Massachusetts. Fundamental Growth acknowledges that the obligations of or arising out of this instrument are not binding upon any of Growth Fund's trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of Growth Fund. c. Further Assurances. Each party hereto covenants and agrees to provide the other party hereto and its agents and counsel with any and all documentation, information, assistance and cooperation that may become necessary from time to time with respect to the transactions contemplated by this Agreement. d. Notices. Any notice, report or other communication hereunder shall be in writing and shall be given to the Person entitled thereto by hand delivery, prepaid certified mail or overnight service, addressed to Growth Fund or Fundamental Growth, as applicable, at the addresses set forth below. If the notice is sent by certified mail, it shall be deemed to have been given to the Person entitled thereto five (5) business days after being deposited in the United States mail and if the notice is sent by overnight service, it shall be deemed to have been given to the Person entitled thereto one (1) business day after it was deposited with the courier service for delivery to that Person. Notice of any change in any address listed below also shall be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived by the party entitled to receive such notice. If to Growth Fund, to: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Attention: Terry K. Glenn With a copy to: Shearman & Sterling 599 Lexington Avenue New York, New York 10022 Attention: Margery K. Neale, Esq. If to Fundamental Growth, to: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Attention: Terry K. Glenn With a copy to: Sidley Austin Brown & Wood LLP One World Trade Center New York, New York 10048-0557 Attention: Frank P. Bruno, Esq. e. Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all previous agreements or understandings between the parties related to such matters. f. Amendment. Except as set forth in Section 9(d) hereof, this Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by all of the parties hereto or, in the case of a waiver, by the party waiving compliance. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. g. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York applicable to agreements made and to be performed in said state, without giving effect to the principles of conflict of laws thereof. h. Assignment. This Agreement shall not be assigned by any of the parties hereto, in whole or in part, whether by operation of law or otherwise, without the prior written consent of the other party hereto. Any purported assignment contrary to the terms hereof shall be null, void and of no effect. i. Fees and Expenses. With respect to expenses incurred in connection with the Reorganization, (i) MLIM has agreed to pay all Reorganization expenses incurred which are directly attributable to Fundamental Growth and the conduct of its business, including the costs of printing sufficient copies of its prospectus, and its most recent Annual Report to accompany the proxy statement and prospectus, in connection with the N-14 Registration Statement, (ii) Growth Fund shall pay all expenses incurred which are directly attributable to Growth Fund and the conduct of its business, including the expenses incurred in preparing, printing and mailing the proxy materials to be utilized in connection with the special meeting of Growth Fund shareholders and the expenses related to the solicitation of proxies to be voted at such meeting and (iii) Growth Fund and MLIM, on behalf of Fundamental Growth, shall pay all other expenses incurred in connection with the Reorganization equally, including, but not limited to, expenses in connection with obtaining an opinion of counsel with respect to the tax consequences of the Reorganization, the preparation of the Agreement, legal fees, transfer agent fees and audit fees. j. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms and provisions of this Agreement in any other jurisdiction. k. Headings. Headings to sections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the heading of any section. l. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. Merrill Lynch Growth Fund By: ___________________________ Name: Title: Attest: By:__________________________ Name: Title: Merrill Lynch Fundamental Growth Fund, Inc. By: ___________________________ Name: Title: Attest: By:__________________________ Name: Title: Exhibit II SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND RECORD OWNERS OF SHARES OF FUNDAMENTAL GROWTH AND GROWTH FUND The following tables provide information about the persons or entities who, to the knowledge of the relevant Fund, owned beneficially or of record 5% or more of any class of that Fund's outstanding shares as of June 29, 2001: Fundamental Growth
Percentage Percentage Name Address of Class of Fund - ------------------------------------------------- ---------------------------------- ---------------------- ----------------- MERRILL LYNCH TRUST COMPANY(1) 800 Scudders Mill Road 19.88% of Class A 3.35% TRUSTEE FBO THE KROGER CO SAVINGS PLAN Plainsboro, New Jersey 08536 shares MERRILL LYNCH TRUST COMPANY(2) 800 Scudders Mill Road 13.88% of Class A 2.34% TRUSTEE FBO MLSIP INVESTMENT ACCOUNT Plainsboro, New Jersey 08536 shares Growth Fund Percentage Percentage Name Address of Class of Fund - ------------------------------------------------- ---------------------------------- ---------------------- ----------------- MERRILL LYNCH TRUST COMPANY(2) FBO MLSIP 800 Scudders Mill Road 16.51% of Class A 4.24% INVESTMENT ACCOUNT Plainsboro, New Jersey 08536 shares MERRILL LYNCH TRUST COMPANY(1) FBO THE LEE 800 Scudders Mill Road 6.05% of Class A 1.55% ENTERPRISES INC. EMPLOYEES' RETIREMENT Plainsboro, New Jersey 08536 shares - ---------------------------- (1) Represents ownership by pension, 401(k) or similar retirement plans. Merrill Lynch Trust Company is the record owner only. The plan sponsor has the authority to vote and to dispose of the shares. (2) Represents ownership by pension, 401(k) or similar retirement plans. Merrill Lynch Trust Company is the record owner only. The underlying plan participants have the authority to vote and to dispose of the shares. To the knowledge of the relevant Fund, no underlying plan participant is the beneficial owner of 5% or more of any class of shares of the Fund. * Shareholder information will be provided as of the Record Date in a subsequent filing.
The information in this statement of additional information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This statement of additional information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JULY 23, 2001 __________________ STATEMENT OF ADDITIONAL INFORMATION __________________ MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. MERRILL LYNCH GROWTH FUND P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 (609) 282-2800 This Statement of Additional Information is not a prospectus and should be read in conjunction with Exchange the Proxy Statement and Prospectus of Merrill Lynch Growth Fund ("Growth Fund") and Merrill Lynch Commission Fundamental Growth Fund, Inc. ("Fundamental Growth") dated August ___, 2001 (the "Proxy Statement and is Prospectus"), which has been filed with the Securities and Exchange Commission and can be obtained, without effective. charge, by calling Fundamental Growth at 1-800-MER-FUND, or by writing to Fundamental Growth at the above This address. This Statement of Additional Information has been incorporated by reference into the Proxy statement Statement and Prospectus. Further information about Fundamental Growth is contained in and incorporated by reference to its Statement of Additional Information, dated December 11, 2000, as amended and supplemented to date, which is incorporated by reference into and accompanies this Statement of Additional Information. The Commission maintains a web site (http://www.sec.gov) that contains the prospectus and statement of additional information of each of Growth Fund and Fundamental Growth, other material incorporated by reference herein, and other information regarding Growth Fund and Fundamental Growth. The date of this Statement of Additional Information is August __, 2001 TABLE OF CONTENTS General Information...................................................... 2 Financial Statements..................................................... 2 Pro Forma Combined Schedules of Investments (unaudited).................. F-1 Pro Forma Combined Schedules of Assets and Liabilities (unaudited)....... F-4 Pro Forma Combined Statement of Operations (unaudited)................... F-5 Notes to Financial Statements............................................ F-6 GENERAL INFORMATION The shareholders of Growth Fund are being asked to approve the acquisition by Fundamental Growth of substantially all of the assets, and the assumption by Fundamental Growth of substantially all of the liabilities, of Growth Fund in return solely for an equal aggregate value of newly-issued shares of Fundamental Growth (the "Reorganization"). Fundamental Growth is an open-end management investment company organized as a Maryland corporation. A Special Meeting of Shareholders of Growth Fund to consider the Reorganization will be held at 800 Scudders Mill Road, Plainsboro, New Jersey, on October 15, 2001 at 10:00 a.m., Eastern time. For detailed information about the Reorganization, shareholders of Growth Fund should refer to the Proxy Statement and Prospectus. For further information about Fundamental Growth, shareholders should refer to Fundamental Growth's Statement of Additional Information, dated December 11, 2000, which accompanies this Statement of Additional Information and is incorporated by reference herein. FINANCIAL STATEMENTS Pro forma financial statements reflecting consummation of the Reorganization are included herein. Fundamental Growth Audited financial statements and accompanying notes for the fiscal year ended August 31, 2000, and the independent auditor's report thereon, dated October 5, 2000, of Fundamental Growth are incorporated herein by reference from Fundamental Growth's Annual Report to Stockholders. Unaudited financial statements and accompanying notes of Fundamental Growth for the six-month period ended February 28, 2001 are incorporated herein by reference from Fundamental Growth's Semi-Annual Report to Stockholders. Growth Fund Audited financial statements and accompanying notes for the fiscal year ended October 31, 2000, and the independent auditor's report thereon, dated December 15, 2000, of Growth Fund are incorporated herein by reference from Growth Fund's October 31, 2000 Annual Report. Unaudited financial statements and accompanying notes of Growth Fund for the six-month period ended April 30, 2001 are incorporated herein by reference from Growth Fund's April 30, 2001 Semi-Annual Report.
Combined Schedule of Investments for Merrill Lynch Fundamental Growth Fund, Inc. and Merrill Lynch Growth Fund As of February 28, 2001 (unaudited) Value ---------------------------------------------------------- Pro Forma for Shares Fundamental Growth Combined Industries Held Stocks Growth Fund Fund - -------------------------------------------------------------------------------------------------------------------------------- Banks 735,000 BB&T Corporation $26,555,550 - $26,555,550 1,280,000 Northern Trust Corporation 90,960,000 - 90,960,000 750,000 PNC Bank Corp. 52,125,000 - 52,125,000 3,825,000 Wells Fargo Company 189,873,000 - 189,873,000 ------------- ------------- ------------- 359,513,550 - 359,513,550 - -------------------------------------------------------------------------------------------------------------------------------- Beverages 3,579,000 The Coca-Cola Company 153,787,000 $36,007,370 189,794,370 4,590,000 PepsiCo, Inc. 179,251,200 32,256,000 211,507,200 ----------- ---------- ----------- 333,038,200 68,263,370 401,301,570 - -------------------------------------------------------------------------------------------------------------------------------- Biotechnology 1,750,000 +Amgen Inc. 126,000,000 - 126,000,000 - -------------------------------------------------------------------------------------------------------------------------------- Communications 1,915,308 +Cisco Systems, Inc. - 45,368,858 45,368,858 Equipment 648,200 +Comverse Technology, Inc. - 48,574,488 48,574,488 1,527,450 Corning Incorporated - 41,393,895 41,393,895 650,000 +Finisar Corporation - 7,637,500 7,637,500 579,500 +Metawave Communications Corporation - 6,410,719 6,410,719 1,026,500 Motorola, Inc. - 15,572,005 15,572,005 500,000 +Netro Corporation - 3,281,250 3,281,250 --------- --------- --------- - 168,238,715 168,238,715 - -------------------------------------------------------------------------------------------------------------------------------- Computers & 834,900 +EMC Corporation - 33,195,624 33,195,624 Peripherals 387,200 International Business Machines Corporation - 38,681,280 38,681,280 30,730 +McDATA Corporation (Class - 549,300 549,300 A) 420,800 +Palm, Inc. 7,285,100 - 7,285,100 --------- ---------- --------- 7,285,100 72,426,204 79,711,304 - -------------------------------------------------------------------------------------------------------------------------------- Diversified 2,231,736 Citigroup Inc. - 109,756,776 109,756,776 Financials 1,000,000 Countrywide Credit 44,230,000 - 44,230,000 Industries , Inc. 720,000 State Street Corporation 72,324,000 - 72,324,000 1,524,700 T. Rowe Price Group Inc. 54,317,437 - 54,317,437 ---------- ----------- ---------- 170,871,437 109,756,776 280,628,213 - -------------------------------------------------------------------------------------------------------------------------------- Diversified Telecommunication Services 4,120,000 Infonet Services Corporation 21,712,400 - 21,712,400 (Class B) 4,705,600 +McLeodUSA Incorporated (Class A) - 61,466,900 61,466,900 ---------- ---------- ---------- 21,712,400 61,466,900 83,179,300 - -------------------------------------------------------------------------------------------------------------------------------- Electric Utilities 460,000 +Amgen Inc. - 33,120,000 33,120,000 - -------------------------------------------------------------------------------------------------------------------------------- Electrical Equipment 974,100 +Active Power, Inc. - 19,238,475 19,238,475 600,000 +Beacon Power Corporation - 4,462,500 4,462,500 100,000 +Capstone Turbine - 2,443,750 2,443,750 Corporation 742,300 +Proton Energy Systems, Inc. - 7,051,850 7,051,850 ---------- --------- --------- - 33,196,575 33,196,575 - -------------------------------------------------------------------------------------------------------------------------------- Energy Equipment & 2,800,000 Baker Hughes Incorporated 109,760,000 - 109,760,000 Service 574,000 +Bookham Technology PLC (ADR)(a) - 4,430,562 4,430,562 1,620,000 Diamond Offshore Drilling, 67,878,000 - 67,878,000 Inc. 251,000 +FuelCell Energy, Inc. - 11,765,625 11,765,625 3,025,000 Halliburton Company 120,455,500 - 120,455,500 680,000 +Noble Drilling Corporation 31,654,000 - 31,654,000 2,050,000 +Rowan Companies, Inc. 58,527,500 - 58,527,500 1,310,000 +Sanmina Corporation - 38,972,500 38,972,500 1,988,889 +Solectron Corporation - 54,197,225 54,197,225 1,340,000 Transocean Sedco Forex Inc. 64,494,200 - 64,494,200 2,415,000 +Weatherford International, Inc. 125,652,450 - 125,652,450 ----------- ----------- ----------- 578,421,650 109,365,912 687,787,562 - -------------------------------------------------------------------------------------------------------------------------------- Food & Drug Retailing 2,640,920 CVS Corporation 161,096,120 - 161,096,120 2,135,000 Koninklijke Ahold NV 68,795,644 - 68,795,644 2,822,500 Walgreen Co. 125,093,200 - 125,093,200 ----------- ----------- ----------- 354,984,964 - 354,984,964 - -------------------------------------------------------------------------------------------------------------------------------- Food Products 300,000 The Quaker Oats Company 29,256,000 - 29,256,000 - -------------------------------------------------------------------------------------------------------------------------------- Gas Utilities 2,105,000 El Paso Corporation 147,981,500 - 147,981,500 - -------------------------------------------------------------------------------------------------------------------------------- Health Care 1,033,300 Medtronic, Inc. - 52,884,294 52,884,294 Equipment & Supplies - -------------------------------------------------------------------------------------------------------------------------------- Hotels, Restaurants & Leisure 730,000 McDonald's Corporation 21,462,000 - 21,462,000 - -------------------------------------------------------------------------------------------------------------------------------- Household Durables 1,526,850 Sony Corporation (ADR)(a) 109,185,044 - 109,185,044 - -------------------------------------------------------------------------------------------------------------------------------- Household Products 750,000 Colgate-Palmolive Company 44,287,500 - 44,287,500 - -------------------------------------------------------------------------------------------------------------------------------- Industrial 8,996,400 General Electric Company 290,917,950 127,414,650 418,332,600 Conglomerates - -------------------------------------------------------------------------------------------------------------------------------- Insurance 835,000 AFLAC Incorporated 50,233,600 - 50,233,600 3,168,000 American International 202,455,000 56,687,400 259,142,400 Group, Inc. 900,000 Everest Re Group, Ltd. 56,925,000 - 56,925,000 3,240,000 Lincoln National Corporation 142,138,800 - 142,138,800 13,700 +Markel Corporation 2,462,575 - 2,462,575 477,000 Marsh & McLennan Companies, Inc. 51,039,000 - 51,039,000 ----------- ----------- ----------- 505,253,975 56,687,400 561,941,375 - -------------------------------------------------------------------------------------------------------------------------------- Internet & Catalog Retail 250,000 +Amazon.com, Inc. 2,531,250 - 2,531,250 - -------------------------------------------------------------------------------------------------------------------------------- Internet Software & 2,050,000 +Commerce One, Inc. 35,746,875 - 35,746,875 Services 3,485,000 +Exodus Communications, Inc. 50,968,125 - 50,968,125 ----------- ----------- ----------- 86,715,000 - 86,715,000 - -------------------------------------------------------------------------------------------------------------------------------- Media 6,986,900 +AOL Time Warner Inc. 242,165,000 65,468,207 307,633,207 1,243,300 +Clear Channel Communications, Inc. 71,054,595 - 71,054,595 1,660,300 +Hispanic Broadcasting Corporation 37,356,750 - 37,356,750 350,000 The Interpublic Group of Companies, Inc. 13,160,000 - 13,160,000 1,237,100 +Viacom, Inc. (Class B) 61,483,870 - 61,483,870 3,412,300 The Walt Disney Company 105,610,685 - 105,610,685 ----------- ----------- ----------- 530,830,900 65,468,207 596,299,107 - -------------------------------------------------------------------------------------------------------------------------------- Multi - Utilities 4,042,100 Enron Corp. 194,135,850 82,748,000 276,883,850 - -------------------------------------------------------------------------------------------------------------------------------- Multiline Retail 1,100,000 +Kohl's Corporation 72,501,000 - 72,501,000 5,780,800 Wal-Mart Stores, Inc. 213,633,850 75,926,422 289,560,272 ----------- ----------- ----------- 286,134,850 75,926,422 362,061,272 - -------------------------------------------------------------------------------------------------------------------------------- Oil & Gas 3,848,434 +TransMontaigne Inc.(b) - 14,162,237 14,162,237 - -------------------------------------------------------------------------------------------------------------------------------- Personal Products 725,000 The Estee Lauder Companies 28,014,000 - 28,014,000 Inc. (Class A) 800,000 The Gillette Company 26,008,000 - 26,008,000 ----------- ----------- ----------- 54,022,000 - 54,022,000 - -------------------------------------------------------------------------------------------------------------------------------- Pharmaceuticals 435,000 Abbott Laboratories - 21,310,650 21,310,650 662,950 American Home Products Corporation - 40,950,422 40,950,422 1,100,000 Aventis SA 88,612,656 - 88,612,656 2,603,900 Bristol-Myers Squibb Company 165,113,299 - 165,113,299 1,904,000 Eli Lilly and Company 107,271,000 44,020,840 151,291,840 2,835,000 +Immunex Corporation 92,137,500 - 92,137,500 3,540,300 Merck & Co., Inc. 220,149,000 63,783,060 283,932,060 6,998,580 Pfizer Inc. 273,384,000 41,552,100 314,936,100 3,586,310 Pharmacia Corporation 129,255,170 56,157,057 185,412,227 1,500,000 Sanofi-Synthelabo SA 80,832,840 - 80,832,840 500,000 Schering-Plough Corporation - 20,125,000 20,125,000 ----------- ----------- ----------- 1,156,755,465 287,899,129 1,444,654,594 - -------------------------------------------------------------------------------------------------------------------------------- Semiconductor 400,000 +ASM Lithography Holding NV 8,721,486 - 8,721,486 Equipment & Products 1,962,060 Intel Corporation - 56,041,339 56,041,339 500,000 +International Rectifier - 16,500,000 16,500,000 Corp. 1,150,000 +Lattice Semiconductor - 21,203,125 21,203,125 Corporation 467,000 +Transmeta Corporation 9,515,125 - 9,515,125 519,000 +Xilinx, Inc. - 20,176,125 20,176,125 ----------- ----------- ----------- 18,236,611 113,920,589 132,157,200 - -------------------------------------------------------------------------------------------------------------------------------- Software 1,480,000 +Microsoft Corporation - 87,227,500 87,227,500 450,000 +Quest Software, Inc. - 11,643,750 11,643,750 1,290,000 +Rational Software 45,069,375 - 45,069,375 Corporation 270,000 +VERITAS Software - 17,533,125 17,533,125 Corporation ----------- ----------- ----------- 45,069,375 116,404,375 161,473,750 - -------------------------------------------------------------------------------------------------------------------------------- Specialty Retail 5,635,600 The Home Depot, Inc. 239,513,000 - 239,513,000 734,400 Lowe's Companies, Inc. - 41,038,272 41,038,272 ----------- ----------- ----------- 239,513,000 41,038,272 280,551,272 - -------------------------------------------------------------------------------------------------------------------------------- Telecommunications & 66,100 +Corvis Corporation - 685,788 685,788 Equipment 77,100 +TyCom, Ltd. - 1,522,725 1,522,725 ----------- ----------- ----------- - 2,208,513 2,208,513 - -------------------------------------------------------------------------------------------------------------------------------- Wireless Telecommunications Services 13,056,786 Vodafone Group PLC (ADR)(a) 27,310,000 32,648,791 59,958,791 - -------------------------------------------------------------------------------------------------------------------------------- Total Stocks 5,741,425,571 1,725,245,331 7,466,670,902 - -------------------------------------------------------------------------------------------------------------------------------- Face Amount Short-Term Securities - -------------------------------------------------------------------------------------------------------------------------------- Commercial Paper* $50,000,000 CBA (Delaware) Finance, 5.46% due 3/05/2001 49,969,667 - 49,969,667 70,000,000 CIT Group Holdings, 5.52% due 3/01/2001 - 70,000,000 70,000,000 63,681,000 General Motors Acceptance Corp., 5.56% due 3/01/2001 39,887,000 23,794,000 63,681,000 50,000,000 J.P. Morgan Securities Inc., 5.50% due 3/01/2001 50,000,000 - 50,000,000 45,000,000 Verizon Global Funding, 5.33% due 4/16/2001 44,693,525 - 44,693,525 -------------- --------------- ----------------- Total Short-Term Securities 184,550,192 93,794,000 278,344,192 - -------------------------------------------------------------------------------------------------------------------------------- Total Investments (Cost - 5,925,975,763 1,819,039,331 7,745,015,094 $8,097,197,043)-100.0% Liabilities in Excess of Other Assets-0.0% (4,889,345) (4,750,112) (130,590,194)** -------------- --------------- ----------------- Net Assets-100.0% 5,921,086,418 1,814,289,219 7,614,424,900** + Non-income producing security. (a) American Depositary Receipts (ADR). (b) Investment in an affiliated company. * Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Fund. ** Amounts reflect Pro Forma adjustments to the Statement of Assets and Liabilities. See Notes to Financial Statements.
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES FOR MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. AND MERRILL LYNCH GROWTH FUND As of February 28, 2001 (Unaudited) The following unaudited pro forma Combined Statement of Assets and Liabilities has been derived from the Statements of Assets and Liabilities of Merrill Lynch Fundamental Growth Fund, Inc. and Merrill Lynch Growth Fund at February 28, 2001 and such information has been adjusted to give effect to the Reorganization as if the Reorganization had occurred at February 28, 2001. The pro forma Combined Statement of Assets and Liabilities is presented for informational purposes only and does not purport to be indicative of the financial condition that actually would have resulted if the Reorganization had been consummated at February 28, 2001. The pro forma Combined Statement of Assets and Liabilities should be read in conjunction with the financial statements of Merrill Lynch Fundamental Growth Fund, Inc. included in its Annual Report to Stockholders for the fiscal year ended August 31, 2000 and the financial statements and related notes from the unaudited financial statements of Merrill Lynch Fundamental Growth Fund, Inc. included in its Semi-Annual Report to Stockholders for the six-month period ended February 28, 2001, which are incorporated herein by reference, and the financial statements and related notes from the audited financial statements of Merrill Lynch Growth Fund included in its October 31, 2000 Annual Report and the financial statements and related notes from the unaudited financial statements of Merrill Lynch Growth Fund included in its April 30, 2001 Semi-Annual Report, which are incorporated herein by reference.
Pro Forma for Fundamental Growth Combined Growth Fund Adjustments(1) Fund(1) -------------- -------------- -------------- --------------- Assets: Investments, at value* $5,925,975,763 $1,819,039,330 $7,745,015,093 Cash 773,119 - 773,119 Foreign cash 1,279 576,709 577,988 Receivables: Securities sold 52,050,553 95,153,000 147,203,553 Capital shares sold 45,630,052 959,655 46,589,707 Dividends 3,567,786 708,508 4,276,294 Prepaid registrations fees and other assets 219,065 130,854 349,919 -------------- -------------- -------------- --------------- Total assets 6,028,217,617 1,916,568,056 7,944,785,673 Liabilities: Payables: Securities purchased 86,823,876 93,779,592 180,603,468 Distributions to shareholders - - $119,115,137 119,115,137 Capital shares redeemed 11,823,493 3,926,778 15,750,271 Distributor 2,960,935 790,565 3,751,500 Investment adviser 2,596,036 897,666 3,493,702 Accrued expenses and other liabilities 2,926,859 2,884,236 1,835,600 7,646,695 -------------- -------------- -------------- --------------- Total liabilities 107,131,199 102,278,837 120,950,737 330,360,773 -------------- -------------- -------------- --------------- Net Assets: Net Assets $5,921,086,418 $1,814,289,219 $(120,950,737) $7,614,424,900 ============== ============== ============== ============== Net Assets Consist of: Class A Common Stock, $.10 par value, 100,000,000 shares authorized $4,912,676 $2,684,067 $(353,603) $7,243,140 Class B Common Stock, $.10 par value, 250,000,000 shares authorized 14,304,202 4,427,769 (748,242) 17,983,729 Class C Common Stock, $.10 par value, 100,000,000 shares authorized 3,145,482 394,019 (71,166) 3,468,335 Class D Common Stock, $.10 par value, 100,000,000 shares authorized 7,117,652 2,834,607 (365,444) 9,586,815 Paid-in capital in excess of par 6,010,413,779 1,952,692,223 (297,145) 7,962,808,857 Accumulated investment loss - net (1,736,840) (32,739,765) 34,476,605 Undistributed realized capital gains on investments and foreign currency transactions - net 68,707,240 50,407,897 (119,115,137) - Unrealized depreciation on investments-net (185,777,773) (166,411,598) (352,189,371) -------------- -------------- -------------- --------------- Net assets $5,921,086,418 $1,814,289,219 $(120,950,737) $7,614,424,900 ============== ============== ============== ============== Net Asset Value: Class A: Net assets $1,028,534,852 $496,550,053 $(26,233,380) $1,498,851,525 Shares outstanding 49,126,759 26,840,672 (3,536,030) 72,431,401 Net Asset Value $20.94 $18.50 $20.69 Class B: Net assets $2,800,424,387 $733,113,643 $(53,606,057) $3,479,931,973 Shares outstanding 143,042,022 44,277,693 (7,482,418) 179,837,297 Net Asset Value $19.58 $16.56 $19.35 Class C: Net Assets $619,472,942 $64,708,637 $(9,051,577) $675,130,002 Shares outstanding 31,454,824 3,940,191 (711,658) 34,683,357 Net Asset Value $19.69 $16.42 $19.47 Class D: Net Assets $1,472,654,237 $519,916,886 $(32,059,723) $1,960,511,400 Shares outstanding 71,176,520 28,346,073 (3,654,442) 95,868,151 Net Asset Value $20.69 $18.34 $20.45 *identified cost $6,111,753,536 $1,985,443,507 $8,097,197,043
- --------------- (1) Reflects the charge for estimated Reorganization expenses of $1,835,600 attributable to Growth Fund. The estimated Reorganization expenses of $211,200 attributable to Fundamental Growth will be paid by Merrill Lynch Investment Managers, L.P. See Notes to Financial Statements. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC AND MERRILL LYNCH GROWTH FUND For the Six Months Ended February 28, 2001 (Unaudited) The following unaudited pro forma Combined Statement of Operations has been derived from the Statements of Operations of Merrill Lynch Fundamental Growth Fund, Inc. and Merrill Lynch Growth Fund for the period March 1, 2000 to February 28, 2001, and such information has been adjusted to give effect to the Reorganization as if the Reorganization had occurred at March 1, 2000. The pro forma Combined Statement of Operations is presented for informational purposes only and does not purport to be indicative of the financial operations that actually would have resulted if the Reorganization had been consummated at February 28, 2001 nor which may result from future operations. The pro forma Combined Statement of Operations should be read in conjunction with the financial statements of Merrill Lynch Fundamental Growth Fund, Inc. included in its Annual Report to Stockholders for the fiscal year ended August 31, 2000 and the financial statements and related notes from the unaudited financial statements of Merrill Lynch Fundamental Growth Fund, Inc. included in its Semi-Annual Report to Stockholders for the six-month period ended February 28, 2001, which are incorporated herein by reference, and the financial statements and related notes from the audited financial statements of Merrill Lynch Growth Fund included in its October 31, 2000 Annual Report and the financial statements and related notes from the unaudited financial statements of Merrill Lynch Growth Fund included in its April 30, 2001 Semi-Annual Report, which are incorporated herein by reference.
Pro Forma for Fundamental Growth Combined Growth Fund Adjustments(1) Fund(2) ---------------- --------------- -------------- ---------------- Investment Income: Dividends** $20,713,186 $4,169,611 $24,882,797 Interest and discount earned 19,673,898 3,079,890 22,753,788 ---------------- --------------- ---------------- Total income 40,387,084 7,249,501 47,636,585 ---------------- --------------- ---------------- Expenses: Investment advisory fees 18,001,215 8,302,689 $(1,700,824) 24,603,080 Account maintenance and distribution fees -Class B 14,798,487 4,782,276 19,580,763 Account maintenance and distribution fees -Class C 2,957,010 424,592 3,381,602 Transfer agent fees - Class B 1,817,312 1,128,492 2,945,804 Account maintenance fees - Class D 1,912,333 837,677 2,750,010 Transfer agent fees - Class D 798,728 694,164 1,492,892 Transfer agent fees - Class A 453,157 669,455 1,122,612 Accounting services 364,409 151,853 516,262 Transfer agent fees - Class C 386,007 107,431 493,438 Registration fees 231,208 32,113 (30,197) 233,124 Printing and shareholder reports 95,780 104,801 (84,911) 115,670 Custodian fees 125,628 59,097 184,725 Professional fees 67,714 63,770 (63,209) 68,275 Directors' fees and expenses 45,440 40,975 (23,915) 62,500 Pricing fees 16,038 14,684 (13,712) 17,010 Other 53,458 30,006 (18,589) 64,875 ---------------- --------------- ------------ ---------------- Total expenses 42,123,924 17,444,075 (1,935,357) 57,632,642 Reimbursement of expenses -- (943,188) (943,188) ---------------- --------------- ------------ ---------------- Total expenses, net of reimbursement 42,123,924 16,500,887 (1,935,357) 56,689,454 ---------------- --------------- ------------ ---------------- Investment income (loss) - net (1,736,840) (9,251,386) 1,935,357 (9,052,869) ---------------- --------------- ------------ ---------------- Realized and Unrealized Gain (Loss) on Investments & Foreign Currency Transactions - Net: Realized gain (loss) from: Investments - net 91,376,206 56,089,253 147,465,459 Foreign currency transactions - net (1,102,204) (1,625) (1,103,829) Change in unrealized appreciation/depreciation on: Investments - net (1,788,982,857) (1,040,183,058) (2,829,165,915) Foreign currency transactions - net 20,894 32,458 53,352 ---------------- --------------- ------------ ---------------- Net Decrease in Net Assets Resulting $(1,700,424,801) $(993,314,358) $1,935,357 $(2,691,803,802) from Operations ---------------- --------------- ------------ ---------------- ** Net foreign withholding tax on dividends $ -- $ 13,131 (1) Reflects the anticipated savings as a result of the Reorganization through consolidation of printing, legal and other services. (2) This Pro Forma Combined Statement of Operations excludes non-recurring aggregate estimated Reorganization expenses of $2,046,800, and of which $1,835,600 is attributable to Growth Fund and $211,200 is attributable to Fundamental Growth and will be paid by Merrill Lynch Investment Managers, L.P. and of which $1,835,600 is attributable to Growth Fund.
Merrill Lynch Fundamental Growth Fund, Inc. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Fundamental Growth Fund, Inc. ("Fundamental Growth" or the "Fund," which terms are used herein shall refer to Merrill Lynch Fundamental Growth Fund, Inc., after giving effect to the reorganization with Merrill Lynch Growth Fund ("Growth Fund" and together with the Fund, the "Funds") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments -- Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. 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 that are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Directors. (b) Derivative financial instruments -- The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. o Options -- The Fund is authorized to write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Foreign currency transactions -- Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. 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 U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income -- Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized on the accrual basis. The Fund will adopt the provisions to amortize all premiums and discounts on debt securities effective September 1, 2001, as now required under the new AICPA Audit and Accounting Guide for Investment Companies. The cumulative effect of this accounting change will have no impact on the total net assets of the Fund. The impact of this accounting change has not been determined, but will result in an adjustment to the cost of securities and a corresponding adjustment to net unrealized appreciation/depreciation, based on securities held as of August 31, 2001. (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) Security loans -- The Fund receives compensation in the form of fees, or it retains a portion of the interest on the investment of any cash received as collateral. The Fund also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at the annual rate of .65% of the average net assets of the Fund not exceeding $1 billion, .625% of the average net assets of the Fund in excess of $1 billion but not exceeding $1.5 billion, .60% of the average net assets of the Fund in excess of $1.5 billion but not exceeding $5 billion, .575% of the average net assets of the Fund in excess of $5 billion but not exceeding $7.5 billion and .55% of the average net assets of the Fund in excess of $7.5 billion. Pursuant to the Distribution Plans adopted by the Funds in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Funds pay the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: - ------------------------------------------------------------------------------- Account Maintenance Distribution Fee Fee - ------------------------------------------------------------------------------- Class B .25% .75% - ------------------------------------------------------------------------------- Class C .25% .75% - ------------------------------------------------------------------------------- Class D .25% -- - ------------------------------------------------------------------------------- Pursuant to sub-agreements with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Funds. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended February 28, 2001, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Funds' Class A and Class D Shares as follows: - ------------------------------------------------------------------------ FAMD MLPF&S - ------------------------------------------------------------------------ Fundamental Growth - ------------------------------------------------------------------------ Class A $1,057 $15,107 - ------------------------------------------------------------------------ Class D $79,139 $1,189,409 - ------------------------------------------------------------------------ Growth Fund - ------------------------------------------------------------------------ Class A $264 $3,876 - ------------------------------------------------------------------------ Class D $2,327 $33,550 - ------------------------------------------------------------------------ For the six months ended February 28, 2001, MLPF&S received contingent deferred sales charges relating to transactions in Class B and Class C Shares as follows. - ------------------------------------------------------------------------ Fundamental Growth - ------------------------------------------------------------------------ Class B $1,047,558 - ------------------------------------------------------------------------ Class C $61,132 - ------------------------------------------------------------------------ Growth Fund - ------------------------------------------------------------------------ Class B $367,976 - ------------------------------------------------------------------------ Class C $5,146 - ------------------------------------------------------------------------ Furthermore, MLPF&S received contingent deferred sales charges relating to transactions subject to front-end sales charge waivers with respect to Class A and Class D Shares as follows. - ------------------------------------------------------------------------ Fundamental Growth - ------------------------------------------------------------------------ Class A $0 - ------------------------------------------------------------------------ Class D $1,474 - ------------------------------------------------------------------------ Growth Fund - ------------------------------------------------------------------------ Class A $0 - ------------------------------------------------------------------------ Class D $23 - ------------------------------------------------------------------------ In addition, MLPF&S received $855,409 in commissions on the execution of portfolio security transactions for the Fund for the six months ended February 28, 2001. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Funds' transfer agent. Accounting services were provided to the Funds by MLIM through December 31, 2000. Up to this date, Fundamental Growth and Growth Fund reimbursed MLIM $226,724 and $220,738, respectively, for these services. As of January 1, 2001, accounting services are provided for the Funds by State Street Bank and Trust Company ("State Street") pursuant to an agreement between State Street and the Funds. The Funds will pay the cost of these services. In addition, the Funds will reimburse MLIM for the cost of certain additional accounting services. Certain officers and/or directors of the Funds are officers and/or directors of MLIM, FDS, PSI, FAMD, and/or ML & Co. PART C OTHER INFORMATION Item 15. Indemnification. Reference is made to Article VI of the Articles of Incorporation of Merrill Lynch Fundamental Growth Fund, Inc. (the "Registrant"), Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Distribution Agreement. Article VI of the By-Laws provides that each officer and director of the Registrant shall be indemnified by the Registrant to the full extent permitted under the General Laws of the State of Maryland, except that such indemnity shall not protect any such person against any liability to the Registrant or any shareholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Absent a court determination that an officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office, the decision by the Registrant to indemnify such person must be based upon the reasonable determination of independent legal counsel or the vote of a majority of a quorum of the directors who are neither "interested persons," as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("non-party independent directors"), after review of the facts, that such officer or director is not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Each officer and director of the Registrant claiming indemnification within the scope of Article VI of the By-Laws shall be entitled to advances from the Registrant for payment of the reasonable expenses incurred by him or her in connection with proceedings to which he or she is a party in the manner and to the full extent permitted under the General Laws of the State of Maryland without a preliminary determination as to his or her ultimate entitlement to indemnification (except as set forth below); provided, however, that the person seeking indemnification shall provide to the Registrant a written affirmation of his or her good faith belief that the standard of conduct necessary for indemnification by the Registrant has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Registrant for his or her undertaking; (b) the Registrant is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Registrant at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. The Registrant may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland from liability arising from his or her activities as an officer or director of the Registrant. The Registrant, however, may not purchase insurance on behalf of any officer or director of the Registrant that protects or purports to protect such person from liability to the Registrant or to its shareholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. The Registrant may indemnify, make advances or purchase insurance to the extent provided in Article VI of the By-Laws on behalf of an employee or agent who is not an officer or director of the Registrant. In Section 9 of the Distribution Agreement relating to the securities being offered hereby, the Registrant agrees to indemnify the Distributor and each person, if any, who controls the Distributor within the meaning of the Securities Act of 1933 (the "1933 Act"), against certain types of civil liabilities arising in connection with the Registration Statement or Prospectus and Statement of Additional Information. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to Directors, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person or the principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. Item 16. Exhibits.
1(a) -- Articles of Incorporation of the Registrant, dated April 29, 1992. (a) 1(b) -- Articles of Amendment to Articles of Incorporation of the Registrant, dated July 7, 1992. (a) 1(c) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated October 17, 1994.(a) 1(d) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated October 17, 1994.(a) 1(e) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated October 17, 1994.(a) 1(f) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated November 17, 1999.(b) 1(g) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated October 20, 2000.(c) 2 -- By-Laws of the Registrant. (a) 3 -- Not applicable. 4 -- Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch Growth Fund. (d) 5 -- Copies of instruments defining the rights of stockholders, including the relevant portions of the Articles of Incorporation, as amended, and the By-Laws of the Registrant.(e) 6(a) -- Management Agreement, as amended, between the Registrant and Merrill Lynch Investment Managers, L.P. (the "Manager").(c) 6(b) -- Sub-Advisory Agreement between the Manager and Merrill Lynch Asset Management U.K. Limited.(f) 7 -- Form of Distribution Agreement between the Registrant and FAM Distributors, Inc. (the "Distributor").(g) 8 -- None. 9(a) -- Form of Custody Agreement between the Registrant and The Chase Manhattan Bank.(a) 9(b) -- Amended and Restated Credit Agreement between the Registrant and a syndicate of banks.(h) 10(a) -- Form of Amended and Restated Class B Distribution Plan of the Registrant.(i) 10(b) -- Form of Amended and Restated Class C Distribution Plan of the Registrant.(i) 10(c) -- Form of Amended and Restated Class D Distribution Plan of the Registrant.(i) 10(d) -- Merrill Lynch Select PricingSM System Plan pursuant to Rule l8f-3.(j) 11 -- Opinion of Sidley Austin Brown & Wood LLP, counsel for the Registrant. 12 -- Opinion of Sidley Austin Brown & Wood LLP, counsel for the Registrant and special tax counsel for Merrill Lynch Growth Fund.* 13 -- Not applicable. 14(a) -- Consent of Ernst & Young LLP, independent auditors for the Registrant. 14(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Growth Fund. 15 -- Not applicable. 16 -- Power of Attorney.(k) 17(a) -- Prospectus dated December 11, 2000, and Statement of Additional Information dated December 11, 2000, of the Registrant. 17(b) -- Prospectus dated February 16, 2001, and Statement of Additional Information dated February 16, 2001, of Merrill Lynch Growth Fund. 17(c) -- Annual Report to Stockholders of the Registrant for the year ended August 31, 2000. 17(d) -- Semi-Annual Report to Stockholders of the Registrant for the six months ended February 28, 2001. 17(e) -- Annual Report to Shareholders of Merrill Lynch Growth Fund for the year ended October 31, 2000. 17(f) -- Semi-Annual Report to Shareholders of Merrill Lynch Growth Fund for the six months ended April 30, 2001. 17(g) -- Form of Proxy.
- --------------- (a) Re-Filed on December 21, 1995, as an Exhibit to Post Effective Amendment No. 4 to the Registrant's Registration Statement on Form N-1A (the "Registration Statement") pursuant to the Electronic Data Gathering Analysis and Retrieval ("Edgar") requirements. (b) Filed on December 1, 1999, as an exhibit to Post-Effective Amendment No. 9 to the Registrant's Registration Statement. (c) Filed on November 30, 2000, as an exhibit to Post-Effective Amendment No. 10 to the Registrant's Registration Statement. (d) Included as Exhibit I to the Proxy Statement and Prospectus contained in the Registration Statement. (e) Reference is made to Article II, Article IV, Article V (sections 2, 3, 4 and 6), Article VI, Article VII and Article IX of the Registrant's Articles of Incorporation, previously filed as Exhibit (1), to the Registration Statement, and to Article II, Article III (sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XII, Article XIII and Article XIV of the Registrant's By-Laws previously filed as Exhibit (2) to the Registration Statement (f) Filed on December 23, 1996, as an exhibit to Post-Effective Amendment No. 5 to the Registrant's Registration Statement. (g) Incorporated by reference to Exhibit 5 of Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A of Merrill Lynch Adjustable Rate Securities Fund, Inc. (File No. 33-40322), filed on July 5, 2000. (h) Incorporated by reference to Exhibit B to Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc. (File No. 333-15973), filed December 14, 2000. (i) Incorporated by reference to Exhibit 13 of Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A of Merrill Lynch Adjustable Rate Securities Fund, Inc. (File No. 33-40322), filed on September 28, 2000. (j) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A of Merrill Lynch New York Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed on January 25, 1996. (k) Included on the signature page of this Registration Statement. * To be filed by amendment. Item 17. Undertakings. (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through use of a prospectus which is part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the reoffering prospectus will contain information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by other items of the applicable form. (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering of them. (3) The Registrant undertakes to file, by post-effective amendment, a copy of the opinion of counsel as to certain tax matters, within a reasonable time after receipt of such opinion. SIGNATURES As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the Township of Plainsboro and State of New Jersey, on the 23rd day of July, 2001. Merrill Lynch Fundamental Growth Fund, Inc. (Registrant) By /s/ TERRY K. GLENN -------------------------------------- (Terry K. Glenn, President) Each person whose signature appears below hereby authorizes Terry K. Glenn, Donald C. Burke and Alan J. Oster or any of them, as attorney-in-fact, to sign on his behalf, individually and in each capacity stated below, any amendments to this Registration Statement (including post-effective amendments) and to file the same, with all exhibits thereto, with the Securities and Exchange Commission. As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signatures Title Date /s/ TERRY K. GLENN President and Director July 23, 2001 - ------------------------------------------- (Principal Executive Officer) (Terry K. Glenn) /s/ DONALD C. BURKE Vice President and Treasurer July 23, 2001 - ------------------------------------------- (Principal Financial (Donald C. Burke) and Accounting Officer) /s/ JOE GRILLS Director July 23, 2001 - ------------------------------------------- (Joe Grills) /s/ WALTER MINTZ Director July 23, 2001 - ------------------------------------------- (Walter Mintz) /s/ ROBERT S. SALOMON, JR. Director July 23, 2001 - ------------------------------------------- (Robert S. Salomon, Jr.) /s/ MELVIN R. SEIDEN Director July 23, 2001 - ------------------------------------------- (Melvin R. Seiden) /s/ STEPHEN B. SWENSRUD Director July 23, 2001 - ----------------------------------------------- (Stephen B. Swensrud)
EXHIBIT INDEX
Exhibit Number Description 11 -- Opinion of Sidley Austin Brown & Wood LLP, counsel for the Registrant 14(a) -- Consent of Ernst & Young LLP, independent auditors for the Registrant. 14(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Growth Fund. 17(a) -- Prospectus dated December 11, 2000, and Statement of Additional Information dated December 11, 2000, of the Registrant. 17(b) -- Prospectus dated February 16, 2001, and Statement of Additional Information dated February 16, 2001, of Merrill Lynch Growth Fund. 17(c) -- Annual Report to Stockholders of the Registrant for the year ended August 31, 2000. 17(d) -- Semi-Annual Report to Stockholders of the Registrant for the six months ended February 28, 2001. 17(e) Annual Report to Shareholders of Merrill Lynch Growth Fund for the year ended October 31, 2000. 17(f) -- Semi-Annual Report to Shareholders of Merrill Lynch Growth Fund for the six months ended April 30, 2001. 17(g) -- Form of Proxy.
EX-11 2 efc1-0730_ex11.txt Exhibit 11 SIDLEY AUSTIN BROWN & WOOD LLP ONE WORLD TRADE CENTER NEW YORK, NEW YORK 10048-0557 TELEPHONE 212 839 5300 FACSIMILE 212 839 5599 WWW.SIDLEY.COM FOUNDED 1866 July 23, 2001 Merrill Lynch Fundamental Growth Fund, Inc. 800 Scudders Mill Road Plainsboro, New Jersey 08536 Ladies and Gentlemen: We have acted as counsel for Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") in connection with the proposed acquisition by the Fund of substantially all of the assets, and the proposed assumption by the the Fund of substantially all of the liabilities, of Merrill Lynch Growth Fund ("Growth Fund"), and the simultaneous distribution to Growth Fund of newly-issued shares of common stock of the Fund having an aggregate net asset value equal to the net assets of Growth Fund acquired by the Fund reduced by the amount of liabilities of Growth Fund assumed by the Fund (collectively, the "Reorganization"). This opinion is furnished in connection with the Fund's Registration Statement on Form N-14 under the Securities Act of 1933, as amended (the "Registration Statement"), relating to shares of common stock, par value $0.10 per share, of the Fund (the "Shares"), to be issued in the Reorganization. As counsel for the Fund, we are familiar with the proceedings taken by the Fund and to be taken by the Fund in connection with the authorization and issuance of the Shares. In addition, we have examined and are familiar with the Articles of Incorporation of the Fund, as amended and supplemented, the By-laws of the Fund, as amended, and such other documents as we have deemed relevant to the matters referred to in this opinion. Based upon the foregoing, we are of the opinion that subsequent to the approval of the Agreement and Plan of Reorganization between the Fund and Growth Fund as set forth in the proxy statement and prospectus constituting a part of the Registration Statement (the "Proxy Statement and Prospectus"), the Shares, upon issuance in the manner referred to in the Registration Statement, for consideration not less than the par value thereof, will be legally issued, fully paid and non-assessable shares of common stock of the Fund. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Proxy Statement and Prospectus constituting a part thereof. Very truly yours, /S/ SIDLEY AUSTIN BROWN & WOOD LLP EX-14.A 3 efc1-0730_exhibit14a.txt Exhibit 14(a) CONSENT OF INDEPENDENT AUDITORS Merrill Lynch Fundamental Growth Fund, Inc. We consent to the reference to our firm under the captions "Comparison of the Funds-Financial Highlights", "Experts" and "Representations and Warranties of Fundamental Growth--Financial Statements" and to the incorporation by reference of our report dated October 5, 2000 for Merrill Lynch Fundamental Growth Fund, Inc. included in the Registration Statement (Form N-14 No. 811-6669) and related Proxy Statement and Prospectus of Merrill Lynch Fundamental Growth Fund, Inc. and Merrill Lynch Growth Fund filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP MetroPark, New Jersey July 20, 2001 EX-14.B 4 efc1-0730_exhibit14b.txt Exhibit 14(b) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement (Investment Company Act File No. 811-6669) on Form N-14 of Merrill Lynch Fundamental Growth Fund, Inc. of our report dated December 15, 2000 appearing in the October 31, 2000 Annual Report of Merrill Lynch Growth Fund, and to the references to us under the captions "COMPARISON OF THE FUNDS - Financial Highlights, Growth Fund" and "EXPERTS" appearing in the Proxy Statement and Prospectus, which is a part of this Registration Statement. /s/ Deloitte & Touche LLP New York, New York July 19, 2001 EX-17.A 5 efc1-0730_ex17a.txt Exhibit 17(a) Prospectus MERRILL LYNCH INVESTMENT MANAGERS LOGO Merrill Lynch Fundamental Growth Fund, Inc. December 11, 2000 This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. Table of Contents PAGE (ICON) KEY FACTS --------------------------------------------------- Merrill Lynch Fundamental Growth Fund at a Glance 3 Risk/Return Bar Chart 4 Fees and Expenses 5 (ICON) DETAILS ABOUT THE FUND --------------------------------------------------- How the Fund Invests 7 Investment Risks 8 (ICON) YOUR ACCOUNT --------------------------------------------------- Merrill Lynch Select Pricing(SM) System 14 How to Buy, Sell, Transfer and Exchange Shares 20 Participation in Fee-Based Programs 25 (ICON) MANAGEMENT OF THE FUND --------------------------------------------------- Merrill Lynch Investment Managers 28 Financial Highlights 29 (ICON) FOR MORE INFORMATION --------------------------------------------------- Shareholder Reports Back Cover Statement of Additional Information Back Cover --------------------------------------------------- MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. (ICON) Key Facts MERRILL LYNCH FUNDAMENTAL GROWTH FUND AT A GLANCE In an effort to help you better understand the many concepts involved in making an investment decision, we have defined the highlighted terms in this prospectus in the sidebar. Common Stock -- shares of ownership of a corporation. What is the Fund's investment objective? The investment objective of the Fund is to seek long-term growth of capital. What are the Fund's main investment strategies? The Fund tries to achieve its objective by investing primarily in a portfolio of common stocks of U.S. companies that Fund management believes have shown above-average rates of growth earnings over the long-term. In other words, Fund management tries to choose investments that will increase in value over the long-term. To a lesser extent the Fund may also invest in securities convertible into common stock and rights to subscribe to common stock of these companies. The Fund may invest up to 10% of its total assets in securities issued by foreign companies. The Fund may also invest in certain types of "derivative" securities. We cannot guarantee that the Fund will achieve its objective. What are the main risks of investing in the Fund? As with any mutual fund, the value of the Fund's investments -- and therefore the value of Fund shares -- may go up or down. These changes may occur because a particular stock market is rising or falling. At other times, there are specific factors that may affect the value of a particular investment. Since foreign markets may differ significantly from U.S. markets in terms of both economic conditions and government regulation, investments in foreign securities involve special risks. Derivatives may be volatile and subject to liquidity, leverage and credit risks. If the value of the Fund's investments goes down, you may lose money. Who should invest? The Fund may be an appropriate investment for you if you: * Are investing with long-term goals, such as retirement or funding a child's education * Want a professionally managed and diversified portfolio * Are willing to accept the risk that the value of your investment may decline in order to seek long-term growth of capital * Are not looking for a significant amount of current income MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 3 (ICON) Key Facts RISK/RETURN BAR CHART The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance for Class D shares for each complete calendar year since the Fund 's inception. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual total returns for each class of the Fund 's shares for the periods shown with those of the S&P 500 Index. How the Fund performed in the past is not necessarily an indication of how the Fund will perform in the future. [BAR CHART] 1993 1994 1995 1996 1997 1998 1999 5.95% -5.56% 33.58% 18.69% 31.63% 34.47% 35.99% During the period shown in the bar chart, the highest return for a quarter was 27.31% (quarter ended December 31, 1998) and the lowest return for a quarter was - 12.60% (quarter ended September 30, 1998). The Fund's year-to-date return as of September 30, 2000 was 6.73%.
Average Annual Total Returns (as of the Past Past Since calendar year ended December 31, 1999) One Year Five Years Inception -------------------------------------------------------------------------------- Merrill Lynch Fundamental Growth Fund* A 29.15% 29.62% 28.23%+ S&P 500 Index** 21.04% 28.54% 27.19%++ -------------------------------------------------------------------------------- Merrill Lynch Fundamental Growth Fund* B 30.98% 29.70% 28.26%+ S&P 500 Index** 21.04% 28.54% 27.19%++ -------------------------------------------------------------------------------- Merrill Lynch Fundamental Growth Fund* C 33.95% 29.69% 19.96%# S&P 500 Index** 21.04% 28.54% 21.30%## -------------------------------------------------------------------------------- Merrill Lynch Fundamental Growth Fund* D+- 28.85% 29.31% 19.97%# S&P 500 Index** 21.04% 28.54% 21.30%## --------------------------------------------------------------------------------
* Includes sales charge. ** The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged index of common stock prices. Past performance is not predictive of future performance. + Inception date is October 21, 1994. ++ Since October 21, 1994. # Inception date is December 24, 1992. ## Since December 24, 1992. +- As a result of the implementation of the Merrill Lynch Select Pricing(SM) System, Class A shares outstanding prior to October 21, 1994 were redesignated as Class D shares. Historical performance information pertaining to these shares is included here. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 4 (ICON) Key Facts FEES AND EXPENSES UNDERSTANDING EXPENSES Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses, which the Fund may charge: Expenses paid directly by the shareholder: Shareholder Fees -- These include sales charges which you may pay when you buy or sell shares of the Fund. Expenses paid indirectly by the shareholder: Annual Fund Operating Expenses -- expenses that cover the costs of operating the Fund. Management Fee -- a fee paid to the Manager for managing the Fund. Distribution Fees -- fees used to support the Fund's marketing and distribution efforts, such as compensating Financial Consultants and other financial intermediaries, advertising and promotion. Service (Account Maintenance) Fees -- fees used to compensate securities dealers and other financial intermediaries for account maintenance activities. The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your Merrill Lynch Financial Consultant can help you with this decision. This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.
Shareholder Fees (fees paid directly from your investment)(a): Class A Class B(b) Class C Class D --------------------------------------------------------------------------------------------- Maximum Sales Charge (Load) imposed on purchases (as a percentage of offering price) 5.25%(c) None None 5.25%(c) --------------------------------------------------------------------------------------------- Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d) --------------------------------------------------------------------------------------------- Maximum Sales Charge (Load) imposed on Dividend Reinvestments None None None None --------------------------------------------------------------------------------------------- Redemption Fee None None None None --------------------------------------------------------------------------------------------- Exchange Fee None None None None --------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (expenses that are deducted from Fund assets): --------------------------------------------------------------------------------------------- Management Fee(e) 0.61% 0.61% 0.61% 0.61% --------------------------------------------------------------------------------------------- Distribution and/or Service (12b-1) Fees(f) None 1.00% 1.00% 0.25% --------------------------------------------------------------------------------------------- Other Expenses (including transfer agency fees)(g) 0.15% 0.16% 0.17% 0.15% --------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.76% 1.77% 1.78% 1.01% ---------------------------------------------------------------------------------------------
a. In addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or sells shares. See "How to Buy, Sell, Transfer and Exchange Shares." b. Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be subject to distribution fees. c. Some investors may qualify for reductions in the sales charge (load). d. You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year. e. The Fund pays the Manager a fee at the annual rate of 0.65% of the average daily net assets of the Fund for the first $1 billion, 0.625% of average daily net assets above $1 billion to $1.5 billion, 0.60% of average daily net assets above $1.5 billion to $5 billion and 0.575% of average daily net assets above $5 billion. For the fiscal year ended August 31, 2000, the Manager received a fee equal to 0.61% of the Fund's average daily net assets. f. The Fund calls the Service Fee an "Account Maintenance Fee." Account Maintenance Fee is the term used elsewhere in this Prospectus and in all other Fund materials. If you hold Class B or Class C shares for a long time, it may cost you more in distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 5 (ICON) Key Facts g. The Fund pays the Transfer Agent $11.00 for each Class A and Class D shareholder account and $14.00 for each Class B and Class C shareholder account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund pays a 0.10% fee for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the month the account is closed and ends at the end of the calendar year. For the fiscal year ended August 31, 2000, the Fund paid the Transfer Agent fees totaling $6,266,647. The Manager provides accounting services to the Fund at its cost. For the fiscal year ended August 31, 2000, the Fund reimbursed the Manager $372,148 for these services. Examples: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund's operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES: 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------ Class A $599 $755 $925 $1,418 ------------------------------------------------------------------------------ Class B $580 $757 $959 $1,886* ------------------------------------------------------------------------------ Class C $281 $560 $964 $2,095 ------------------------------------------------------------------------------ Class D $623 $830 $1,054 $1,696 ------------------------------------------------------------------------------ EXPENSES IF YOU DID NOT REDEEM YOUR SHARES: 1 Year 3 Years 5 Years 10 Years ------------------------------------------------------------------------------ Class A $599 $755 $925 $1,418 ------------------------------------------------------------------------------ Class B $180 $557 $959 $1,886* ------------------------------------------------------------------------------ Class C $181 $560 $964 $2,095 ------------------------------------------------------------------------------ Class D $623 $830 $1,054 $1,696 ------------------------------------------------------------------------------
* Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 6 Details About the Fund (ICON) HOW THE FUND INVESTS ABOUT THE PORTFOLIO MANAGER Lawrence R. Fuller is a Senior Vice President and the portfolio manager of the Fund. Mr. Fuller has been a First Vice President of Merrill Lynch Investment Managers since 1997 and Vice President from 1992 to 1997. ABOUT THE MANAGER The Fund is managed by Merrill Lynch Investment Managers. The Fund's main objective is long-term growth of capital. The Fund tries to achieve its goals by investing in a diversified portfolio consisting primarily of common stocks. The Fund will generally invest at least 65% of its total assets in the following equity securities: o Common stock o Convertible preferred stock o Securities convertible into common stock o Rights to subscribe to common stock Of these securities the Fund will generally invest in common stock. In selecting securities, Fund management emphasizes common stocks of companies that have above-average rates of earnings growth. Fund management believes that the common stocks of companies with above-average rates of earnings growth frequently have the prospect of having above-average increases in price. On the other hand, such companies tend to have higher stock market valuations. As a result, their shares may be more vulnerable to price declines from unexpected adverse developments. The common stocks of these companies also tend to have higher prices relative to stocks of companies that do not have above average rates of earnings growth. Some, but not all, of the factors that may cause a company to have an above-average rate of earnings growth include: o Above average growth rate in sales o Improvement in its profit margin o Providing proprietary or niche products or services o Strong industry growth The Fund may invest in companies of any size but emphasizes common stocks of companies having a medium to large stock market capitalization ($500 million or more). The Fund may also invest up to 10% of its total assets in the securities of foreign companies. Securities of foreign companies may be in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other securities convertible into securities of foreign companies. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 7 (ICON) Details About the Fund The Fund's restriction limiting investments in foreign securities to 10% of total assets does not include ADRs. The Fund may use derivatives to hedge its portfolio against market and currency risks. Derivatives are financial instruments whose value is derived from another security, a commodity (such as oil or gold), or an index such as the Standard & Poor's 500 Index. The derivatives that the Fund may use include futures, forwards, options, indexed securities and inverse securities. The Fund may also lend its portfolio securities. The Fund will normally invest a portion of its assets in short-term debt securities, such as commercial paper. These securities can be sold easily and have limited risk of loss but earn only limited returns. The Fund may also invest without limitation in short-term debt securities (including repurchase agreements), non-convertible preferred stocks and bonds or government and money market securities when Fund management is unable to find enough attractive equity investments and to reduce exposure to equities when management believes it is advisable to do so on a temporary basis. Investment in these securities may also be used to meet redemptions. Short-term investments and temporary defensive positions may limit the potential for the Fund to achieve its objective of long-term growth of capital. INVESTMENT RISKS This section contains a summary discussion of the general risks of investing in the Fund. As with any mutual fund, there can be no guarantee that the Fund will meet its goals or that the Fund's performance will be positive for any period of time. Market and Selection Risk -- Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, including the possibility that the market will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform other funds with similar investment objectives and investment strategies. Foreign Market Risks -- Since the Fund may invest in foreign securities, it offers the potential for more diversification than an investment only in the United MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 8 States. This is because securities traded on foreign markets have often (though not always) performed differently than securities in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, investment in foreign securities involves the following risks, which are generally greater for investments in emerging markets. o The economies of some foreign markets often do not compare favorably with that of the United States in areas such as growth of gross domestic product, reinvestment of capital, resources and balance of payments. Some of these economies may rely heavily on particular industries or foreign capital. They may be more vulnerable to adverse diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures. o Investments in foreign markets may be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets, or the imposition of punitive taxes. o The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices. They could also impair the Fund's ability to purchase or sell foreign securities or transfer its assets or income back into the United States, or otherwise adversely affect the Fund's operations. o Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts, and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States. o Because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may be difficult for the Fund to buy and sell securities on MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 9 (ICON) Details About the Fund those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States. o Foreign markets may have different clearance and settlement procedures. In certain markets, settlements may be unable to keep pace with the volume of securities transactions. If this occurs, settlement may be delayed and, the Fund's assets may be uninvested and not earning returns. The Fund may miss investment opportunities or be unable to dispose of a security because of these delays. Certain Risks of Holding Fund Assets Outside the United States -- The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than for investment companies invested only in the United States. European Economic and Monetary Union (EMU) -- A number of European countries entered into EMU in an effort to reduce trade barriers between themselves and eliminate fluctuations in their currencies. EMU established a single European currency (the euro), that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all initial EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro and are traded and make dividend and other payments only in euros. Like other investment companies and business organizations, including the companies in which the Fund invests, the Fund could be adversely affected if the transition to the euro, or EMU as a whole, does not proceed as planned or if a participating country withdraws from EMU. Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 10 the net asset value of Fund shares and in the return on the Fund's portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund's return. Risks associated with certain types of securities in which the Fund may invest include: Convertibles -- Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible's value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risks as the underlying common stock. Derivatives -- The Fund may use derivative instruments including futures, forwards, options, indexed securities and inverse securities. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including: Credit risk -- the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund. Currency risk -- the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment. Leverage risk -- the risk, associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments), that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. Liquidity risk -- the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 11 (ICON) Details About the Fund The Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will beeither available or cost effective. The Fund is not required to use hedging and may choose not to do so. Indexed and Inverse Floating Rate Securities - The Fund may invest in securities whose potential returns are directly related to changes in an underlying index or interest rate, known as indexed securities. The return on indexed securities will rise when the underlying index or interest rate rises and fall when the index or interest rate falls. The Fund may also invest in securities whose return is inversely related to changes in an interest rate (inverse floaters). In general, income on inverse floaters will decrease when interest rates increase and increase when interest rates decrease. Investments in inverse floaters may subject the Fund to the risks of reduced or eliminated interest payments and losses of principal. In addition, certain indexed securities and inverse floaters may increase or decrease in value at a greater rate than the underlying interest rate, which effectively leverages the Fund's investment. Indexed securities and inverse floaters are derivative securities and can be considered speculative. Indexed and inverse securities involve credit risk and certain indexed and inverse securities may involve currency risk, leverage risk and liquidity risk. Warrants -- A warrant gives the Fund the right to buy a quantity of stock. The warrant specifies the amount of underlying stock, the purchase (or "exercise") price, and the date the warrant expires. The Fund has no obligation to exercise the warrant and buy the stock. A warrant has value only if the Fund can exercise it or sell it before it expires. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 12 Illiquid Securities -- The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If the Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value. Restricted Securities -- Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that the Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market. Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the security. Rule 144A Securities -- Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue. Securities Lending -- The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and the value of the collateral falls. These events could trigger adverse tax consequences to the Fund. STATEMENT OF ADDITIONAL INFORMATION If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 13 Your Account (ICON) MERRILL LYNCH SELECT PRICING (SM) SYSTEM The Fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Consultant or other financial intermediary can help you determine which share class is best suited to your personal financial goals. For example, if you select Class A or D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver. Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Manager, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholders servicing activities. If you select Class B or C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Class B or C shares. The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of Merrill Lynch. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 14 The table below summarizes key features of the Merrill Lynch Select Pricing(SM) System.
Class A Class B Class C Class D - ---------------------------------------------------------------------------------------------------------------------------------- Availability Limited to certain Generally available Generally available Generally available investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch. o Current Class A Limited availability Limited availability Limited availability shareholders through selected through selected through selected o Certain Retirement Plans securities dealers and securities dealers and securities dealers and o Participants in certain other financial other financial other financial Merrill Lynch sponsored intermediaries. intermediaries. intermediaries. programs o Certain affiliates of Merrill Lynch, selected securities dealers and other financial intermediaries. - ---------------------------------------------------------------------------------------------------------------------------------- Initial Sales Yes. Payable at time of No. Entire purchase price No. Entire purchase Yes. Payable at time of Charge? purchase. Lower sales is invested in shares of price is invested in purchase. Lower sales charges available for the Fund. shares of the Fund. charges available for larger investments. larger investments. - ---------------------------------------------------------------------------------------------------------------------------------- Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged for Charge? for purchases over $1 redeem within four redeem within one purchases over $1 million that are years of purchase. year of purchase. million that are redeemed within one year.) redeemed within one year.) - ---------------------------------------------------------------------------------------------------------------------------------- Account No. 0.25% Account 0.25% Account 0.25% Account Maintenance Maintenance Fee Maintenance Fee Maintenance Fee and 0.75% Distribution Fee. 0.75% Distribution Fee. No Distribution Fee. Distribution Fees? - ---------------------------------------------------------------------------------------------------------------------------------- Conversion to No. Yes, automatically No. No. Class D shares? after approximately eight years. - ----------------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 15 (ICON) Your Account Class A and Class D Shares -- Initial Sales Charge Options If you select Class A or Class D shares, you will pay a sales charge at the time of purchase.
Dealer Compensation Your Investment As a % of Offering Price As a % of Your Investment* as a % of Offering Price ------------------------------------------------------------------------------------------------------------------------- Less than $25,000 5.25% 5.54% 5.00% ------------------------------------------------------------------------------------------------------------------------- $25,000 but less than $50,000 4.75% 4.99% 4.50% ------------------------------------------------------------------------------------------------------------------------- $50,000 but less than $100,000 4.00% 4.17% 3.75% ------------------------------------------------------------------------------------------------------------------------- $100,000 but less than $250,000 3.00% 3.09% 2.75% ------------------------------------------------------------------------------------------------------------------------- $250,000 but less than $1,000,000 2.00% 2.04% 1.80% ------------------------------------------------------------------------------------------------------------------------- $1,000,000 and over** 0.00% 0.00% 0.00% -------------------------------------------------------------------------------------------------------------------------
* Rounded to the nearest one-hundredth percent. ** If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Manager compensates the selling dealer or other financial intermediary from its own funds. However, if you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer sponsored retirement or savings plans. Right of Accumulation -- permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all shares you own in the Merrill Lynch mutual funds that offer Select Pricing(SM) options. Letter of Intent -- permits you to pay the sales charge that would be applicable if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that you agree to buy within a 13 month period. Certain restrictions apply. No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends. A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for: o Purchases under a Right of Accumulation or Letter of Intent o Merrill Lynch Blueprint(SM) Program participants o TMA(SM) Managed Trusts o Certain Merrill Lynch investment or central asset accounts o Certain employer-sponsored retirement or savings plans o Purchases using proceeds from the sale of certain Merrill Lynch closed-end funds under certain circumstances MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 16 o Certain investors, including directors or trustees of Merrill Lynch mutual funds and Merrill Lynch employees o Certain fee-based programs of Merrill Lynch and other financial intermediaries that have agreements with the Distributor or its affiliates Only certain investors are eligible to buy Class A shares. Your Merrill Lynch Financial Consultant can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs. If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not. If you redeem Class A or Class D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this "Reinstatement Privilege" may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Consultant, selected securities dealer, other financial intermediary or the Fund's Transfer Agent at 1-800-MER-FUND. As a result of the implementation of the Merrill Lynch Select Pricing(SM) System Class A shares outstanding prior to October 21, 1994 were redesignated as Class D shares. The Class A shares currently being offered differ from the Class shares offered prior to October 21, 1994 in many respects including sales charges, exchange privileges and the classes of persons to whom such shares are offered. Class B and Class C Shares--Deferred Sales Charge Options If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within four years after purchase, or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 17 (ICON) Your Account the costs of marketing, advertising and compensating the Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares. Class B Shares If you redeem Class B shares within four years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule: Years Since Purchase Sales Charge* ---------------------------------- 0 - 1 4.00% ---------------------------------- 1 - 2 3.00% ---------------------------------- 2 - 3 2.00% ---------------------------------- 3 - 4 1.00% ---------------------------------- 4 and thereafter 0.00% ---------------------------------- * The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. Not all Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply. The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as: o Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59 1/2 years old o Redemption by certain eligible 401(a) and 401(k) plans, certain related accounts, group plans participating in the Merrill Lynch Blueprint(SM) Program and certain retirement plan rollovers o Redemption in connection with participation in certain fee-based programs of Merrill Lynch or other financial intermediaries that have agreements with the Distributor or its affiliates o Withdrawals resulting from shareholder death or disability as long as the waiver request is made within one year of death or disability or, if later, reasonably promptly following completion of probate, or in connection with involuntary termination of an account in which Fund shares are held MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 18 o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes. Different conversion schedules apply to Class B shares of different Merrill Lynch mutual funds. For example, Class B shares of a fixed-income fund typically convert approximately ten years after purchase compared to approximately eight years for equity funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund's eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund's conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well. Class C Shares If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relating to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. Class C shares do not offer a conversion privilege. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 19 (ICON) Your Account HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Consultant may help you with this decision. Because of the high costs of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 20
If You Want to Your Choices Information Important for You to Know ------------------------------------------------------------------------------------------------------------------------------ Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 15. Be sure to appropriate for you read this prospectus carefully. ----------------------------------------------------------------------------------------------------------- Next, determine the amount of The minimum initial investment for the Fund is $1,000 for all accounts your investment except: o $250 for certain Merrill Lynch fee-based programs o $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.) ----------------------------------------------------------------------------------------------------------- Have your Merrill Lynch The price of your shares is based on the next calculation of net asset Financial Consultant, value after your order is placed. Any purchase orders placed prior to the selected securities dealer close of business on the New York Stock Exchange (generally 4:00 p.m. or other financial Eastern time) will be priced at the net asset value determined that day. intermediary submit your Certain financial intermediaries, however, may require submission of purchase order orders prior to that time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Selected securities dealers or other financial intermediaries, including Merrill Lynch, may charge a processing fee to confirm a purchase. Merrill Lynch currently charges a fee of $5.35. ----------------------------------------------------------------------------------------------------------- Or contact the Transfer To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND Agent and request a purchase order. Mail the completed purchase order to the Transfer Agent at the address on the inside back cover of this Prospectus ------------------------------------------------------------------------------------------------------------------------------ Add to Your Purchase additional shares The minimum investment for additional purchases is generally $50 for all Investment accounts except that retirement plans have a minimum additional purchase of $1 and certain programs, such as automatic investment plans, may have higher minimums. (The minimums for additional purchases may be waived under certain circumstances.) ----------------------------------------------------------------------------------------------------------- Acquire additional shares All dividends are automatically reinvested without a sales charge. through the automatic dividend reinvestment plan ----------------------------------------------------------------------------------------------------------- Participate in the automatic You may invest a specific amount on a periodic basis through certain investment plan Merrill Lynch investment or entral asset accounts. ------------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 21
(ICON) Your Account If You Want to Your Choices Information Important for You to Know ----------------------------------------------------------------------------------------------------------------------------- Transfer Transfer to a participating You may transfer your Fund shares only to another securities dealer that Shares to securities dealer or other has entered into an agreement with Merrill Lynch. Certain shareholder Another financial intermediary services may not be available for the transferred shares. You may only Securities purchase additional shares of funds previously owned before the transfer. Dealer or All future trading of these assets must be coordinated by the receiving Other firm. Financial Intermediary ---------------------------------------------------------------------------------------------------------- Transfer to a non- You must either: participating securities o Transfer your shares to an account with the Transfer Agent; or dealer or other financial o Sell your shares, paying any applicable deferred sales charge. intermediary ----------------------------------------------------------------------------------------------------------------------------- Sell Your Have your Merrill Lynch The price of your shares is based on the next calculation of net asset Shares Financial Consultant, value after your order is placed. For your redemption request to be selected securities dealer priced at the net asset value on the day of your request, you must submit or other financial your to your dealer or other financial intermediary prior to that day's intermediary submit your close of business on the New York Stock Exchange (generally 4:00 p.m. sales order Eastern time). Certain financial intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business day. Securities dealers or other financial intermediaries, including Merrill Lynch, may charge a fee to process a redemption of shares. Merrill Lynch currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent. The Fund may reject an order to sell shares under certain circumstances. -----------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 22
If You Want to Your Choices Information Important for You to Know ------------------------------------------------------------------------------------------------------------------------------ Sell Your Shares Sell through the You may sell shares held at the Transfer Agent by writing to the Transfer (continued) Transfer Agent Agent at the address on the inside back cover of this prospectus. All shareholders on the account must sign the letter. A signature guarantee will generally be required but may be waived in certain limited circumstances. You can obtain a signature guarantee from a bank, securities dealer, securities broker, credit union, savings association, national securities exchange and registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. The Transfer Agent will normally mail redemption proceeds within seven days following receipt of a properly completed request. If you make a redemption request before the Fund has collected payment for the purchase of shares, the Fund or the Transfer Agent may delay mailing your proceeds. This delay will usually not exceed ten days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-800-MER-FUND for details. Sell Shares Participate in the Fund's Plan You can choose to receive systematic payments from your Fund account Systematically Systematic Withdrawal either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA(R), CBA(R) or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your Merrill Lynch Financial Consultant for details. ------------------------------------------------------------------------------------------------------------------------------ MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 23
(ICON) Your Account
If You Want to Your Choices Information Important for You to Know ------------------------------------------------------------------------------------------------------------------------------ Exchange Your Select the fund into which You can exchange your shares of the Fund for shares of many other Merrill Shares you want to exchange. Be Lynch mutual funds. You must have held the shares used in the exchange sure to read that fund's for at least 15 calendar days before prospectus you can exchange to another fund. Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares (and are not eligible to purchase Class A shares), you will exchange into Class D shares. Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will apply. The time you hold Class B or C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. If you exchange Class A or D shares for money market fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class B or C shares of the Fund will be exchanged for Class B shares of Summit. To exercise the exchange privilege contact your Merrill Lynch Financial Consultant or other financial intermediary or call the Transfer Agent at 1-800-MER-FUND. Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future. ------------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 24 HOW SHARES ARE PRICED Net asset value -- the market value of the Fund's total assets after deducting liabilities, divided by the number of shares outstanding. When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open as of the close of business on the Exchange based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund 's net asset value may change on days when you will not be able to purchase or redeem the Fund's shares. The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the financial intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses. Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, and Class D shares will have a higher net asset value than Class B or Class C shares. Also dividends paid on Class A and Class D shares will generally be higher than dividends paid on Class B and Class C shares because Class A and Class D shares have lower expenses. PARTICIPATION IN FEE-BASED PROGRAMS If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances. You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 25 (ICON) Your Account If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program. Dividends -- ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid. "BUYING A DIVIDEND" Unless your investment is in a tax-deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser. Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary. DIVIDENDS AND TAXES The Fund will distribute at least annually any net investment income and any net realized long-term capital gains. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. If you would like to receive dividends in cash, contact your Merrill Lynch Financial Consultant, selected securities dealer, other financial intermediary or the Transfer Agent. Although this cannot be predicted with any certainty, the Fund anticipates that the majority of its dividends, if any, will consist of capital gains. Capital gains paid by the Fund, if any, may be taxable to you at different rates, depending, in part, on how long the Fund has held the assets sold. You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Capital gain dividends are generally taxed at different rates than ordinary income dividends. If you are neither a lawful permanent resident nor a citizen of the U.S. or if you are a foreign entity, the Fund's ordinary income dividends (which include MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 26 distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. By law, the Fund must withhold 31% of your dividends and redemption proceeds if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect. This section summarizes some of the consequences under current Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 27 Management of the Fund (ICON) MERRILL LYNCH INVESTMENT MANAGERS Merrill Lynch Investment Managers, the Fund's Manager, manages the Fund's investments and its business operations under the overall supervision of the Fund's Board of Directors. The Manager has the responsibility for making all investment decisions for the Fund. The Manager has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the Manager may pay a fee for services it receives. The Fund pays the Manager a fee at the annual rate of 0.65% of the average daily net assets of the Fund for the first $1 billion, 0.625% of the average daily net assets above $1 billion to $1.5 billion, 0.60% of the average daily net assets above $1.5 billion to $5 billion and 0.575% of average daily net assets above $5 billion. For the fiscal year ended August 31, 2000 the Manager received a management fee equal to 0.61% of the Fund's average daily net assets. Merrill Lynch Investment Managers was organized as an investment adviser in 1977 and offers investment advisory services to more than 40 registered investment companies. Merrill Lynch Investment Managers and its affiliates, including Fund Asset Management, had approximately $560 billion in investment company and other portfolio assets under management as of October 2000. This amount includes assets managed for Merrill Lynch affiliates. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 28 (ICON) Management of the Fund FINANCIAL HIGHLIGHTS The Financial Highlights table is intended to help you understand the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends). This information has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statements, is included in the Fund's Annual Report which is available upon request.
Class A+ Class B+ --------------------------------------------- -------------------------------------------- For the Year Ended August 31, For the Year Ended August 31, Increase (Decrease) in Net Asset --------------------------------------------- -------------------------------------------- Value: 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------ -------------------------------------------- Per Share Operating Performance: - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $21.99 $16.19 $17.37 $13.60 $11.66 $20.75 $15.39 $16.69 $13.14 $11.40 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net .02 .13 .07 .07 .07 (.23) (.08) (.11) (.09) (.07) - ---------------------------------------------------------------------------------------------------------------------------------- Realized and unrealized gain on investments and foreign currency transactions -- net 9.91 6.37 1.09 4.95 2.13 9.32 6.05 1.05 4.79 2.07 - ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 9.93 6.50 1.16 5.02 2.20 9.09 5.97 .94 4.70 2.00 - ---------------------------------------------------------------------------------------------------------------------------------- Less distributions from realized gain on investments -- net (1.94) (.70) (2.34) (1.25) (.26) (1.78) (.61) (2.24) (1.15) (.26 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of year $29.98 $21.99 $16.19 $17.37 $13.60 $28.06 $20.75 $15.39 $16.69 $13.14 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Return:* - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share 47.01% 41.08% 6.37% 39.24% 19.02% 45.55% 39.58% 5.21% 37.95% 17.68% - ---------------------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: - ---------------------------------------------------------------------------------------------------------------------------------- Expenses .76% .81% .87% .99% 1.12% 1.77% 1.83% 1.88% 2.02% 2.16% - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net .09% .60% .37% .47% .51% (.92)% (.41)% (.64)% (.59)% (.54)% - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental Data: - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of year (in thousands) $882,072 $472,464 $167,133 $62,049 $47,048 $3,411,474 $2,000,535 $641,688 $216,636 $116,641 - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% 98.71% 52.72% 40.27% 94.38% 82.10% - ----------------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 29 FINANCIAL HIGHLIGHTS (concluded)
Class C+ Class D+ ----------------------------------------- ------------------------------------------ For the Year Ended August 31, For the Year Ended August 31, ----------------------------------------- ------------------------------------------ Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year $20.88 $15.45 $16.72 $13.14 $11.40 $21.77 $16.06 $17.27 $13.54 $11.64 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net (.24) (.09) (.11) (.09) (.07) (.04) .08 .02 .03 .03 - ---------------------------------------------------------------------------------------------------------------------------------- Realized and unrealized gain on investments and foreign currency transactions -- net 9.39 6.10 1.05 4.79 2.07 9.80 6.31 1.09 4.93 2.13 - ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 9.15 6.01 .94 4.70 2.00 9.76 6.39 1.11 4.96 2.16 - ---------------------------------------------------------------------------------------------------------------------------------- Less distributions from realized gain on investments -- net (1.77) (.58) (2.21) (1.12) (.26) (1.90) (.68) (2.32) (1.23) (.26) - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of year $28.26 $20.88 $15.45 $16.72 $13.14 $29.63 $21.77 $16.06 $17.27 $13.54 - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Return:* - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share 45.53% 39.65% 5.19% 37.90% 17.68% 46.67% 40.67% 6.08% 38.90% 18.70% - ---------------------------------------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: - ---------------------------------------------------------------------------------------------------------------------------------- Expenses 1.78% 1.83% 1.89% 2.02% 2.15% 1.01% 1.05% 1.11% 1.24% 1.37% - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net (.93)% (.43)% (.63)% (.58)% (.57)% (.17)% .36% .12% .17% .24% - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental Data: - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of year (in thousands) $627,021 $307,988 $130,652 $74,732 $54,052 $1,712,701 $795,607 $157,899 $53,101 $22,892 - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% 98.71% 52.72% 40.27% 94.38% 82.10% - ----------------------------------------------------------------------------------------------------------------------------------
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 30 [REPRESENTATION OF MERRILL LYNCH POTENTIAL INVESTORS FLOWCHART]
------------------------------- POTENTIAL ___________ INVESTORS _____________ | Open an account (two options). | | ------------------------------- | | | | | \|/ \|/ 1 2 -------------------------- --------------------------------------- MERRILL LYNCH TRANSFER AGENT FINANCIAL CONSULTANT Financial Data Services, Inc. OR SECURITIES DEALER Advises shareholders ADMINISTRATIVE OFFICES on their Fund investments. 4800 Deer Lake Drive East -------------------------- Jacksonville, Florida 32246-6484 /|\ | MAILING ADDRESS | P.O. Box 45289 | Jacksonville, Florida 32232-5289 | | Performs shareholder | recordkeeping and reporting services. | --------------------------------------- | /|\ | | | | | | | ----------------------------------------------- | | DISTRIBUTOR | | FAM Distributors, Inc. | | P.O. Box 9081 | ________\ Princeton, New Jersey 08543-9081 /_________ / \ Arranges for the sale of Fund shares. ----------------------------------------------- | | | | | \|/ - ---------------------------------- --------------------- ---------------------------------------- COUNSEL THE FUND CUSTODIAN Brown & Wood LLP _____\ /_____ The Chase Manhattan Bank One World Trade Center / The Board of Trustees \ Global Securities Services New York, New York 10048-0557 oversees the Fund. Chase MetroTechCenter, Provides legal advice to the Fund. --------------------- 18th Floor - ---------------------------------- _ _ Brooklyn, New York 11245 /| |\ Holds the Fund's assets for safekeeping. / \ ---------------------------------------- / \ / \ / \ ----------------------------------- ----------------------------------------- INDEPENDENT AUDITORS MANAGER Ernst & Young LLP Merrill Lynch Investment Managers, L.P. 99 Wood Avenue South Iselin, New Jersey 08830-0471 ADMINISTRATIVE OFFICES 800 Scudders Mill Road Audits the financial Plainsboro, New Jersey 08536 statements of the Fund on behalf of the shareholders. MAILING ADDRESS ----------------------------------- P.O. Box 9011 Princeton, New Jersey 08543-9011 TELEPHONE NUMBER 1-800-MER-FUND Manages the Fund's day-to-day activities. -----------------------------------------
For More Information (ICON) Shareholder Reports Additional information about the Fund's investments is available in the Fund's annual and semi-annual reports to shareholders. In the Fund's annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND. The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your Merrill Lynch Financial Consultant or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and Merrill Lynch brokerage or mutual fund account number. If you have any questions, please call your Merrill Lynch Financial Consultant, or other financial intermediary or the Transfer Agent at 1-800-MER-FUND. Statement of Additional Information The Fund's Statement of Additional Information contains further information about the Fund and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND. Contact your Merrill Lynch Financial Consultant, selected dealer, or other financial intermediary or the Fund, at the telephone number or address indicated on the inside back cover of this Prospectus, if you have any questions. Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC's Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102. You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from the information contained in this Prospectus. Investment Company Act file #811-6669 Code #16463-12-00 (C) Merrill Lynch Investment Managers, L.P. [LOGO OF MERRILL LYNCH INVESTMENT MANAGERS] Prospectus Merrill Lynch Fundamental Growth Fund, Inc. December 11, 2000 STATEMENT OF ADDITIONAL INFORMATION Merrill Lynch Fundamental Growth Fund, Inc. P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800 ------------- Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is a mutual fund that seeks to provide shareholders with long-term growth of capital. The Fund will seek to achieve its investment objective by investing in a diversified portfolio of equity securities placing particular emphasis on companies that have exhibited above-average growth rates in earnings. There can be no assurance that the investment objective of the Fund will be realized. For more information on the Fund's investment objectives and policies, see "Investment Objective and Policies." Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. See "Purchase of Shares." ------------- This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated December 11, 2000 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling 1-800-MER-FUND or by writing the Fund at the above address. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund's audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling 1-800-637-3863, between 8:00 a.m. and 8:00 p.m. Eastern time on any business day. ------------- Merrill Lynch Investment Managers -- Manager FAM Distributors -- Distributor ------------- The date of this Statement of Additional Information is December 11, 2000. TABLE OF CONTENTS Page ---- Investment Objective and Policies 2 Convertible Securities 4 Warrants 6 Derivatives 6 Other Investment Policies and Practices 11 Investment Restrictions 12 Portfolio Turnover 14 Management of the Fund 15 Directors and Officers 15 Compensation of Directors 16 Management and Advisory Arrangements 17 Code of Ethics 18 Purchase of Shares 18 Initial Sales Charge Alternatives -- Class A and Class D Shares 19 Reduced Initial Sales Charges 21 Deferred Sales Charge Alternatives -- Class B and Class C Shares 24 Closed-End Fund Reinvestment Option 27 Distribution Plans 27 Limitations on the Payment of Deferred Sales Charges 29 Redemption of Shares 30 Redemption 31 Repurchase 32 Reinstatement Privilege -- Class A and Class D Shares 32 Pricing of Shares 32 Determination of Net Asset Value 32 Computation of Offering Price Per Share 33 Portfolio Transactions and Brokerage 34 Transactions in Portfolio Securities 34 Shareholder Services 35 Investment Account 35 Exchange Privilege 36 Fee-Based Programs 38 Retirement and Education Savings Plans 39 Automatic Investment Plans 39 Automatic Dividend Reinvestment Plan 39 Systematic Withdrawal Plan 40 Dividends and Taxes 41 Dividends 41 Taxes 41 Tax Treatment of Options and Futures Transactions 42 Special Rules for Certain Foreign Currency Transactions 43 Performance Data 44 General Information 45 Description of Shares 45 Independent Auditors 46 Custodian 46 Transfer Agent 46 Legal Counsel 46 Reports to Shareholders 46 Shareholder Inquiries 46 Additional Information 47 Financial Statements 47 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek long-term growth of capital. The Fund will seek to achieve its investment objective by investing in a diversified portfolio of equity securities placing particular emphasis on companies that have exhibited above-average growth rates in earnings. There can be no assurance that the investment objective of the Fund will be realized. The investment objective of the Fund set forth in the first sentence of this paragraph is a fundamental policy of the Fund which may not be changed without a vote of a majority of its outstanding shares as defined below. Reference is made to "How the Fund Invests" and "Investment Risks" in the Prospectus. The Fund is classified as a diversified fund under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Fund will give particular emphasis to companies that have exhibited above-average growth rates in earnings, resulting from a variety of factors including -- but not limited to -- above-average growth rates in sales, profit margin improvement, proprietary or niche products or services, leading market shares, and underlying strong industry growth. Merrill Lynch Investment Managers, L.P., the Fund's investment manager ("MLIM" or the "Manager") believes that companies which possess above-average earnings growth frequently provide the prospect of above-average stock market returns, although such companies tend to have higher relative stock market valuations. Emphasis also will be given to companies having medium to large stock market capitalizations ($500 million or more). Investment in companies with lower market capitalizations, especially those under $1 billion, may involve special risks including limited product lines, market or financial resources or a limited management group. In addition, many smaller company stocks trade less frequently and in smaller volume, and may be subject to more abrupt or erratic price movements or more sensitive to market fluctuations, than stocks of larger companies. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stock and rights to subscribe for common stock. The Fund will maintain at least 65% of its total assets invested in equity securities except during defensive periods. The Fund reserves the right as a defensive measure and to provide for redemptions to hold other types of securities, including non-convertible preferred stocks and debt securities rated investment grade by a nationally recognized statistical ratings organization, Government and money market securities, including repurchase agreements, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets in equity securities of foreign issuers with the foregoing characteristics. (Purchases of American Depositary Receipts ("ADRs"), however, are not subject to this restriction.) Investments in securities of foreign entities and securities denominated in foreign currencies involve risks not typically involved in domestic investment, including fluctuations in foreign exchange rates, future foreign political and economic developments, and the possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. Since the Fund may invest in securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of investments in the portfolio and the unrealized appreciation or depreciation of investments insofar as the United States investors are concerned. Changes in foreign currency exchange rates relative to the U.S. dollar will affect the U.S. dollar value of the Fund's assets denominated in that currency and the Fund's yield on such assets. Foreign currency exchange rates are determined by forces of supply and demand on the foreign exchange markets. These forces are, in turn, affected by the international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position. With respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could affect investment in those countries. There may be less publicly available information about a foreign financial instrument than about a United States instrument, and foreign entities may not be subject to accounting, 2 auditing and financial reporting standards and requirements comparable to those of United States entities. In addition, certain foreign investments may be subject to foreign withholding taxes. Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than United States markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The ability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Costs associated with transactions in foreign securities are generally higher than with transactions in United States securities. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States. The Fund may invest in the securities of foreign issuers in the form of ADRs, European Depositary Receipts ("EDRs") or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designed for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the market value of such ADRs. European Economic and Monetary Union. For a number of years, certain European countries have been seeking economic unification that would, among other things, reduce barriers between countries, increase competition among companies, reduce government subsidies in certain industries, and reduce or eliminate currency fluctuations among these European countries. The Treaty on European Union (the "Maastricht Treaty") set out a framework for the European Economic and Monetary Union ("EMU") among the countries that comprise the European Union ("EU"). EMU established a single common European currency (the "euro") that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all EMU participants by July 1, 2002. EMU took effect for the initial EMU participants on January 1, 1999. Certain securities issued in participating EU countries (beginning with government and corporate bonds) will be redenominated in the euro, and are listed, traded and make dividend and other payments only in euros. No assurance can be given that EMU will take effect, that the changes planned for the EU can be successfully implemented, or that these changes will result in the economic and monetary unity and stability intended. There is a possibility that EMU will not be completed, or will be completed but then partially or completely unwound. Because any participating country may opt out of EMU within the first three years, it is also possible that a significant participant could choose to abandon EMU, which would diminish its credibility and influence. Any of these occurrences could have adverse effects on the markets of both participating and non-participating countries, including sharp appreciation or depreciation of the participants' national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the European markets, an undermining of European economic stability, the collapse or slowdown of the drive toward European economic unity, and/or reversion of the attempts to lower government debt and inflation rates that were introduced in anticipation of EMU. Also, withdrawal from EMU by an initial participant could cause disruption of the financial markets as securities redenominated in euros are transferred back into that country's national currency, particularly if the withdrawing country is a major economic power. Such developments could have an adverse impact on the Fund's investments in Europe generally or in specific countries 3 participating in EMU. Gains or losses resulting from the euro conversion may be taxable to Fund shareholders under foreign or, in certain limited circumstances, U.S. tax laws. Convertible Securities Convertible securities entitle the holder to receive interest payments paid on corporate debt securities or the dividend preference on a preferred stock until such time as the convertible security matures or is redeemed or until the holder elects to exercise the conversion privilege. Synthetic convertible securities may be either (i) a debt security or preferred stock that may be convertible only under certain contingent circumstances or that may pay the holder a cash amount based on the value of shares of underlying common stock partly or wholly in lieu of a conversion right (a "Cash-Settled Convertible") or (ii) a combination of separate securities chosen by the Manager in order to create the economic characteristics of a convertible security, i.e., a fixed income security paired with a security with equity conversion features, such as an option or warrant (a "Manufactured Convertible"). The characteristics of convertible securities make them appropriate investments for an investment company seeking a high total return from capital appreciation and investment income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were issued in nonconvertible form. In analyzing convertible securities, the Manager will consider both the yield on the convertible security and the potential capital appreciation that is offered by the underlying common stock. Convertible securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by the Fund are denominated in United States dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. As described below, the Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of such fluctuations. Apart from currency considerations, the value of convertible securities is influenced by both the yield of nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its "investment value." To the extent interest rates change, the investment value of the convertible security typically will fluctuate. However, at the same time, the value of the convertible security will be influenced by its "conversion value," which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock. If, because of a low price of the common stock the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value. To the extent the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities' investment value. Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A convertible 4 security may be subject to redemption at the option of the issuer at a price established in the charter provision, indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances. As indicated above, synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured Convertibles are created by the Manager by combining separate securities that possess one of the two principal characteristics of a convertible security, i.e., fixed income ("fixed income component") or a right to acquire equity securities ("convertible component"). The fixed income component is achieved by investing in nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component is achieved by investing in call options, warrants, Long Term Equity Appreciation Participation Securities ("LEAPS"), or other securities with equity conversion features ("equity features") granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying stock index. A Manufactured Convertible differs from traditional convertible securities in several respects. Unlike a traditional convertible security, which is a single security having a unitary market value, a Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore, the total "market value" of such a Manufactured Convertible is the sum of the values of its fixed-income component and its convertibility component. More flexibility is possible in the creation of a Manufactured Convertible than in the purchase of a traditional convertible security. Because many corporations have not issued convertible securities, the Manager may combine a fixed income instrument and an equity feature with respect to the stock of the issuer of the fixed income instrument to create a synthetic convertible security otherwise unavailable in the market. The Manager may also combine a fixed income instrument of an issuer with an equity feature with respect to the stock of a different issuer when the Manager believes such a Manufactured Convertible would better promote the Fund's objective than alternative investments. For example, the Manager may combine an equity feature with respect to an issuer's stock with a fixed income security of a different issuer in the same industry to diversify the Fund's credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible with a higher credit profile than a traditional convertible security issued by that issuer. A Manufactured Convertible also is a more flexible investment in that its two components may be purchased separately and, upon purchasing the separate securities, "combined" to create a Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion in a Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant pending development of more favorable market conditions. The value of a Manufactured Convertible may respond differently to certain market fluctuations than would a traditional convertible security with similar characteristics. For example, in the event the Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option on a stock, the Manufactured Convertible would likely outperform a traditional convertible of similar maturity and which is convertible into that stock during periods when Treasury instruments outperform corporate fixed income securities and underperform during periods when corporate fixed-income securities outperform Treasury instruments. 5 Warrants The Fund may invest in warrants, which are securities permitting, but not obligating, the warrant holder to subscribe for other securities. Buying a warrant does not make the Fund a shareholder of the underlying stock. The warrant holder has no right to dividends or votes on the underlying stock. A warrant does not carry any right to assets of the issuer, and for this reason investment in warrants may be more speculative than other equity-based investments. Derivatives The Fund may use instruments referred to as Derivatives. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency or an index (a measure of value or rates, such as the Standard & Poor's 500 Index or the prime lending rate). Derivatives allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a strategy in which a Derivative is used to offset the risk that other Fund holdings may decrease in value. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. The Fund may use Derivative instruments and trading strategies including the following: Indexed and Inverse Securities The Fund may invest in securities the potential return of which is based on an index. As an illustration, the Fund may invest in a debt security that pays interest based on the current value of an interest rate index, such as the prime rate. The Fund may also invest in a debt security which returns principal at maturity based on the level of a securities index or a basket of securities, or based on the relative changes of two indices. In addition, the Fund may invest in securities the potential return of which is based inversely on the change in an index (that is, a security the value of which will move in the opposite direction of changes to an index). For example, the Fund may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant index or indices. Indexed and inverse securities involve credit risk, and certain indexed and inverse securities may involve currency risk, leverage risk and liquidity risk. The Fund may invest in indexed and inverse securities for hedging purposes only, including anticipatory hedging. When used for hedging purposes, indexed and inverse securities involve correlation risk. Options on Securities and Securities Indices Purchasing Put Options. The Fund may purchase put options on securities held in its portfolio or on securities or interest rate indices which are correlated with securities held in its portfolio. When the Fund purchases a put option, in consideration for an up front payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the 6 portfolio holdings than would have been realized without the purchase of the put. Purchasing a put option may involve correlation risk, and may also involve liquidity and credit risk. Purchasing Call Options. The Fund may also purchase call options on securities it intends to purchase or securities or interest rate indices, which are correlated with the types of securities it intends to purchase. When the Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. Purchasing a call option involves correlation risk, and may also involve liquidity and credit risk. The Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. However, the Fund will not purchase options on securities if, as a result of such purchase, the aggregate cost (option plus premiums paid) of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Writing Call Options. The Fund may write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which correlates with securities held in its portfolio. When the Fund writes a call option, in return for an option premium, the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. Writing a call option may involve correlation risk. Writing Put Options. The Fund may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options -- for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called 7 a "spread"). Writing a put option may involve substantial leverage risk. The Fund may not write covered put options on underlying securities exceeding 50% of its total assets, taken at market value. The Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased. Other than with respect to closing transactions, the Fund will only write call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in "Risk Factors in Derivatives" below. A call option will also be considered covered if the Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of an option on a securities index, securities which substantially correlate with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. Types of Options. The Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater liquidity risk. See "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives" below. Futures The Fund may engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk. The sale of a futures contract limits the Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect the Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. The Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying asset is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). The Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool" under regulations of the Commodity Futures Trading Commission. Foreign Exchange Transactions The Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options 8 thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar. Forward Foreign Exchange Transactions. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. The Fund may enter into a forward foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. The Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. The Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and liquidity risk. Currency Futures. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts. See "Futures" above. Currency futures involve substantial currency risk, and also involve leverage risk. Currency Options. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives" below. Currency options involve substantial currency risk, and may also involve credit, leverage or liquidity risk. Limitations on Currency Hedging. The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged. Risk Factors in Hedging Foreign Currency Risks. Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated 9 that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. Risk Factors in Derivatives Derivatives are volatile and involve significant risks, including: Credit risk -- the risk that the counterparty on a Derivative transaction will be unable to honor its financial obligation to the Fund. Currency risk -- the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment. Leverage risk -- the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. Liquidity risk -- the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. Use of Derivatives for hedging purposes involves correlation risk. If the value of the Derivative moves more or less than the value of the hedged instruments the Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. The Fund intends to enter into transactions involving Derivatives only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Derivative without incurring substantial losses, if at all. Certain transactions in Derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Fund to potential losses which exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives Certain Derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. Because Derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Derivatives traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement. 10 Other Investment Policies and Practices Repurchase Agreements. The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the bank or primary dealer or an affiliate thereof agrees, on entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. Such agreements usually cover short periods, such as under a week. The Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of a default by the seller, the Fund ordinarily will retain ownership of the securities underlying the repurchase agreement, and instead of a contractually fixed rate of return, the rate of return to the Fund shall be dependent upon intervening fluctuations of the market value of such securities and the accrued interest on the securities. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. The Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the securities underlying a repurchase agreement in the event of the counterparty's default. From time to time the Fund also may invest in securities pursuant to purchase and sale contracts. While purchase and sale contracts are similar to repurchase agreements, purchase and sale contracts are structured so as to be in substance more like a purchase and sale of the underlying security than is the case with repurchase agreements. When Issued Securities and Delayed Delivery Transactions. The Fund may purchase or sell securities on a delayed delivery basis or a when issued basis at fixed purchase terms. These transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future. The purchase will be recorded on the date the Fund enters into the commitment and the value of the obligation will thereafter be reflected in the calculation of the Fund's net asset value. The value of the obligation on the delivery date may be more or less than its purchase price. A separate account of the Fund will be established with its custodian consisting of cash, cash equivalents or high grade, liquid debt securities having a market value at all times at least equal to the amount of the forward commitment. Illiquid or Restricted Securities. The Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund's assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund's operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments. The Fund may invest in securities that are not registered under the Securities Act of 1933, as amended (the "Securities Act") or otherwise have contractual or legal restrictions on their resale ("restricted securities"). These include "private placement" securities that the Fund may buy directly from the issuer. Restricted securities may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be 11 required to bear the expenses of registration. Certain of the Fund's investments in private placements may consist of direct investments and may include investments in smaller, less-seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material non-public information which may restrict the Fund's ability to conduct portfolio transactions in such securities. 144A Securities. The Fund may purchase restricted securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act. The Board of Directors has determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund's Board. The Board has adopted guidelines and delegated to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will continue to develop, the Board will carefully monitor the Fund's investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities. Investment Restrictions In addition to the investment restrictions set forth in the Prospectus, the Fund has adopted a number of fundamental and non-fundamental investment policies and restrictions. The fundamental policies and restrictions set forth below may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). Unless otherwise provided, all references to the assets of the Fund below are in terms of current market value. The Fund may not: 1. Make any investment inconsistent with the Fund's classification as a diversified company under the Investment Company Act. 2. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). 3. Make investments for the purpose of exercising control or management. 4. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. 6. Issue senior securities to the extent such issuance would violate applicable law. 7. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 20% of its total assets (including the amount borrowed), (ii) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in its Prospectus and Statement of 12 Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 8. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act in selling portfolio securities. 9. Purchase or sell commodities or contracts on commodities, except to the extent that the Fund may do so in accordance with applicable law and the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. Notwithstanding fundamental investment restriction (7) above, the Fund currently does not intend to borrow amounts in excess of 33 1/3 % of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. In addition, the Fund will not purchase securities while borrowings are outstanding. The Fund has also adopted non-fundamental investment restrictions, which may be changed by the Board of Directors without shareholder approval. Under the non-fundamental restrictions, the Fund may not: a. Purchase securities of other investment companies, except to the extent permitted by applicable law. As a matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment Company Act, at any time its shares are owned by another investment company that is part of the same group of investment companies as the Fund. b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund currently does not intend to engage in short sales, except short sales "against the box." c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors of the Fund have otherwise determined to be liquid pursuant to applicable law. d. Notwithstanding fundamental investment restriction (7) above, borrow amounts in excess of 20% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. Securities Lending. Subject to investment restriction (5) above, the Fund may from time to time lend securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States Government which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Such cash collateral will be invested in short-term securities, which will increase the current income of the Fund. Such loans will be terminable at any time. The Fund will have the right to regain record ownership of loaned securities to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. The Fund may pay reasonable fees to persons unaffiliated with the Fund for services in arranging such loans. With respect to the lending of portfolio securities, there is the risk of failure by the borrower to return the securities involved in such transactions. The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by 13 the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceed 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if an OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Board of Directors of the Fund without the approval of the Fund's shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position. Because of the affiliation of Merrill Lynch, Pierce, Fenner and Smith Incorporated ("Merrill Lynch") with the Manager, the Fund is prohibited from engaging in certain transactions involving Merrill Lynch or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions pursuant to an exemptive order under the Investment Company Act. See "Portfolio Transactions and Brokerage." Without such an exemptive order the Fund would be prohibited from engaging in portfolio transactions with Merrill Lynch or any of its affiliates acting as principal. Portfolio Turnover While the Fund generally does not expect to engage in trading for short-term gains, it will effect portfolio transactions without regard to a holding period if, in its management's judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. Higher portfolio turnover involves tax consequences for investors and correspondingly greater transaction costs in the form of the dealer spreads and brokerage commissions, which are borne directly by the Fund. 14 MANAGEMENT OF THE FUND Directors and Officers The Directors of the Fund consist of seven individuals, five of whom are not "interested persons" of the Fund as defined in the Investment Company Act (the "non-interested Directors"). The Directors are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act. Information about the Directors, executive officers and the portfolio manager of the Fund, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Director, executive officer and the portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011. TERRY K. GLENN (60) -- President and Director(1)(2) -- Executive Vice President of the Manager and Fund Asset Management, L.P. ("FAM") (which terms as used herein include their corporate predecessors) since 1983; Executive Vice President and Director of Princeton Services Inc. ("Princeton Services") since 1993; President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988. JOE GRILLS (65) -- Director(2)(3) -- P.O. Box 98, Rapidan, Virginia 22733. Member of the Committee of Investment of Employee Benefit Assets of the Financial Executives Institute (now associated with the Association of Financial Professionals) ("CIEBA") since 1986; Member of CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Incorporated ("IBM") and Chief Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committees of the State of New York Common Retirement Fund and the Howard Hughes Medical Institute since 1997; Director, Duke Management Company since 1992 and elected Vice Chairman in May 1998; Director, LaSalle Street Fund since 1995; Director, Hotchkis and Wiley Mutual Funds since 1996; Director, Kimco Realty Corporation since January 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998; Director, Montpelier Foundation since 1998 and its Vice Chairman since 2000; Member of Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000. WALTER MINTZ (71) -- Director(2)(3) -- 1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Associates (investment partnership) since 1982. ROBERT S. SALOMON, JR. (64) -- Director(2)(3) -- 106 Dolphin Cove Quay, Stamford, Connecticut 06902. Principal of STI Management (investment adviser) since 1994; Trustee, Commonfund since 1980; Chairman and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers equity mutual funds from 1992 until 1995; regular columnist with Forbes magazine since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991. MELVIN R. SEIDEN (70) -- Director(2)(3) -- 780 Third Avenue, Suite 2502, New York, New York 10017. Director of Silbanc Properties, Ltd. (real estate, investment and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc. (private investment firm) from 1964 to 1987. STEPHEN B. SWENSRUD (67) -- Director(2)(3) -- 88 Broad Street, 2nd Floor, Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since 1996; Principal, Fernwood Associates (financial consultant) since 1975; Chairman of RPP Corporation since 1978; Director of International Mobile Communications, Inc. since 1998. ARTHUR ZEIKEL (68) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New Jersey 07090. Chairman of the Manager and FAM from 1997 to 1999; President of the Manager and FAM from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999, Director thereof from 1993 to 1999; President thereof from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to 1999. 15 ROBERT C. DOLL (46) -- Senior Vice President(1)(2) -- Senior Vice President of the Manager and FAM since 1999; Senior Vice President of Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999. LAWRENCE R. FULLER (59) -- Senior Vice President and Portfolio Manager(1) -- First Vice President of the Manager since 1997 and Vice President of the Manager from 1992 to 1997. THOMAS J. VERAGE (59) -- Senior Vice President(1)(2) -- First Vice President of the Manager since 1997 and Assistant Equity Funds Investment Officer thereof since 1994. DONALD C. BURKE (40) -- Vice President and Treasurer(1)(2) -- First Vice President of the Manager and FAM since 2000; Treasurer of the Manager and FAM since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; Senior Vice President of the Manager from 1999 to 2000; First Vice President of the Manager from 1997 to 1999; Vice President of the Manager from 1990 to 1997; Director of Taxation of the Manager since 1990. ALLAN J. OSTER (37) -- Secretary(1)(2) -- Vice President (Legal Advisory) of MLIM since 2000; Attorney associated with the Manager and FAM since 1999; Associate, Drinker Biddle & Reath LLP from 1996 to 1999; Senior Counsel, U.S. Securities and Exchange Commission from 1991 to 1996. 1. Interested Person, as defined in the Investment Company Act, of the Fund. 2. Such Director or officer is a director, trustee or officer of one or more investment companies for which the Manager, or its affiliate FAM, acts as investment adviser or manager. 3. Member of the Fund's Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Directors. As of November 1, 2000, the Directors and officers of the Fund as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director and an officer of the Fund, and the other officers of the Fund owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co. Compensation of Directors The Fund pays each non-interested Director a fee of $6,000 per year plus $1,000 per meeting attended. The Fund also compensates each member of the Audit and Nominating Committee (the "Committee"), which consists of all the non-interested Directors, at a rate of $6,000 per year plus $1,000 for each Committee meeting attended. The Fund reimburses each non-interested Director for his out-of-pocket expenses relating to attendance at Board and Committee meetings. The following table shows the compensation earned by the non-interested Directors for the fiscal year ended August 31, 2000 and the aggregate compensation paid to them from all registered investment companies advised by the Manager and its affiliate, FAM ("MLIM/FAM-advised funds"), for the calendar year ended December 31, 1999.
Aggregate Pension or Estimated Compensation from Retirement Benefits Annual Fund and Other Position with Compensation Accrued as Part of Benefits upon MLIM/FAM- Name Fund From Fund Fund Expense Retirement Advised Funds(1) - ---------------------------- -------------- ------------- -------------------- ---------------- ---------------------- Joe Grills Director $20,000 None None $245,250 Walter Mintz Director $20,000 None None $211,250 Robert S. Salomon, Jr. Director $20,000 None None $211,250 Melvin R. Seiden Director $20,000 None None $211,250 Stephen B. Swensrud Director $20,000 None None $232,250 - ---------------
1. The Directors serve on the boards of MLIM/FAM-advised funds as follows: Joe Grills (32 registered investment companies consisting of 54 portfolios), Walter Mintz (18 registered investment companies consisting of 40 portfolios), Robert S. Salomon, Jr. (18 registered investment companies consisting of 40 portfolios), Melvin R. Seiden (18 registered investment companies consisting of 40 portfolios), Stephen B. Swensrud (44 registered investment companies consisting of 91 portfolios). 16 Directors of the Fund may purchase Class A shares of the Fund at net asset value. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares -- Reduced Initial Sales Charge -- Purchase Privilege of Certain Persons." Management and Advisory Arrangements Management Services. The Manager provides the Fund with investment advisory and management services. Subject to the supervision of the Directors, the Manager is responsible for the actual management of the Fund's portfolio and constantly reviews the Fund's holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Fund. Management Fee. The Fund has entered into an investment management agreement with the Manager (the "Management Agreement"), pursuant to which the Manager receives for its services to the Fund monthly compensation at the annual rate of 0.65% of the average daily net assets of the Fund not exceeding $1 billion, 0.625% of the average daily net assets in excess of $1 billion but not exceeding $1.5 billion, 0.60% of the average daily net assets in excess of $1.5 billion but not exceeding $5 billion and 0.575% of the average daily net assets in excess of $5 billion. The table below sets forth information about the total investment advisory fees paid by the Fund to the Manager for the periods indicated. Fiscal Year Ended August 31, Investment Advisory Fee ---------------------------- ----------------------- 2000 $31,124,064 1999 $16,601,840 1998 $4,761,601 The Manager has entered into a sub-advisory agreement (the "Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services to the Manager with respect to the Fund. For the fiscal years ended August 31, 2000, 1999 and 1998, the Manager paid no fees to MLAM U.K. pursuant to this agreement. Payment of Fund Expenses. The Management Agreement obligates the Manager to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of the Manager. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes; expenses for legal and auditing services, costs of preparing, printing and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; charges of the custodian and sub-custodian, and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal, state or foreign laws; fees and expenses of non-interested Directors; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Accounting services are provided for the Fund by the Manager and the Fund reimburses the Manager for its costs in connection with such services. The Distributor will pay certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses will be financed by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of Shares -- Distribution Plans." Organization of the Manager. The Manager is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are "controlling persons" of the Manager as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its management or policies. 17 The following entities may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co. Duration and Termination. Unless earlier terminated as described herein, the Management Agreement and Sub-Advisory Agreement will continue in effect from year to year if approved annually (a) by the Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days' written notice at the option of either party or by vote of the shareholders of the Fund. Transfer Agency Services. Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B or Class C account and is entitled to reimbursement for certain transaction charges and out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge will be assessed on all accounts which close during the calendar year. Application of this fee will commence the month following the month the account is closed. At the end of the calendar year, no further fees will be due. For purposes of the Transfer Agency Agreement, the term "account" includes a shareholder account maintained directly by the Transfer Agent and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system, provided the recordkeeping system is maintained by a subsidiary of ML & Co. Distribution Expenses. The Fund has entered into a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund (the "Distribution Agreement"). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Management Agreement described above. Code of Ethics The Board of Directors of the Fund has approved a Code of Ethics under Rule 17j-1 of the Investment Company Act that covers the Fund, its adviser and its distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the Fund. PURCHASE OF SHARES Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus. The Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM) System: shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Each Class A, Class B, Class C or Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges ("CDSCs"), 18 distribution fees and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services - -- Exchange Privilege." Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. The Merrill Lynch Select Pricing(SM) System is used by more than 50 registered investment companies advised by MLIM or FAM. Funds advised by MLIM or FAM that use the Merrill Lynch Select Pricing(SM) System are referred to herein as "Select Pricing Funds." The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers or other financial intermediaries prior to the close of business on the New York Stock Exchange (the "NYSE") (generally 4:00 p.m., Eastern time) which includes orders received after the determination of the net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or other financial intermediaries have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE in order to purchase shares at that day's offering price. The Fund or the Distributor may suspend the continuous offering of the Fund's shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Fund or the Distributor. Neither the Distributor, the dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $5.35) to confirm a sale of shares to such customers. Purchases made directly through the Transfer Agent are not subject to the processing fee. Initial Sales Charge Alternatives -- Class A and Class D Shares Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because 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 who previously purchased Class A shares may no longer be eligible to purchase Class A shares of other Select Pricing Funds, those previously purchased 19 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 charge on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares. The term "purchase," as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term "purchase" also includes purchases by any "company, " as that term is defined in the Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. Eligible Class A Investors Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors who currently own Class A shares in a shareholder account, including participants in the Merrill Lynch Blueprint(SM) Program, are entitled to purchase additional Class A shares of the Fund in that account. Certain employer-sponsored retirement or savings plans, including eligible 401(k) plans, may purchase Class A shares at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by the Manager or any of its affiliates. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs and U.S. branches of foreign banking institutions provided that the program or bank has $3 million or more initially invested in Select Pricing Funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company serves as trustee and certain purchases made in connection with certain fee-based programs. In addition, Class A shares are offered at net asset value to ML & Co. and its subsidiaries and their directors and employees and to members of the Boards of MLIM/FAM-advised investment companies. Certain persons who acquired shares of certain MLIM/FAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions are met. In addition, Class A shares of the Fund and certain other Select Pricing Funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds in shares of the Fund and certain other Select Pricing Funds. 20
Class A and Class D Sales Charge Information Class A Shares - ------------------------------------------------------------------------------------------------------ For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on Ended Charges Retained by Paid to Redemptioin of August 31, Collected Distributor Merrill Lynch Load-Waived Shares - ------------------- ---------- ------------ ------------- ------------------ 2000 $18,568 $1,264 $17,304 $198,968 1999 $ 7,247 $ 871 $ 6,376 $ 0 1998 $14,787 $1,019 $13,768 $ 0 Class D Shares - ------------------------------------------------------------------------------------------------------ For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on Ended Charges Retained by Paid to Redemptioin of August 31, Collected Distributor Merrill Lynch Load-Waived Shares - ------------------- ---------- ------------ ------------- ------------------ 2000 $1,350,171 $85,151 $1,265,020 $54,503 1999 $1,046,275 $67,018 $ 979,257 $ 0 1998 $ 660,062 $43,898 $ 616,164 $ 0
The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act. Reduced Initial Sales Charges Reductions in or exemptions from the imposition of a sales charge are due to the nature of the investors and/or the reduced sales efforts that will be needed to obtain such investments. Reinvested Dividends. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends. Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of shares of the Fund and of any other Select Pricing Funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intent. Reduced sales charges are applicable to purchases aggregating $25,000 or more of the Class A or Class D shares of the Fund or any Select Pricing Funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intent. The Letter of Intent is available only to investors whose accounts are established and maintained at the Fund's Transfer Agent. The Letter of Intent is not available to employee benefit plans for which Merrill Lynch provides plan participant recordkeeping services. The Letter of Intent is not a binding obligation to purchase any amount of Class A or Class D shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Fund and of other Select Pricing Funds presently held, at cost or maximum offering 21 price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to at least 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the further reduced percentage sales charge that would be applicable to a single purchase equal to the total dollar value of the Class A or Class D shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charge on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intent from the Fund. Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In addition, participants in Blueprint who own Class A shares of the Fund may purchase additional Class A shares of the Fund through Blueprint. The Blueprint program is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions, trade associations and benefit plans. Investors placing orders to purchase Class A or Class D shares of the Fund through Blueprint will acquire the Class A or Class D shares at net asset value plus a sales charge calculated in accordance with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 up to $5,000 at 3.25% plus $3, and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class A or Class D shares of the Fund are being offered at net asset value plus a sales charge of 0.50% of 1% for corporate or group IRA programs placing orders to purchase their Class A or Class D shares through Blueprint. Services, including the exchange privilege, available to Class A and Class D investors through Blueprint, however, may differ from those available to other investors in Class A or Class D shares. Class A and Class D shares are offered at net asset value to participants in Blueprint through the Merrill Lynch Directed IRA Rollover Program (the "IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian rollover assets from employer-sponsored retirement and savings plans (as defined below) whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service Agreement. Orders for purchases and redemptions of Class A or Class D shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. TMA(SM) Managed Trusts. Class A shares are offered at net asset value to TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services. Employee Access(SM) Accounts. Provided applicable threshold requirements are met, either Class A or Class D shares are offered at net asset value to Employee Access(SM) Accounts available through authorized employers. The initial minimum investment for such accounts is $500, except that the initial 22 minimum investment for shares purchased for such accounts pursuant to the Automatic Investment Program is $50. Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class A or Class D shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at 1-800-237-7777. Purchase Privilege of Certain Persons. Directors of the Fund, members of the Boards of other MLIM/FAM-advised investment companies, ML & Co. and its subsidiaries (the term "subsidiaries," when used herein with respect to ML & Co., includes MLIM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML & Co.) and their directors and employees, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund's suitability standards. Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Financial Consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the Financial Consultant's previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis; and, second, the investor must establish that such redemption had been made within 60 days prior to the investment in the Fund and the proceeds from the redemption had been maintained in the interim in cash or a money market fund. Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("notice") if the following conditions are satisfied: first, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and the shares of such other fund were subject to a sales charge either at the time of purchase or on a deferred basis; and, second, such purchase of Class D shares must be made within 90 days after such notice. Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of shares of such other mutual fund and that such shares have been outstanding for a period of no less than six months; and, second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund. Acquisition of Certain Investment Companies. Class D shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. Purchases Through Certain Financial Intermediaries. Reduced sales charges may be applicable for purchases of Class A or Class D shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager from time to time. 23 Deferred Sales Charge Alternatives -- Class B and Class C Shares Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Select Pricing Funds. Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees. The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See "Pricing of Shares -- Determination of Net Asset Value" below. Contingent Deferred Sales Charges -- Class B Shares Class B shares that are redeemed within four years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the four-year period. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. The following table sets forth the Class B CDSC: CDSC as a Percentage of Dollar Amount Year Since Purchase Payment Made Subject to Charge -------------------------------- -------------------- 0-1 4.0% 1-2 3.0% 2-3 2.0% 3-4 1.0% 4 and thereafter None To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because of dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the applicable rate in the third year after purchase). The Class B CDSC may be waived on redemptions of shares in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability (as defined in the Internal Revenue Code of 1986, as amended) of a shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability or, if later, 24 reasonably promptly following completion of probate. The Class B CDSC also may be waived on redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also be waived for any Class B shares that are purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The Class B CDSC may also be waived for any Class B shares that are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan managed by the MLIM Private Portfolio Group and held in such account at the time of redemption. The Class B CDSC may also be waived or its terms may be modified in connection with certain fee-based programs. The Class B CDSC may also be waived in connection with involuntary termination of an account in which Fund shares are held or for withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs" and "-- Systematic Withdrawal Plan." Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class B shares with a waiver of the CDSC upon redemption, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Such Class B shares will convert into Class D shares approximately ten years after the plan purchases the first share of any Select Pricing Fund. Minimum purchase requirements may be waived or varied for such plans. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at 1-800-237-7777. Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain participants in Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as trade associations and credit unions. Class B shares of the Fund are offered through Blueprint only to members of certain affinity groups. The CDSC is waived in connection with purchase orders placed through Blueprint. Services, including the exchange privilege, available to Class B investors through Blueprint, however, may differ from those available to other Class B investors. Orders for purchases and redemptions of Class B shares of the Fund will be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of a Blueprint automatic investment plan. Additional information concerning these Blueprint programs, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. Conversion of Class B Shares to Class D Shares. After approximately eight years (the "Conversion Period"), Class B shares will be converted automatically into Class D shares of the Fund. Class D shares are subject to an ongoing account maintenance fee of 0.25% of average daily net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the "Conversion Date") on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. You should consult your tax advisor regarding the state and local tax consequences. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at the Conversion Date the conversion of Class B shares to Class D shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the Fund. In general, Class B shares of equity Select Pricing Funds will convert approximately eight years after initial purchase and Class B shares of taxable and tax-exempt fixed income Select Pricing Funds will 25 convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified for investors that participate in certain fee-based programs. See "Shareholder Services -- Fee-Based Programs." Class B shareholders of the Fund exercising the exchange privilege described under "Shareholder Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered. Contingent Deferred Sales Charges -- Class C Shares Class C shares that are redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. The Class C CDSC may be waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services -- Systematic Withdrawal Plan." Class B and Class C Sales Charge Information Class B Shares* ------------------------------------------------------------------- For the Fiscal Year CDSCs Received CDSCs Paid to Ended August 31, by Distributor Merrill Lynch ------------------- -------------- ------------- 2000 $2,803,938 $2,803,938 1999 $1,984,060 $1,984,060 1998 $ 509,105 $ 509,105 - ----------------- * Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder's participation in certain fee-based programs. Class C Shares ------------------------------------------------------------------- For the Fiscal Year CDSCs Received CDSCs Paid to Ended August 31, by Distributor Merrill Lynch ------------------- -------------- ------------- 2000 $113,340 $113,340 1999 $ 72,553 $ 72,553 1998 $ 22,666 $ 22,666 Merrill Lynch compensates its Financial Consultants for selling Class B and Class C shares at the time of purchase from its own funds. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers or other financial intermediaries (including Merrill Lynch) related to providing distribution-related services to the 26 Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares from a dealer's own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. See "Distribution Plans" below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities Dealers, Inc. ("NASD") asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. Closed-End Fund Reinvestment Option Class A shares of the Fund and certain other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset value to shareholders of certain closed-end funds advised by FAM or MLIM who purchased such closed-end fund shares prior to October 21, 1994 (the date the Merrill Lynch Select Pricing(SM) System commenced operations) and wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in Eligible Class A Shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to buy Class A shares) or Class D shares of the Fund and other Select Pricing Funds ("Eligible Class D Shares"), if the following conditions are met. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Eligible Class D Shares. Second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Shareholders of certain MLIM/FAM-advised continuously offered closed-end funds may reinvest at net asset value the net proceeds from a sale of certain shares of common stock of such funds in shares of the Fund. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund, shareholders of Merrill Lynch Senior Floating Rate II, Inc. will receive Class C shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except that shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. already owning Class A shares of the Fund will be eligible to purchase additional Class A shares pursuant to this option, if such additional Class A shares will be held in the same account as the existing Class A shares and the other requirements pertaining to the reinvestment privilege are met. In order to exercise this investment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an "eligible fund") must sell his or her shares of common stock of the eligible fund (the "eligible shares") back to the eligible fund in connection with a tender offer conducted by the eligible fund and reinvest the proceeds immediately in the designated class of shares of the Fund. This investment option is available only with respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is applicable. Purchase orders from eligible fund shareholders wishing to exercise this investment option will be accepted only on the day that the related tender offer terminates and will be effected at the net asset value of the designated class of the Fund on such day. The Class C CDSC may be waived upon redemption of Class C shares purchased by an investor pursuant to this closed-end fund investment option. Such waiver is subject to the requirement that the tendered shares shall have been held by the investor for a minimum of one year and to such other conditions as are set forth in the prospectus for the related closed-end fund. Distribution Plans Reference is made to "Fees and Expenses" in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. 27 The Distribution Plans for Class B, Class C and Class D shares each provides that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class B, Class C and Class D shares. Each of those classes has exclusive voting rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan). The Distribution Plans for Class B and Class C shares each provides that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services and bearing certain distribution-related expenses of the Fund, including payments to financial consultants or other financial intermediaries for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through selected securities dealers and other financial intermediaries without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants, selected securities dealers or other financial intermediaries in connection with the sale of the Class B and Class C shares. The Fund's Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and each related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Directors shall be committed to the discretion of the non-interested Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that each Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the non-interested Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders and all material amendments are required to be approved by the vote of Directors, including a majority of the non-interested Directors who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of the Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Distribution Plan or such report, the first two years in an easily accessible place. Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans annually, as of December 31 of each year, on a "fully allocated accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On the fully allocated accrual basis, revenues consist of the account maintenance fees, distribution fees, the CDSCs and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and 28 revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and CDSCs and the expenses consist of financial consultant compensation. As of December 31, 1999, the fully allocated accrual revenues of the Distributor and Merrill Lynch for the period since the commencement of operations of Class B shares exceeded fully allocated accrual expenses by approximately $15,459,000 (.60% of Class B net assets at that date). As of August 31, 2000, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $83,424,129 (2.95% of Class B net assets at that date). As of December 31, 1999, the fully allocated accrual revenues of the Distributor and Merrill Lynch for the period since the commencement of operations of Class C shares exceeded the fully allocated accrual expenses by approximately $695,000 (.17% of Class C net assets at that date). As of August 31, 2000, direct cash revenues for the period since the commencement of operations of Class C shares exceeded direct cash expenses by $6,622,426 (1.06% of Class C net assets at that date). For the fiscal year ended August 31, 2000, the Fund paid the Distributor $27,067,662 pursuant to the Class B Distribution Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $2.7 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 August 31, 2000, the Fund paid the Distributor $4,434,385 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of approximately $443.4 million), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class C shares. For the fiscal year ended August 31, 2000, the Fund paid the Distributor $3,188,884 pursuant to the Class D Distribution Plan (based on average daily net assets subject to such Class D Distribution Plan of approximately $1.3 billion), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class D shares. Limitations on the Payment of Deferred Sales Charges The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the "voluntary maximum") in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made. The following table sets forth comparative information as of August 31, 2000 with respect to the Class B and Class C shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and, with respect to the Class B shares, the Distributor's voluntary maximum. 29
Data Calculated as of August 31, 2000 --------------------------------------------------------------------------------------------- (In thousands) Annual Allowable Distribution Interest Amount Fee at Allowable on Previously Current Eligible Aggregate Unpaid Maximum Paid to Aggregate Net Gross Sales Balance Amount Distributor Unpaid Asset Sales(1) Charge(2) (3) Payable (4) Balance Level(5) -------- --------- -------- ------- ----------- --------- ------------ Class B Shares for the period October 21, 1994 (commencement of operations) to August 31, 2000 Under NASD Rule as Adopted $2,474,874 $159,311 $93,322 $252,633 $100,390 $152,243 $25,566 Under Distributor's Voluntary Waiver $2,474,874 $154,680 $12,374 $167,054 $100,390 $ 66,664 $25,566 Class C Shares for the period December 24, 1992 (commencement of operations) to August 31, 2000 Under NASD Rule as Adopted $ 371,668 $ 23,772 $ 3,246 $ 27,018 $ 7,763 $ 19,255 $ 4,688 - ---------------------------- 1. Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares acquired through dividend reinvestment and the exchange privilege. 2. Includes amounts attributable to exchanges from Summit Cash Reserves Fund ( "Summit") which are not reflected in Eligible Gross Sales. Shares of Summit can only be purchased by exchange from another fund (the "redeemed fund"). Upon such an exchange, the maximum allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption. This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made. 3. Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule. 4. Consists of CDSC payments, distribution fee payments and accruals. 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 "What are the Fund's fees and expenses?" in the Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in Class A shares in conjunction with the shareholder's participation in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA Program. 5. Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus. The Fund is required to redeem for cash all shares of the Fund upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption. The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than seven days only for any period during which trading on the New York Stock Exchange ("NYSE") is restricted as determined by the Commission or the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of the Fund. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending in part on the market value of the securities held by the Fund at such time. 30 The Fund has entered into a joint committed line of credit with other investment companies advised by the Manager and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances. Redemption A shareholder wishing to redeem shares held with the Transfer Agent may do so without charge by tendering the shares directly to the Transfer Agent at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. Redemption requests should not be sent to the Fund. The redemption request in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent's register. The signature(s) on the redemption requests may require a guarantee by an "eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. In the event a signature guarantee is required, notarized signatures are not sufficient. In general, signature guarantees are waived on redemptions of less than $50,000 as long as the following requirements are met: (i) all requests require the signature(s) of all persons in whose name(s) shares are recorded on the Transfer Agent's register; (ii) all checks must be mailed to the stencil address of record on the Transfer Agent's register and (iii) the stencil address must not have changed within 30 days. Certain rules may apply regarding certain account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship, contra broker transactions, and institutional accounts. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. A shareholder may also redeem shares held with the Transfer Agent by telephone request. To request a redemption from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder of record and be for an amount less than $50,000. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The shares being redeemed must have been held for at least 15 days. Telephone redemption requests will not be honored in the following situations: the accountholder is deceased, the proceeds are to be sent to someone other than the shareholder of record, funds are to be wired to the client's bank account, a systematic withdrawal plan is in effect, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced, the address on the account has changed within the last 30 days or share certificates have been issued on the account. Since this account feature involves a risk of loss from unauthorized or fraudulent transactions, the Transfer Agent will take certain precautions to protect your account from fraud. Telephone redemption may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time. For shareholders redeeming directly with the Transfer Agent, payments will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of such Fund shares, which will usually not exceed 10 days. In the event that a shareholder account held directly with the Transfer Agent contains a fractional share balance, such fractional share balance will be automatically redeemed by the Fund. 31 Repurchase The Fund also will repurchase Fund shares through a shareholder's listed selected securities dealer or other financial intermediary. The Fund normally will accept orders to repurchase Fund shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary within fifteen minutes after the regular close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the day received, and such request is received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the close of business on the NYSE, in order to obtain that day's closing price. The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch, selected securities dealers or other financial intermediaries may charge customers a processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase of shares to such customers. Repurchases made directly through the Transfer Agent on accounts held at the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. However, a shareholder whose order for repurchase is rejected by the Fund may redeem Fund shares as set forth above. Reinstatement Privilege -- Class A and Class D Shares Shareholders who have redeemed their Class A or Class D shares of the Fund have a privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor's Merrill Lynch Financial Consultant within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. PRICING OF SHARES Determination of Net Asset Value Reference is made to "How Shares are Priced" in the Prospectus. The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Manager and Distributor, are accrued daily. The per share net asset value of Class B, Class C and Class D shares generally will be lower than the per share net asset value of Class A shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C 32 shares, and the daily expense accruals of the account maintenance fees applicable with respect to the Class D shares; moreover, the per share net asset value of the Class B and Class C shares generally will be lower than the per share net asset value of Class D shares reflecting the daily expense accruals of the distribution fees and higher transfer agency fees applicable with respect to Class B and Class C shares of the Fund. It is expected, however, that the per share net asset value of the four classes will tend to converge (although not necessarily meet) immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differentials between the classes. Portfolio securities including ADRs and EDRs that are traded on stock exchanges are valued at the last sale price (regular way) on the exchange on which such securities are traded as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available ask price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Directors as the primary market. Long positions in securities traded in the OTC market are valued at the last available bid price in the OTC market prior to the time of valuation. Short positions in securities traded in the OTC market are valued at the last available ask price in the OTC market prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Other investments, including financial futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Directors of the Fund. Such valuations and procedures will be reviewed periodically by the Directors. Generally, trading in foreign securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that will not be reflected in the computation of the Fund's net asset value. Computation of Offering Price Per Share An illustration of the computation of the offering price for Class A, Class B, Class C and Class D shares of the Fund based on the value of the Fund 's net assets and number of shares outstanding on August 31, 2000 is set forth below.
Class A Class B Class C Class D ----------- -------------- ----------- -------------- Net Assets $882,072,040 $3,411,474,588 $627,021,108 $1,712,700,627 ------------ -------------- ------------ -------------- Number of Shares Outstanding 29,418,341 121,559,761 22,184,399 57,798,298 ------------ -------------- ------------ -------------- Net Asset Value Per Share (net assets divided by number of shares outstanding) $29.98 $28.06 $28.26 $29.63 Sales Charge (for Class A and Class D shares: 5.25% of offering price; 5.54% of net asset value per share)* 1.66 ** ** 1.64 ------------ -------------- ------------ -------------- Offering Price $31.64 $28.06 $28.26 $31.27 ------------ -------------- ------------ -------------- - ---------------- * Rounded to the nearest one-hundredth percent; assumes maximum sales chargeis applicable. ** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" herein.
33 PORTFOLIO TRANSACTIONS AND BROKERAGE Transactions in Portfolio Securities Subject to policies established by the Board of Directors of the Fund, the Manager is primarily responsible for the execution of the Fund's portfolio transactions and the allocation of brokerage. The Fund has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities of the Fund and does not use any particular broker or dealer. In executing transactions with brokers and dealers, the Manager seeks to obtain the best results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operations facilities of the firm and the firm's risk in positioning a block of securities. While the Manager generally seeks reasonably competitive commission rates, the Fund will not necessarily be paying the lowest spread or commission available. In addition, consistent with the Conduct Rules of the NASD and policies established by the Directors of the Fund, the Manager may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the Fund neither qualifies nor disqualifies such broker or dealer to execute transactions for the Fund. Transactions with respect to the securities of small and emerging growth companies in which the Fund may invest may involve specialized services on the part of the broker or dealer and thereby entail higher commissions or spreads than would be the case with transactions involving more widely traded securities. Subject to obtaining the best net results, brokers who provide supplemental investment research services to the Manager may receive orders for transactions by the Fund. Such supplemental research services ordinarily consist of assessments and analyses of the business or prospects of a company, industry or economic sector. Information so received will be in addition to and not in lieu of the services required to be performed by the Manager under its Management Agreement, and the expense of the Manager will not necessarily be reduced as a result of the receipt of such supplemental information. If in the judgment of the Manager the Fund will benefit from supplemental research services, the Manager is authorized to pay brokerage commissions to a broker furnishing such services that are in excess of commissions that another broker may have charged for effecting the same transaction. Certain supplemental research services may primarily benefit one or more other investment companies or other accounts for which the Manager exercises investment discretion. Conversely, the Fund may be the primary beneficiary of the supplemental research services received as a result of portfolio transactions effected for such other accounts or investment companies. The Fund anticipates that its brokerage transactions involving securities of issuers domiciled in countries other than the United States generally will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transactions costs on foreign stock exchange transactions generally are higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States. The Fund's ability and decisions to purchase and sell portfolio securities may be affected by foreign laws and regulations relating to the convertibility and repatriation of assets. Information about the brokerage commissions paid by the Fund, including commissions paid to Merrill Lynch, is set forth in the following table:
Aggregate Brokerage Commissions Paid Fiscal Year Ended August 31, 2000 Commissions Paid to Merrill Lynch --------------------------------- ------------------- ---------------- 2000 $7,457,058 $947,213 1999 $3,725,747 $336,235 1998 $ 843,807 $ 55,594
For the fiscal year ended August 31, 2000, the brokerage commissions paid to Merrill Lynch represented 12.70% of the aggregate brokerage commissions paid and involved 13.47% of the Fund's dollar amount of transactions involving payment of commissions during the year. 34 The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Fund will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which Merrill Lynch is a member or in a private placement in which Merrill Lynch serves as placement agent except pursuant to procedures approved by the Board of Directors of the Fund that either comply with rules adopted by the Commission or with interpretations of the Commission staff. See "Investment Objective and Policies -- Investment Restrictions." Section 11(a) of the Exchange Act generally prohibits members of the U.S. national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with a statement setting forth the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Fund and annual statements as to aggregate compensation will be provided to the Fund. The Board of Directors of the Fund has considered the possibility of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Fund to the Manager. After considering all factors deemed relevant, the Board of Directors made a determination not to seek such recapture. The Board will reconsider this matter from time to time. Because of different objectives or other factors, a particular security may be bought for one or more clients of the Manager or an affiliate when one or more clients of the Manager or an affiliate are selling the same security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Manager or an affiliate acts as manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Manager or an affiliate during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. SHAREHOLDER SERVICES The Fund offers a number of shareholder services and investment plans described below that are designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans and instructions as to how to participate in the various services or plans, or how to change options with respect thereto, can be obtained from the Fund, by calling the telephone number on the cover page hereof, or from the Distributor or Merrill Lynch, a selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors and certain of these services are not available to investors who place orders through the Merrill Lynch Blueprint(SM) Program. Investment Account Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as 35 transaction confirmations for automatic investment purchases and the reinvestment of dividends. The statements will also show any other activity in the account since the preceding statement. Shareholders will also receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of dividends. A shareholder with an account held at the Transfer Agent may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. A shareholder may also maintain an account through Merrill Lynch, a selected securities dealer or other financial intermediary. Upon the transfer of shares out of a Merrill Lynch brokerage account or account maintained with a selected securities dealer or other financial intermediary, an Investment Account in the transferring shareholder's name may be opened automatically at the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of a shareholder who has an Investment Account. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. Shareholders may transfer their Fund shares from Merrill Lynch, a selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement with the Distributor. Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may purchase additional shares of funds owned before the transfer and all future trading of these assets must be coordinated by the new firm. If a shareholder wishes to transfer his or her shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Distributor, the shareholder must either (i) redeem his or her shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. The shareholder may also request the new securities dealer or other financial intermediary to maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer or other financial intermediary for the benefit of the shareholder whether the securities dealer or other financial intermediary has entered into a selected dealer agreement or not. Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from Merrill Lynch to another securities dealer or other financial intermediary should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares, paying any applicable CDSC, so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares. Exchange Privilege U.S. shareholders of each class of shares of the Fund have an exchange privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund ("Summit"), a series of Financial Institutions Series Trust, which is a Merrill Lynch-sponsored money market fund specifically designated as available for exchange by holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes. Such treatment may also apply for state and local tax purposes. Exchanges of Class A and Class D Shares. Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second Select Pricing Fund if the shareholder holds any Class A shares of the second fund in the account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second Select Pricing Fund, but does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second Select Pricing 36 Fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class D shares are exchangeable with shares of the same class of other Select Pricing Funds. Exchanges of Class A or Class D shares outstanding ("outstanding Class A or Class D shares") for Class A or Class D shares of other Select Pricing Funds or for Class A shares of Summit ("new Class A or Class D shares") are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A or Class D shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class A or Class D shares on which the dividend was paid. Based on this formula, Class A and Class D shares generally may be exchanged into the Class A or Class D shares, respectively, of the other funds with a reduced sales charge or without a sales charge. Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with Class B or Class C shares outstanding ("outstanding Class B or Class C shares") offer to exchange their Class B or Class C shares for Class B or Class C shares, respectively, of certain other Select Pricing Funds or for Class B shares of Summit ("new Class B or Class C shares") on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the CDSC that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Small Cap Value Fund, Inc. ("Small Cap Value Fund") after having held the Fund's Class B shares for two and a half years. The 2% CDSC that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of Small Cap Value Fund and receive cash. There will be no CDSC due on this redemption, since by "tacking" the two and a half year holding period of Fund Class B shares to the three-year holding period for the Small Cap Value Fund Class B shares, the investor will be deemed to have held the Small Cap Value Fund Class B shares for more than five years. Exchanges for Shares of a Money Market Fund. Class A and Class D shares are exchangeable for Class A shares of Summit and Class B and Class C shares are exchangeable for Class B shares of Summit. Class A shares of Summit have an exchange privilege back into Class A or Class D shares of Select Pricing Funds; Class B shares of Summit have an exchange privilege back into Class B or Class C shares of Select Pricing Funds and, in the event of such an exchange, the period of time that Class B shares of Summit are held will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Class B shares. Class B shares of Summit will be subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Class B shares. This exchange privilege does not apply with respect to certain Merrill Lynch fee-based programs for which alternative exchange arrangements may exist. Please see your Merrill Lynch Financial Consultant for further information. Prior to October 12, 1998, exchanges from the Fund and other Select Pricing Funds into a money market fund were directed to certain Merrill Lynch-sponsored money market funds other than Summit. 37 Shareholders who exchanged Select Pricing Fund shares for such other money market funds and subsequently wish to exchange those money market fund shares for shares of the Fund will be subject to the CDSC schedule applicable to such Fund shares, if any. The holding period for those money market fund shares will not count toward satisfaction of the holding period requirement for reduction of the CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. However, the holding period for Class B or Class C shares received in exchange for such money market fund shares will be aggregated with the holding period for the original Select Pricing Fund shares for purposes of reducing the CDSC or satisfying the Conversion Period. Exchanges by Participants in the MFA Program. The exchange privilege is modified with respect to certain retirement plans which participate in the MFA Program. Such retirement plans may exchange Class B, Class C or Class D shares that have been held for at least one year for Class A shares of the same fund on the basis of relative net asset values in connection with the commencement of participation in the MFA Program, i.e., no CDSC will apply. The one year holding period does not apply to shares acquired through reinvestment of dividends. Upon termination of participation in the MFA Program, Class A shares will be re-exchanged for the class of shares originally held. For purposes of computing any CDSC that may be payable upon redemption of Class B or Class C shares so reacquired, or the Conversion Period for Class B shares so reacquired, the holding period for the Class A shares will be "tacked" to the holding period for the Class B or Class C shares originally held. The Fund's exchange privilege is also modified with respect to purchases of Class A and Class D shares by non-retirement plan investors under the MFA Program. First, the initial allocation of assets is made under the MFA Program. Then, any subsequent exchange under the MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other Select Pricing Fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA Program. Exercise of the Exchange Privilege. To exercise the exchange privilege, a shareholder should contact his or her Merrill Lynch Financial Consultant, who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other Select Pricing Funds with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealer or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application. Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To request an exchange from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the accountholder is deceased, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time. This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. Fee-Based Programs Certain fee-based programs offered by Merrill Lynch and other financial intermediaries, including pricing alternatives for securities transactions (each referred to in this paragraph as a "Program"), may permit the purchase of Class A shares at net asset value. Under specified circumstances, participants in 38 certain Programs may deposit other classes of shares which will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another financial intermediary, broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program's client agreement and from the Transfer Agent at 1-800-MER-FUND or 1-800-637-3863. Retirement and Education Savings Plans Individual retirement accounts and other retirement and education savings plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. There may be fees associated with investing through these plans. Merrill Lynch may charge 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. Dividends received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans. Different tax rules apply to Roth IRA plans and education savings plans. Investors considering participation in any retirement or education savings plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. Automatic Investment Plans A shareholder may make additions to an Investment Account at any time by purchasing Class A shares (if he or she is an eligible Class A investor) or Class B, Class C or Class D shares at the applicable public offering price. These purchases may be made either through the shareholder's securities dealer, or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Fund's Automatic Investment Plan. The Fund would be authorized, on a regular basis, to provide systematic additions to the Investment Account of such shareholder through charges of $50 or more to the regular bank account of the shareholder by either pre-authorized checks or automated clearing house debits. For investors who buy shares of the Fund through Blueprint, no minimum charge to the investor's bank account is required. Alternatively, an investor that maintains a CMA(R) or CBA(R) Account may arrange to have periodic investments made in the Fund in amounts of $100 ($1 or more for retirement accounts) or more through the CMA(R) or CBA(R) Automated Investment Program. Automatic Dividend Reinvestment Plan Unless specific instructions are given as to the method of payment, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund determined as of the close of business on the NYSE on the monthly payment date for such dividends. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends. Shareholders may, at any time, elect to have subsequent dividends or both dividends and capital gains distributions, paid in cash, rather than reinvested in shares of the Fund or vice versa (provided that, in the 39 event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). If the shareholder's account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-800-MER-FUND). For other accounts, the shareholder should contact his or her Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder's address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder's bank account. Systematic Withdrawal Plan A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders that have acquired shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more. At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and the class of shares to be redeemed. Redemptions will be made at net asset value as determined fifteen minutes after the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the shares will be redeemed as of the close of business on the NYSE on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all shares in the Investment Account are reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor. With respect to redemptions of Class B or Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Contingent Deferred Sales Charges -- Class B and Class C Shares." Where the systematic withdrawal plan is applied to Class B shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will be applied thereafter to Class D shares if the shareholder so elects. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Conversion of Class B Shares to Class D Shares." If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Merrill Lynch Financial Consultant. Withdrawal payments should not be considered as dividends. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors that maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Automatic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis 40 through the CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount redeemable is $50. The proceeds of systematic redemptions will be posted to the shareholder's account three business days after the date the shares are redeemed. All redemptions are made at net asset value. A shareholder may elect to have his or her shares redeemed on the first, second, third or fourth Monday of each month, in the case of monthly redemptions, or of every other month, in the case of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the shareholder may select the month in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automated Investment Program. For more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch Financial Consultant. DIVIDENDS AND TAXES Dividends The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such investment income will be paid at least annually. All net realized capital gains, if any, are distributed to the Fund's shareholders at least annually. Premiums from expired call options written by the Fund and net gains from closing purchase transactions are treated as short-term capital gains for Federal income tax purposes. Shareholders may elect in writing to receive any such dividends in cash. See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for information concerning the manner in which dividends may be reinvested automatically in shares of the Fund. A shareholder may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as described below, whether they are invested in shares of the Fund or received in cash. The per share dividends on Class B and Class C shares will be lower than the per share dividends on Class A and Class D shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends on Class D shares will be lower than the per share dividends on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See "Pricing of Shares -- Determination of Net Asset Value." Taxes The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). As long as the Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains that it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders "). The Fund intends to distribute substantially all of such income. The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. Dividends paid by the Fund from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from an excess of net long-term capital gains over net short-term capital losses (including gains or losses from certain transactions in options, 41 futures and warrants) ("capital gain dividends") are taxable to shareholders as long-term gains, regardless of the length of time the shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Certain categories of capital gains are taxable at different rates. Generally not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any capital gains dividends, as well as any amount of capital gains dividends in the different categories of capital gain referred to above. Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction among the Class A, Class B, Class C and Class D shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of stock) that is based on the gross income allocable to Class A, Class B, Class C and Class D shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. If the Fund pays a dividend in January that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period 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 reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning applicability of the U.S. withholding tax. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Tax Treatment of Options and Futures Transactions The Fund may write, purchase or sell options, futures and forward foreign exchange contracts. Options and futures that are "Section 1256 contracts" will be "marked to market" for Federal income tax 42 purposes at the end of each taxable year, i.e., each such option or futures contract will be treated as sold for its fair market value on the last day of the taxable year. Unless such contract is a forward foreign exchange contract, or is a non-equity option or a regulated futures contract for a non-U.S. currency for which the Fund elects to have gain or loss treated as ordinary gain or loss under Code Section 988 (as described below), gain or loss from Section 1256 contracts will be 60% long-term and 40% short-term capital gain or loss. Application of these rules to Section 1256 contracts held by the Fund may alter the timing and character of distributions to shareholders. The mark-to-market rules outlined above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of changes in price or interest rates with respect to its investments. A forward foreign exchange contract that is a Section 1256 contract will be marked to market, as described above. However, the character of gain or loss from such a contract will generally be ordinary under Code Section 988. The Fund may, nonetheless, elect to treat the gain or loss from certain forward foreign exchange contracts as capital. In this case, gain or loss realized in connection with a forward foreign exchange contract that is a Section 1256 contract will be characterized as 60% long-term and 40% short-term capital gain or loss. Code Section 1092, which applies to certain "straddles," may affect the taxation of the Fund's sales of securities and transactions in options, futures and forward foreign exchange contracts. Under Section 1092, the Fund may be required to postpone recognition for tax purposes of losses incurred in certain sales of securities and closing transactions in options, futures and forward foreign exchange contracts. Special Rules for Certain Foreign Currency Transactions In general, gains from "foreign currencies" and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in 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 U.S. dollar). In general, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from future contracts that are not "regulated futures contracts" and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment for such transactions. Regulated futures contracts, as described above, will be taxed under Code Section 1256 unless application of Section 988 is elected by the Fund. In general, however, Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary income dividend distributions, and all or a portion of distributions made before the losses were realized but in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing the basis of each shareholder's Fund shares and resulting in a capital gain for any shareholder who received a distribution greater than such shareholder's basis in Fund shares (assuming the shares were held as a capital asset). These rules and the mark-to-market rules described above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of currency fluctuations with respect to its investments. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively. Ordinary income and capital gain dividends may also be subject to state and local taxes. 43 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 investment in the Fund. PERFORMANCE DATA From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund 's historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A, Class B, Class C and Class D shares in accordance with formulas specified by the Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period as in the case of Class B and Class C shares and the maximum sales charge in the case of Class A and Class D shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. Set forth in the tables below is total return information for the Class A, Class B, Class C and Class D shares of the Fund for the periods indicated. As a result of the implementation of the Merrill Lynch Select Pricing(SM) System, Class A shares of the Fund outstanding prior to October 21, 1994, were redesignated Class D shares, and historical performance data pertaining to such shares is provided below under the caption "Class D."
Class A Shares Class B Shares ----------------------- ---------------------- Expressed as Expressed as a percentage a percentage based on a based on hypothetical a hypothetical Period $1,000 investment $1,000 investment ----------------------------------------------- ----------------------- ---------------------- Average Annual Total Return (including maximum applicable sales charges) One Year Ended August 31, 2000 39.29% 41.55% Five Years Ended August 31, 2000 28.21% 28.25% Inception (October 21, 1994) to August 31, 2000 27.61% 27.47% 44 Class C Shares Class D Shares ----------------------- ---------------------- Expressed as Expressed as a percentage a percentage based on a based on hypothetical a hypothetical Period $1,000 investment $1,000 investment ----------------------------------------------- ----------------------- ---------------------- Average Annual Total Return (including maximum applicable sales charges) One Year Ended August 31, 2000 44.53% 38.97% Five Years Ended August 31, 2000 28.25% 27.87% Inception (December 24, 1992) to August 31, 2000 20.10% 20.19%
Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. In order to reflect the reduced sales charges in the case of Class A or Class D shares, or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under "Purchase of Shares," the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC, and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of CDSCs, a lower amount of expenses may be deducted. On occasion, the Fund may compare its performance to various indices, including the Standard & Poor's 500 Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc., ("Morningstar"), CDA Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine or other industry publications. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard deviation and beta. In addition, from time to time the Fund may include the Fund's Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature. The Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political, or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance, discussion of the Fund's portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund's performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. GENERAL INFORMATION Description of Shares The Fund was incorporated under Maryland law on April 30, 1992. It has an authorized capital of 1,000,000,000 shares of Common Stock, par value $0.10 per share, divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Class A Common Stock consists of 100,000,000 shares, Class B Common Stock consists of 500,000,000 shares, Class C Common Stock consists of 100,000,000 shares and Class D Common Stock consists of 300,000,000 shares. Class A, Class B, Class C and Class D Common Stock represent an interest in the same assets of the Fund and are identical in all respects except that the Class B, Class C and Class D shares bear certain expenses related to the account maintenance and/or distribution of such shares and have exclusive voting rights with respect to matters relating to such account maintenance and/or distribution expenditures, (except that Class B shares have 45 certain voting rights with respect to Class B share 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 annual meetings of shareholders in any year in which the Investment Company Act does not require shareholders to elect Directors. Also, the by-laws of the Fund require that a special meeting of stockholders be held upon the written request of at least 10% of the outstanding shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in the Prospectus. Each share of Class A, Class B, Class C and Class D Common Stock is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund upon liquidation or dissolution after satisfaction of outstanding liabilities, except that expenses related to the distribution of the shares within a class will be borne solely by such class. Stock certificates are issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case. Independent Auditors Ernst & Young LLP, 99 Wood Avenue South, Iselin, New Jersey 08830-0471, has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to approval by the non-interested Directors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund. Custodian The Chase Manhattan Bank (the "Custodian"), Global Securities Services, Chase MetroTech Center, 18th Floor, Brooklyn, New York 11245, acts as the Custodian of the Fund's assets. Under its contract with the Fund, the Custodian is authorized to establish separate accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Fund's cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund's investments. Transfer Agent Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See "Management of the Fund -- Transfer Agency Services" in the Prospectus. Legal Counsel Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is counsel for the Fund. Reports to Shareholders The fiscal year of the Fund ends on August 31 of each year. The Fund sends to its shareholders at least semi-annually reports showing the Fund's portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year, shareholders will receive Federal income tax information regarding dividends. Shareholder Inquiries Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Statement of Additional Information. 46 Additional Information The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made. Under a separate agreement, ML & Co. has granted the Fund the right to use the "Merrill Lynch" name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund has granted ML & Co. under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by ML & Co. To the knowledge of the Fund, the following entities owned beneficially or of record 5% or more of a class of the Fund's shares as of November 1, 2000:
Percent Name Address and Class ---- ------- --------- Merrill Lynch Trust Company(1) PO Box 30532 New Brunswick, NJ 08989-0532 61.64% Class A Merrill Lynch Trust Company Trustee FBO MLSIP PO Box 30532 Investment Account New Brunswick, NJ 08989-0532 18.15% Class A Attn: East Region Merrill Lynch Trust Company Trustee FBO MLRAP Plan PO Box 30532 Investment Account New Brunswick, NJ 08989-0532 5.70% Class A Attn: East Region Merrill Lynch Trust Company PO Box 30532 New Brunswick, NJ 08989-0532 22.95% Class D
- --------------- (1) Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan accounts for which it acts as trustee. FINANCIAL STATEMENTS The Fund's audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day. 47 EX-17.B 6 efc1-0730_exhibit17b.txt Exhibit 17(b) Merrill Lynch Growth Fund February 16, 2001 PROSPECTUS This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense. Table of Contents TABLE OF CONTENTS MERRILL LYNCH GROWTH FUND AT A GLANCE RISK/RETURN BAR CHART FEES AND EXPENSES HOW THE FUND INVESTS INVESTMENT RISKS MERRILL LYNCH SELECT PRICINGSM SYSTEM HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES PARTICIPATION IN FEE-BASED PROGRAMS MERRILL LYNCH INVESTMENT MANAGERS FINANCIAL HIGHLIGHTS INVESTMENT OBJECTIVE AND POLICIES Other Investment Policies, Practices and Risk Factors Convertible Securities Non-Diversification Risk Foreign Investment Risks Securities of Smaller Companies Derivatives When Issued Securities, Delayed Delivery Securities and Forward Commitments Borrowing and Leverage Standby Commitment Agreements Junk Bonds Investment Restrictions Portfolio Turnover MANAGEMENT OF THE FUND Trustees and Officers Compensation of Trustees Management and Advisory Arrangements Code of Ethics PURCHASE OF SHARES Initial Sales Charge Alternatives -- Class A and Class D Shares Reduced Initial Sales Charges Deferred Sales Charge Alternatives -- Class B and Class C Shares Distribution Plans Limitations on the Payment of Deferred Sales Charges REDEMPTION OF SHARES Redemption Repurchase Reinstatement Privilege -- Class A and Class D Shares PRICING OF SHARES Determination of Net Asset Value Computation of Offering Price Per Share PORTFOLIO TRANSACTIONS AND BROKERAGE SHAREHOLDER SERVICES Investment Account Exchange Privilege Fee-Based Programs Retirement and Education Savings Plans Automatic Investment Plans Automatic Dividend Reinvestment Plan Systematic Withdrawal Plan DIVIDENDS AND TAXES Dividends Taxes Tax Treatment of Options and Futures Transactions Special Rules for Certain Foreign Currency Transactions PERFORMANCE DATA GENERAL INFORMATION Description of Shares Independent Auditors Custodian Transfer Agent Legal Counsel Reports to Shareholders Shareholder Inquiries Additional Information FINANCIAL STATEMENTS AMENDMENT TO DECLARATION OF TRUST AMENDMENT TO DECLARATION OF TRUST 2ND AMENDED AND RESTATED BY-LAWS FORM OF DISTRIBUTION AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT CONSENT OF DELOITTE & TOUCHE LLP CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN LLP FORM OF A/R CLASS B DISTRO PLAN FORM OF A/R CLASS C DISTRO PLAN FORM OF A/R CLASS D DISTRO PLAN POWER OF ATTORNEY PAGE KEY FACTS -------------------------------------------------------------------- Merrill Lynch Growth Fund at a Glance 3 Risk/Return Bar Chart 5 Fees and Expenses 6 DETAILS ABOUT THE FUND -------------------------------------------------------------------- How the Fund Invests 8 Investment Risks 10 YOUR ACCOUNT -------------------------------------------------------------------- Merrill Lynch Select PricingSM System 15 How to Buy, Sell, Transfer and Exchange Shares 21 Participation in Fee-Based Programs 26 MANAGEMENT OF THE FUND -------------------------------------------------------------------- Merrill Lynch Investment Managers 28 Financial Highlights 30 FOR MORE INFORMATION -------------------------------------------------------------------- Shareholder Reports Back Cover Statement of Additional Information Back Cover MERRILL LYNCH GROWTH FUND Table of Contents Key Facts In an effort to help you better understand the many concepts involved in making an investment decision, we have defined the highlighted terms in this prospectus in the sidebar. Common Stock -- securities representing shares of ownership of a corporation. Preferred Stock -- a class of stock that often pays dividends at a specified rate and has preference over common stock in dividend payments and liquidation of assets. Preferred stock may also be convertible into common stock. Convertible Security -- a fixed income security, such as a bond or preferred stock that is exchangeable for shares of common stock of the issuer or of another company. MERRILL LYNCH GROWTH FUND AT A GLANCE - ------------------------------------------------------------------------------ What is the Fund's investment objective? The investment objective of the Fund is to seek growth of capital and, secondarily, income. In other words, it tries to choose investments that will increase in value. The Fund may also select certain investments based on their ability to produce current income. However, the Fund's investments emphasize growth of capital more than current income. What are the Fund's main investment strategies? The Fund invests primarily in common stock of companies that Fund management believes have the potential to achieve above average growth rates in earnings, revenues, cash flow or earnings before interest, taxes, depreciation and amortization (EBITDA). The Fund may also purchase preferred stock and convertible securities. The Fund focuses on companies with medium to large stock market capitalizations. The Fund invests a majority of its assets in U.S. companies, but may invest up to 40% of its total assets in foreign companies. The Fund may invest in securities denominated in foreign currencies. The Fund is a non-diversified fund, which means that it can invest more of its assets in fewer companies than other funds. We cannot guarantee that the Fund will achieve its objective. What are the main risks of investing in the Fund? As with any mutual fund, the value of the Fund's investments -- and therefore the value of Fund shares -- may go up or down. These changes may occur because a particular stock market is rising or falling. At other times, there are specific factors that may affect the value of a particular investment. The Fund may invest in non-U.S. securities. Because foreign markets may differ significantly from U.S. markets in terms of both economic conditions and government regulation, investments in foreign securities involve special risks. In addition, investments in securities denominated in foreign currencies involve the risk that these currencies may decline in value relative to the U.S. dollar, which decreases the value of the investments in U.S. dollar terms. If the value of the Fund's investments goes down, you may lose money. The Fund is a non-diversified fund, which means that it may invest more of its assets in the securities of a single issuer than if it were a diversified fund. If the Fund invests in a smaller number of issuers, the Fund's risk is increased because developments affecting an individual issuer have a greater impact on the Fund's performance. MERRILL LYNCH GROWTH FUND 3 Table of Contents Key Facts Who should invest? The Fund may be an appropriate investment for you if you: o Are investing with long term goals, such as retirement or funding a child's education o Want a professionally managed portfolio o In seeking growth and, secondarily, income you are willing to accept the risk that the value of your investment may decline o Are not looking for a significant amount of current income MERRILL LYNCH GROWTH FUND 4 Table of Contents RISK/RETURN BAR CHART - ------------------------------------------------------------------------------- The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance for Class B shares for each of the past ten calendar years. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual total returns for each class of the Fund's shares for the periods shown with those of the S&P 500 Index. How the Fund performed in the past is not necessarily an indication of how the Fund will perform in the future. [BAR CHART] Merrill Lynch Growth Fund - Class B Annual Total Returns 1991 23.85 1992 8.79 1993 31.11 1994 0.72 1995 35.45 1996 28.38 1997 17.44 1998 -24.23 1999 26.15 2000 -19.10 During the ten year period shown in the bar chart, the highest return for a quarter was 31.76% (quarter ended March 31, 1991) and the lowest return for a quarter was (19.51)% (quarter ended September 30, 1998). The year-to-date return as of December 31, 2000 was (19.10)%. Average Annual Total Returns Past Ten Years/ (as of the calendar year Past Past Since ended December 31, 2000) One Year Five Years Inception ------------------------------------------------------------------------ Merrill Lynch Growth Fund* A (22.57)% 3.06% 11.43% S&P 500** (9.10)% 18.31% 17.44% ------------------------------------------------------------------------ Merrill Lynch Growth Fund* B (22.07)% 3.11% 10.88%# S&P 500** (9.10)% 18.31% 17.44% ------------------------------------------------------------------------ Merrill Lynch Growth Fund* C (19.83)% 3.10% 6.95%+ S&P 500** (9.10)% 18.31% 20.47%++ ------------------------------------------------------------------------ Merrill Lynch Growth Fund* D (22.76)% 2.80% 6.86%+ S&P 500** (9.10)% 18.31% 20.47%++ ------------------------------------------------------------------------ * Includes sales charge. ** The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged index of common stock prices. Past performance is not predictive of future performance. # The performance does not reflect the effect of the conversion of Class B shares to Class D shares after approximately eight years. + Inception date is October 21, 1994. ++ Since October 21, 1994. MERRILL LYNCH GROWTH FUND 5 Table of Contents Key Facts UNDERSTANDING EXPENSES Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses, which the Fund may charge: Expenses paid directly by the shareholder: Shareholder Fees -- these include sales charges which you may pay when you buy or sell shares of the Fund. Expenses paid indirectly by the shareholder: Annual Fund Operating Expenses -- expenses that cover the costs of operating the Fund. Management Fee -- a fee paid to the Investment Adviser for managing the Fund. Distribution Fees -- fees used to support the Fund's marketing and distribution efforts, such as compensating Financial Consultants and other financial intermediaries, advertising and promotion. Service (Account Maintenance) Fees -- fees used to compensate securities dealers and other financial intermediaries for account maintenance activities. FEES AND EXPENSES - ------------------------------------------------------------------------------ The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your Merrill Lynch Financial Consultant can help you with this decision. This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.
Shareholder Fees (fees paid directly from your investment)(a): Class A Class B(b) Class C Class D Maximum Sales Charge (Load) imposed on purchases (as a percentage of offering price) 5.25%(c) None None 5.25%(c) Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d) Maximum Sales Charge (Load) imposed on Dividend Reinvestments None None None None Redemption Fee None None None None Exchange Fee None None None None Annual Fund Operating Expenses (expenses that are deducted from Fund assets): Management Fee(e)(h) 0.65% 0.65% 0.65% 0.65% Distribution and/or Service (12b-1) Fees(f) None 1.00% 1.00% 0.25% Other Expenses (including transfer agency fees)(g) 0.26% 0.28% 0.30% 0.26% Total Annual Fund Operating Expenses(h) 0.91% 1.93% 1.95% 1.16% (a) In addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or redeems shares. See "How to Buy, Sell, Transfer and Exchange Shares." (b) Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be subject to distribution fees. (c) Some investors may qualify for reductions in the sales charge (load). (d)You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year. (e) The Fund pays the Investment Adviser a fee at the annual rate of 0.65% of the average daily net assets of the Fund. The Investment Adviser has voluntarily agreed to reduce its fee as Fund assets grow. The reduced fee is equal to 0.65% of the Fund's first $1 billion of net assets; 0.625% of net assets from $1 billion to $1.5 billion; and 0.60% of net assets above $1.5 billion, but not exceeding $10 billion; and 0.575% of average daily net assets exceeding $10 billion. For the fiscal year ended October 31, 2000, the Investment Adviser received a fee equal to 0.62% of the Fund's average daily net assets. The table shows the full fee without any waiver since the Investment Adviser may stop waiving fees at any time. (f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account Maintenance Fee is the term used elsewhere in this prospectus and in all other Fund materials. (g) The Fund pays the Transfer Agent $11.00 for each Class A and D shareholder account and $14.00 for each Class B and C shareholder account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund pays a 0.10% fee for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed account charge, which is assessed upon all accounts that close during the year. This fee begins the month following the month the account is closed and ends at the end of the calendar year. For the fiscal year ended October 31, 2000, the Fund paid the Transfer Agent fees totaling $6,983,015.
MERRILL LYNCH GROWTH FUND 6 Table of Contents (footnotes continued from previous page) As of January 1, 2001, the Fund has entered into an agreement with State Street Bank and Trust Company pursuant to which State Street provides accounting services to the Fund. The Fund will pay the cost of these services. In addition, the Fund will reimburse the Investment Adviser for the cost of certain additional accounting services. (h) During the fiscal year ended October 31, 2000, the Investment Adviser waived management fees totaling 0.03% for Class A shares, 0.03% for Class B shares, 0.03% for Class C shares and 0.03% for Class D shares. After taking into account these waivers, the Fund's total expense ratio was 0.88% for Class A shares, 1.90% for Class B shares, 1.92% for Class C shares and 1.13% for Class D shares. The Investment Adviser may discontinue or reduce the fee waiver arrangement at any time without notice. Examples: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund's operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions your costs would be: EXPENSES IF YOU DID REDEEM YOUR SHARES: --- 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------- Class A $613 $800 $1,002 $1,586 Class B $596 $806 $1,042 $2,059* Class C $298 $612 $1,052 $2,275 Class D $637 $874 $1,130 $1,860 EXPENSES IF YOU DID NOT REDEEM YOUR SHARES: ------- 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------- Class A $613 $800 $1,002 $1,586 Class B $196 $606 $1,042 $2,059* Class C $198 $612 $1,052 $2,275 Class D $637 $874 $1,130 $1,860 * Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above. MERRILL LYNCH GROWTH FUND 7 Table of Contents Details About the Fund ABOUT THE PORTFOLIO MANAGER Stephen I. Silverman has been the portfolio manager and Senior Vice President of the Fund since February 1999. He has been a First Vice President of Merrill Lynch Investment Managers since 1997 and a Vice President and Senior Portfolio Manager since 1983. ABOUT THE INVESTMENT ADVISER The Fund is managed by Merrill Lynch Investment Managers. HOW THE FUND INVESTS - ------------------------------------------------------------------------------ The Fund's main goal is growth of capital. The Fund also seeks income, but its investments emphasize growth of capital more than income. The Fund tries to achieve its goals by investing primarily in equity securities. In selecting securities, Fund management emphasizes stocks of companies that Fund management believes have the potential to achieve above average growth rates in earnings, revenues, cash flow or EBITDA. The Fund will generally invest at least 65% of its total assets in equity securities. Equity securities consist of: o Common Stock o Preferred Stock o Securities convertible into Common Stock o Derivatives, such as futures, forwards and options, the value of which is based on a common stock or group of common stocks The Fund will focus on investments in common stock of large and mid-size companies having stock market capitalizations of $2 billion or more. The Fund employs a fundamental "bottom up" investment style. This means that the Fund seeks to identify individual companies with attractive business attributes and does not place substantial weight on other security selection techniques, such as sector allocation or technical market analysis. The Fund looks for stocks that its management believes have the potential to achieve above average growth in earnings, revenues, cash flow or EBITDA. A company may achieve growth from: o introducing promising new products, exploiting new technologies or developing new distribution channels o achieving strong growth in sales of existing products through improved pricing or increasing sales volume o developing operating efficiencies o increasing market share Fund management will seek to invest in companies that: o have the potential to achieve above-average growth o are well-managed o achieve attractive returns on capital MERRILL LYNCH GROWTH FUND 8 Table of Contents Earnings -- a company's profits, which is generally its revenues less its expenses. Revenues -- the amount of cash received by a company from sales of products and services. Cash flow -- the amount of cash generated by a company, which is generally equal to its earnings plus non-cash expenses such as depreciation. Futures -- exchange-traded contracts involving the obligation of the seller to deliver, and the buyer to receive, certain assets (or a money payment based on the change in value of certain assets or an index) at a specified time. Forwards -- private contracts involving the obligation of the seller to deliver, and the buyer to receive, certain assets (or a money payment based on the change in value of certain assets or an index) at a specified time. Options --exchange-traded or private contracts involving the right of a holder to deliver (a "put") or receive (a "call") certain assets (or a money payment based on the change in value of certain assets or an index) from another party at a specified price within a specified time period. Market capitalization -- the number of a company's outstanding shares, multiplied by a share's current market value. Market capitalization is a measure of a company's size. Fund management will not place significant weight on a company's current valuation based on statistical characteristics such as price to earnings ratio, price to book value ratio or dividend yield. Fund management believes that companies that have the potential to achieve above-average growth in earnings, revenues, cash flow or EBITDA frequently provide the opportunity for above-average market gains over time. On the other hand, such companies frequently have higher stock market valuations. As a result, their shares may be more vulnerable to price declines from unexpected adverse developments or market corrections. The Fund invests mainly in U.S. companies, but may invest up to 40% of its total assets in securities of foreign companies. The Fund may invest in securities from any country. Foreign investing involves special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Foreign securities may also be less liquid and harder to value than U.S. securities. These risks are greater for investments in emerging markets. The Fund may invest in securities denominated in currencies other than the U.S. dollar. The Fund's return on investments denominated in foreign currencies will be affected by changes in currency exchange rates. The Fund may engage in currency transactions to seek to hedge against the risk of loss from changes in currency exchange rates, but Fund management cannot guarantee that it will be able to enter into such transactions or that such transactions will be effective. The Fund is not required to hedge currency risk, and Fund management may choose not to do so. In addition to the Fund's principal strategies described above, the Fund may also employ the following investment strategies: The Fund may use derivatives, such as futures, forwards and options. Derivatives are financial instruments whose value is derived from another security, a commodity (such as gold or oil) or an index such as the S&P 500. The Fund may use derivatives for hedging purposes, including anticipatory hedges, and may also use options on securities to seek increased return. The Fund may also invest to a lesser extent in junk bonds, when issued securities, delayed delivery securities, forward commitments, restricted and illiquid securities and standby commitment agreements. MERRILL LYNCH GROWTH FUND 9 Table of Contents Details About the Fund Under normal market conditions, the Fund may invest up to 35% of its assets in debt securities. The Fund will normally invest a portion of its assets in short term debt securities, such as commercial paper. The Fund invests in short term debt securities when Fund management is unable to find enough attractive long term investments, to reduce exposure to equities when management believes it is advisable to do so or to meet redemptions. Investments in short term debt securities can be sold easily and have limited risk of loss but earn only limited returns. As a temporary measure for defensive purposes, the Fund may invest more heavily in short term debt securities, without limitation. During such periods, the Fund's investments in equity securities will be limited and the Fund may not be able to achieve its investment objective of growth of capital. The Fund has no stated minimum holding period for investments and will buy or sell securities whenever Fund management sees an appropriate opportunity. The Fund does not consider potential tax consequences to Fund shareholders when it sells securities. Because the Fund has the flexibility to take advantage of short term investment opportunities, it may experience relatively high portfolio turnover during certain periods. High turnover increases the Fund's brokerage expenses and may affect shareholders' taxes by possibly increasing short term capital gains or losses. This prospectus describes the Fund's principal investment strategies and related risks. The Fund may use many different investment strategies and it has certain investment restrictions, all of which are explained in the Fund's Statement of Additional Information. INVESTMENT RISKS - ------------------------------------------------------------------------------- This section contains a summary discussion of the general risks of investing in the Fund. As with any fund, there can be no guarantee that the Fund will meet its goals or that the Fund's performance will be positive for any period of time. The Fund's principal risks are as follows: Market and Selection Risk -- Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, MERRILL LYNCH GROWTH FUND 10 Table of Contents including the possibility that the market will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform other funds with similar investment objectives and investment strategies. Because the Fund invests in a smaller number of issuers and economic sectors than some other funds, the Fund's stock selection risk is increased. Foreign Market Risk -- Since the Fund may invest in foreign securities, it offers the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than securities in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, investment in foreign securities involves the following risks, which are generally greater for investments in emerging markets. o The economies of certain foreign markets often do not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain of these economies may rely heavily on particular industries or foreign capital and may be more vulnerable to adverse diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. o Investments in foreign markets may be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. o The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices. They could also impair the Fund's ability to purchase or sell foreign securities or transfer its assets or income back into the United States, or otherwise adversely affect the Fund's operations. o Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on MERRILL LYNCH GROWTH FUND 11 Table of Contents Details About the Fund foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. o Because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States. o Foreign markets may have different clearance and settlement procedures. In certain markets, settlements may be unable to keep pace with the volume of securities transactions. If this occurs, settlement may be delayed and the Fund's assets may be uninvested and not earning returns. The Fund may miss investment opportunities or be unable to sell an investment because of these delays. Certain Risks of Holding Fund Assets Outside the United States -- The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than investment companies invested only in the United States. European Economic and Monetary Union (EMU) -- A number of European countries have entered into EMU in an effort to reduce trade barriers between themselves and eliminate fluctuations in their currencies. EMU established a single European currency (the euro), which was introduced on January 1, 1999 and is expected to replace the existing national currencies of all initial EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro and are traded and make dividend and other payments only in euros. Like MERRILL LYNCH GROWTH FUND 12 Table of Contents other investment companies and business organizations, including the companies in which the Fund invests, the Fund could be adversely affected if the transition to euro, or EMU as a whole, does not proceed as planned or if a participating country withdraws from EMU. Non-Diversification Risk -- The Fund is a non-diversified fund. If the Fund invests in securities of a smaller number of issuers, the Fund's risk is increased because developments affecting an individual issuer have a greater impact on the Fund's performance. The Fund also may be subject to the following risks: Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes, including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund's return. Certain securities that the Fund buys may create leverage including, for example, when issued securities, forward commitments and options. Derivatives -- The Fund may use derivative instruments, including futures, forwards and options. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including: Leverage risk -- the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. Credit risk -- the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund. Currency risk -- the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment. MERRILL LYNCH GROWTH FUND 13 Table of Contents Details About the Fund Liquidity risk -- the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. The Fund may use derivatives for hedging purposes, including anticipatory hedges, and may also use options on securities to seek increased return. Hedging is a strategy in which the Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so. Convertibles -- Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible's value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risk as the underlying common stock. Illiquid securities -- The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If the Fund buys illiquid securities it may be unable to quickly resell them or may be able to sell them only at a price below current value. STATEMENT OF ADDITIONAL INFORMATION - ------------------------------------------------------------------------------- If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information. MERRILL LYNCH GROWTH FUND 14 Table of Contents Your Account MERRILL LYNCH SELECT PRICING(SM) SYSTEM - ------------------------------------------------------------------------------- The Fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Consultant can help you determine which share class is best suited to your personal financial goals. For example, if you select Class A or D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver. Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Investment Adviser, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities. If you select Class B or C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and account maintenance fee of 0.25%. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. In addition, you may be subject to a deferred sales charge when you sell Class B or C shares. The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of Merrill Lynch. MERRILL LYNCH GROWTH FUND 15 Table of Contents Your Account The table below summarizes key features of the Merrill Lynch Select Pricing(SM) System.
Class A Class B Class C Class D - --------------------------------------------------------------------------------------------------------------------------------- Availability Limited to certain Generally available Generally available Generally available through investors including: through Merrill Lynch. through Merrill Lynch. Merrill Lynch. Limited o Current Class A Limited availability Limited availability availability through selected shareholders through selected through selected securities dealers and other o Certain Retirement securities dealers and securities dealers financial intermediaries. Plans other financial and other financial o Participants in certain intermediaries. intermediaries. Merrill Lynch sponsored programs o Certain affiliates of Merrill Lynch, selected securities dealers and other financial intermediaries. Initial Yes. Payable at time of No. Entire purchase price No. Entire purchase Yes. Payable at time of Sales purchase. Lower sales is invested in shares of price is invested in purchase. Lower sales Charge? charges available for the Fund. shares of the Fund. charges available for larger larger investments. investments. Deferred No. (May be charged Yes. Payable if Yes. Payable if you No. (May be charged Sales for purchases over you redeem within redeem within one for purchases over Charge? $1 million that are four years of purchase. year of purchase. $1 million that are redeemed within one redeemed within one year.) year.) Account No. 0.25% Account 0.25% Account 0.25% Account Maintenance Fee. Maintenance Maintenance Fee. Maintenance Fee. No Distribution Fee. and 0.75% Distribution Fee. 0.75% Distribution Fee. Distribution Fees? Conversion to No. Yes, automatically after No. No. Class D approximately eight years. shares? MERRILL LYNCH GROWTH FUND
16 Table of Contents Right of Accumulation -- permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all shares you own in the Merrill Lynch mutual funds that offer Select PricingSM options. Letter of Intent -- permits you to pay the sales charge that would be applicable if you add up all shares of Merrill Lynch Select PricingSM System funds that you agree to buy within a 13-month period. Certain restrictions apply. Class A and Class D Shares -- Initial Sales Charge Options If you select Class A or Class D shares, you will pay a sales charge at the time of purchase.
Dealer Compensation As a % of As a % of as a % of Your Investment Offering Price Your Investment* Offering Price - ---------------------------------------------------------------------------------------------- Less than $25,000 5.25% 5.54% 5.00% $25,000 but less than $50,000 4.75% 4.99% 4.50% $50,000 but less than $100,000 4.00% 4.17% 3.75% $100,000 but less than $250,000 3.00% 3.09% 2.75% $250,000 but less than $1,000,000 2.00% 2.04% 1.80% $1,000,000 and over** 0.00% 0.00% 0.00%
* Rounded to the nearest one-hundredth percent. ** If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Investment Adviser compensates the selling dealer or other financial intermediary from its own funds. However, if you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer-sponsored retirement or savings plans. No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends. A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for: o Purchases under a Right of Accumulation or Letter of Intent o Merrill Lynch Blueprint SM Program participants o TMA SM Managed Trusts o Certain Merrill Lynch investment or central asset accounts o Certain employer-sponsored retirement or savings plans o Purchases using proceeds from the sale of certain Merrill Lynch closed-end funds under certain circumstances MERRILL LYNCH GROWTH FUND 17 Table of Contents Your Account o Certain investors, including directors or trustees of Merrill Lynch mutual funds and Merrill Lynch employees o Certain fee-based programs of Merrill Lynch and other financial intermediaries that have agreements with the Distributor or its affiliates Only certain investors are eligible to buy Class A shares. Your Merrill Lynch Financial Consultant can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs. As a result of the implementation of the Merrill Lynch Select Pricing SM System, Class A shares of the Fund outstanding prior to October 21, 1994 were redesignated as Class D shares. The Class A shares offered here differ from the Class A shares offered prior to October 21, 1994 in many respects, including eligible investors, sales charges and exchange privileges. If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not. If you redeem Class A or D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this "Reinstatement Privilege" may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary, or the Fund's Transfer Agent at 1-800-MER-FUND. Class B and Class C Shares -- Deferred Sales Charge Options If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within four years after purchase or Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the Merrill Lynch. MERRILL LYNCH GROWTH FUND 18 Table of Contents Financial Consultant, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares. Class B Shares If you redeem Class B shares within four years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule: Years Since Purchase Sales Charge* ---------------------------------------------------------- 0 - 1 4.00% 1 - 2 3.00% 2 - 3 2.00% 3 - 4 1.00% 4 and thereafter 0.00% * The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. Not all Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply. The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as: o Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59 1/2 years old o Redemption by certain eligible 401(a) and 401(k) plans, certain related accounts, group plans participating in the Merrill Lynch Blueprint SM Program and certain retirement plan rollovers o Redemption in connection with participation in certain fee-based programs of Merrill Lynch or other financial intermediaries that have agreements with the Distributor or its affiliates o Withdrawals resulting from shareholder death or disability as long as the waiver request is made within one year of death or disability or, if later, reasonably promptly following completion of probate, or in connection with involuntary termination of an account in which Fund shares are held MERRILL LYNCH GROWTH FUND 19 Table of Contents Your Account o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes. Different conversion schedules apply to Class B shares of different Merrill Lynch mutual funds. For example, Class B shares of a fixed-income fund typically convert approximately ten years after purchase compared to approximately eight years for equity funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund's eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund's conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well. Class C Shares If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relative to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. Class C shares do not offer a conversion privilege. MERRILL LYNCH GROWTH FUND 20 Table of Contents HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES - ------------------------------------------------------------------------------- The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying, selling, transferring or exchanging shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Consultant may help you with this decision. Because of the high costs of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts. MERRILL LYNCH GROWTH FUND 21 Table of Contents Your Account
If You Want To Your Choices Information Important for You to Know Buy Shares First, select the share class appropriate for you Refer to the Merrill Lynch Select Pricing table on page 16. Be sure to read this prospectus carefully. Next, determine the amount of your investment The minimum initial investment for the Fund is $1,000 for all accounts except: o $250 for certain Merrill Lynch fee-based programs o $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.) Have your Merrill Lynch Financial Consultant, The price of your shares is based on the next selected securities dealer or other financial calculation of net asset value after your order intermediary submit your purchase order is placed. Any purchase orders placed prior to the close of business on the New York Stock Exchange (generally, 4:00 p.m. Eastern time) will be priced at the net asset value determined that day. Certain financial intermediaries, however, may require submission of orders prior to that time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Selected securities dealers or other financial intermediaries, including Merrill Lynch, may charge a processing fee to confirm a purchase. Merrill Lynch currently charges a fee of $5.35. Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND and request a purchase application. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this prospectus. Add to Your Investment Purchase additional shares The minimum investment for additional purchases is generally $50 except that retirement plans have a minimum additional purchase of $1 and certain programs, such as automatic investment plans, may have higher minimums. (The minimums for additional purchases may be waived under certain circumstances.) All dividends are automatically reinvested Acquire additional shares through the without a sales charge. automatic dividend reinvestment plan Participate in the automatic investment plan You may invest a specific amount on a periodic basis through certain Merrill Lynch investment or central asset accounts. Transfer Shares to Another Transfer to a participating securities dealer or Securities Dealer or Other other financial intermediary You may transfer your Fund shares only to Financial Intermediary another securities dealer that has entered into an agreement with Merrill Lynch. Certain shareholder services may not be available for the transferred shares. You may only purchase additional shares of funds previously owned before the transfer. All future trading of these assets must be coordinated by the receiving firm. MERRILL LYNCH GROWTH FUND 22
Table of Contents
If You Want To Your Choices Information Important for You to Know Transfer Shares to Another Transfer to a non-participating securities You must either: Securities Dealer or Other dealer or other financial intermediary o Transfer your shares to an account with the Financial Intermediary Transfer Agent; or (continued) o Sell your shares, paying any applicable Sell Your Shares deferred sales charge. Have your Merrill Lynch Financial Consultant, The price of your shares is based on the next selected securities dealer or other financial calculation of net asset value after your order intermediary submit your sales order is placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your dealer or other financial intermediary prior to that day's close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time). Certain financial intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business day. Securities dealers or other financial intermediaries, including Merrill Lynch, may charge a fee to process a redemption of shares. Merrill Lynch currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent. The Fund may reject an order to sell shares under certain circumstances. Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing to the Transfer Agent at the address on the inside back cover of this prospectus. All shareholders on the account must sign the letter. A signature guarantee will generally be required but may be waived in certain limited circumstances. You can obtain a signature guarantee from a bank, securities dealer, securities broker, credit union, savings association, national securities exchange or registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. The Transfer Agent will normally mail redemption proceeds within seven days following receipt of a properly completed request. If you make a redemption request before the Fund has collected payment for the purchase of shares, the Fund or the Transfer Agent may delay mailing your proceeds. This delay will usually not exceed ten days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-800-MER-FUND for details. MERRILL LYNCH GROWTH FUND 23
Table of Contents Your Account
If You Want To Your Choices Information Important for You to Know Sell Shares Systematically Participate in the Fund's Systematic You can choose to receive systematic payments Withdrawal Plan from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA(R), CBA(R) or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your Merrill Lynch Financial Consultant or other financial intermediary for details. Exchange Your Shares Select the fund into which you want to You can exchange your shares of the Fund for exchange. Be sure to read that fund's shares of many other Merrill Lynch mutual funds prospectus You must have held the shares used in the exchange for at least 15 calendar days before you can exchange to another fund. Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares, (and are not eligible to buy Class A shares) you will exchange into Class D shares. Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will apply. The time you hold Class B or C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. If you exchange Class A or D shares for money market fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class B or C shares of the Fund will be exchanged for Class B shares of Summit. To exercise the exchange privilege, contact your Merrill Lynch Financial Consultant or other financial intermediary or call the Transfer Agent at 1-800-MER-FUND. Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future. MERRILL LYNCH GROWTH FUND 24
Table of Contents Net Asset Value -- the market value of the Fund's total assets after deducting liabilities, divided by the number of shares outstanding. Short-term or excessive trading into and out of the Fund may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any purchase orders, including exchanges, particularly from market timers or investors who, in Fund management's opinion, have a pattern of short-term or excessive trading or whose trading has been or may be disruptive to the Fund. For these purposes, Fund management may consider an investor's trading history in the Fund or other Merrill Lynch funds, and accounts under common ownership or control. HOW SHARES ARE PRICED - ------------------------------------------------------------------------------- When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open as of the close of business on the Exchange, based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund's net asset value may change on days when you will not be able to purchase or redeem the Fund's shares. The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses. Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, and Class D shares will have a higher net asset value than Class B or Class C shares. Also, dividends paid on Class A and Class D shares will generally be higher than dividends paid on Class B and Class C shares because Class A and Class D shares have lower expenses. MERRILL LYNCH GROWTH FUND 25 Table of Contents Your Account PARTICIPATION IN FEE-BASED PROGRAMS - ------------------------------------------------------------------------------- If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances. You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges. If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program. Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary. DIVIDENDS AND TAXES - ------------------------------------------------------------------------------- The Fund will distribute at least annually any net investment income and any net realized long term capital gains. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax MERRILL LYNCH GROWTH FUND 26 Table of Contents Dividends -- ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid. "BUYING A DIVIDEND" Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser. requirements. If you would like to receive dividends in cash, contact your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary or the Transfer Agent. Although this cannot be predicted with certainty, the Fund anticipates that the majority of its dividends, if any, will consist of capital gains. Capital gains may be taxable to you at different rates, depending, in part, on how long the Fund has held the assets sold. You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Capital gains derived by individuals are generally taxed at different rates than ordinary income dividends. If you are neither a lawful permanent resident nor a citizen of the United States or if you are a foreign entity, the Fund's ordinary income dividends (which include distributions of net short term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. By law, the Fund must withhold 31% of your dividends and redemption proceeds if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect. This section summarizes some of the consequences under current Federal income tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws. MERRILL LYNCH GROWTH FUND 27 Table of Contents Management of the Fund MERRILL LYNCH INVESTMENT MANAGERS - ------------------------------------------------------------------------------ Merrill Lynch Investment Managers, the Fund's Investment Adviser, manages the Fund's investments and its business operations under the overall supervision of the Fund's Board of Trustees. The Investment Adviser has the responsibility for making all investment decisions for the Fund. The Investment Adviser has a sub-advisory agreement with Merrill Lynch Asset Management, U.K. Limited, an affiliate, under which the Investment Adviser may pay a fee for services it receives. The Fund pays the Investment Adviser a fee at the annual rate of 0.65% of the average daily net assets of the Fund. The Investment Adviser has voluntarily agreed to reduce its fee as Fund assets grow. The reduced fee is equal to 0.65% of the Fund's first $1 billion of net assets; 0.625% of net assets from $1 billion to $1.5 billion; and 0.60% of net assets above $1.5 billion but not exceeding $10 billion; and 0.575% of average daily net assets exceeding $10 billion. The Investment Adviser may discontinue or reduce this waiver of fees at any time without notice. For the fiscal year ended October 31, 2000, the Investment Adviser received a fee equal to 0.62% of the Fund's average daily net assets. Merrill Lynch Investment Managers was organized as an investment adviser in 1976 and offers investment advisory services to more than 50 registered investment companies. Merrill Lynch Investment Managers and its affiliates, including Fund Asset Management had approximately $557 billion in investment company and other portfolio assets under management as of December 2000. OTHER INFORMATION - ------------------------------------------------------------------------------ In November, 2000, a putative class action lawsuit was filed in Federal Court in the Middle District of Florida on behalf of Florida investors against the Fund, the Investment Adviser, certain present and former individual trustees of the Fund and Merrill Lynch, Pierce, Fenner & Smith, Incorporated seeking damages. The plaintiffs, who are trustees of and participants in certain 401(k) profit sharing plans, purport to assert claims against the defendants on their own behalf and on behalf of the plans, the plans' participants and all similarly situated shareholders of the Fund who invested in Florida. The alleged class consists of "all persons and entities who purchased or sold the Growth Fund in Florida through Merrill Lynch, or any related entity . . . at any time from November 1, 1997, up through MERRILL LYNCH GROWTH FUND 28 Table of Contents and including April 30, 1999." The lawsuit involves two claims based on the Florida Securities and Investor Protection Act and the Florida Deceptive and Unfair Trade Practices Act, respectively. The substance of both claims is that the Fund and the other defendants misrepresented and omitted material facts regarding the "true nature of the Fund and its holdings." The defendants, including the Fund, have filed a motion to dismiss the plaintiff's complaint for lack of subject matter jurisdiction. There has been no decision yet with respect to this motion. The Fund and the other defendants believe that the lawsuit is without merit and intend to defend vigorously against the claims. MERRILL LYNCH GROWTH FUND 29 Table of Contents Management of the Fund FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------ The Financial Highlights table is intended to help you understand the Fund's financial performance for the periods shown. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned on an investment in the Fund (assuming reinvestment of all dividends). This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's financial statements, is included in the Fund's annual report to shareholders, which is available upon request and without charge.
Class A+ --------------------------------------------------------------------------------------- For the Year Ended October 31, --------------------------------------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year $23.18 $22.71 $33.13 $26.87 $23.13 Investment income (loss)-- net (.11) (.01) .46 .53 .31 Realized and unrealized gain (loss) on investments and foreign currency transactions -- net 3.18 .69 (8.47) 7.98 5.63 Total from investment operations 3.07 .68 (8.01) 8.51 5.94 Less dividends and distributions: Investment income -- net -- -- (.48) (.44) (.35) In excess of investment income -- net -- (.21) -- -- -- Realized gain on investments -- net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments -- net -- -- (.23) -- -- Total dividends and distributions -- (.21) (2.41) (2.25) (2.20) Net asset value, end of year $26.25 $23.18 $22.71 $33.13 $26.87 Total Investment Return:* Based on net asset value per share 13.24% 3.09% (25.83)% 34.03% 28.15% Ratios to Average Net Assets: Expenses, net of reimbursement .88% .96% .81% .77% .80% Expenses .91% .99% .85% .81% .84% Investment income (loss)-- net (.38)% (.03)% 1.72% 1.84% 1.28% Supplemental Data: Net assets, end of year (in thousands) $701,997 $774,287 $1,111,166 $1,769,296 $1,056,870 Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% [Additional columns below]
[Continued from above table, first column(s) repeated]
Class B+ --------------------------------------------------------------------------------------- For the Year Ended October 31, --------------------------------------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year $21.21 $20.88 $30.63 $25.03 $21.60 Investment income (loss)-- net (.35) (.19) .17 .22 .06 Realized and unrealized gain (loss) on investments and foreign currency transactions -- net 2.91 .61 (7.80) 7.39 5.26 Total from investment operations 2.56 .42 (7.63) 7.61 5.32 Less dividends and distributions: Investment income -- net -- -- (.19) (.20) (.04) In excess of investment income -- net -- (.09) -- -- -- Realized gain on investments -- net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments -- net -- -- (.23) -- -- Total dividends and distributions -- (.09) (2.12) (2.01) (1.89) Net asset value, end of year $23.77 $21.21 $20.88 $30.63 $25.03 Total Investment Return:* Based on net asset value per share 12.07% 2.06% (26.57)% 32.62% 26.84% Ratios to Average Net Assets: Expenses, net of reimbursement 1.90% 1.99% 1.83% 1.79% 1.82% Expenses 1.93% 2.02% 1.87% 1.83% 1.85% Investment income (loss)-- net (1.40)% (.98)% .70% .82% .26% Supplemental Data: Net assets, end of year (in thousands) $1,052,705 $1,247,547 $2,544,979 $4,687,523 $2,916,507 Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. MERRILL LYNCH GROWTH FUND 30 Table of Contents FINANCIAL HIGHLIGHTS (concluded)
Class C+ --------------------------------------------------------------------------------------- For the Year Ended October 31, --------------------------------------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year $21.05 $20.72 $30.43 $24.89 $21.59 Investment income (loss) -- net (.36) (.18) .17 .22 .06 Realized and unrealized gain (loss) on investments and foreign currency transactions -- net 2.91 .59 (7.75) 7.34 5.23 Total from investment operations 2.55 .41 (7.58) 7.56 5.29 Less dividends and distributions: Investment income -- net -- -- (.20) (.21) (.14) In excess of investment income -- net -- (.08) -- -- -- Realized gain on investments -- net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments -- net -- -- (.23) -- -- Total dividends and distributions -- (.08) (2.13) (2.02) (1.99) Net asset value, end of year $23.60 $21.05 $20.72 $30.43 $24.89 Total Investment Return:* Based on net asset value per share 12.11% 2.04% (26.60)% 32.63% 26.84% Ratios to Average Net Assets: Expenses, net of reimbursement 1.92% 2.02% 1.84% 1.80% 1.84% Expenses 1.95% 2.05% 1.88% 1.84% 1.87% Investment income (loss) -- net (1.42)% (.96)% .68% .81% .25% Supplemental Data: Net assets, end of year (in thousands) $93,549 $106,797 $239,445 $427,377 $187,221 Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% [Additional columns below]
[Continued from above table, first column(s) repeated]
Class D+ --------------------------------------------------------------------------------------- For the Year Ended October 31, --------------------------------------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of year $23.07 $22.63 $33.01 $26.79 $23.06 Investment income (loss) -- net (.17) (.06) .39 .46 .24 Realized and unrealized gain (loss) on investments and foreign currency transactions -- net 3.17 .68 (8.43) 7.95 5.63 Total from investment operations 3.00 .62 (8.04) 8.41 5.87 Less dividends and distributions: Investment income -- net -- -- (.41) (.38) (.29) In excess of investment income -- net -- (.18) -- -- -- Realized gain on investments -- net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments -- net -- -- (.23) -- -- Total dividends and distributions -- (.18) (2.34) (2.19) (2.14) Net asset value, end of year $26.07 $23.07 $22.63 $33.01 $26.79 Total Investment Return:* Based on net asset value per share 13.00% 2.82% (26.00)% 33.67% 27.83% Ratios to Average Net Assets: Expenses, net of reimbursement 1.13% 1.21% 1.06% 1.02% 1.05% Expenses 1.16% 1.24% 1.10% 1.06% 1.08% Investment income (loss) -- net (.63)% (.26)% 1.47% 1.59% 1.03% Supplemental Data: Net assets, end of year (in thousands) $732,495 $744,151 $1,082,627 $1,642,665 $932,811 Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01%
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. MERRILL LYNCH GROWTH FUND 31 Table of Contents [CHART OMITTED] MERRILL LYNCH GROWTH FUND Table of Contents For More Information Shareholder Reports Additional information about the Fund's investments is available in the Fund's annual and semi-annual reports to shareholders. In the Fund's annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND. The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your Merrill Lynch Financial Consultant or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and Merrill Lynch brokerage or mutual fund account number. If you have any questions, please call your Merrill Lynch Financial Consultant or other financial intermediary or the Transfer Agent at 1-800-MER-FUND. Statement of Additional Information The Fund's Statement of Additional Information contains further information about the Fund and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND. Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone number or address indicated on the inside back cover of this prospectus, if you have any questions. Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the Public Reference Room. This information is also available on the SEC's Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102. You should rely only on the information contained in this prospectus. No one is authorized to provide you with information that is different from the information contained in this prospectus. Investment Company Act file #811-4934 Code #10479-0201 (C) Merrill Lynch Investment Managers, L.P. Merrill Lynch Growth Fund February 16, 2001 Merrill Lynch Investment Managers Table of Contents STATEMENT OF ADDITIONAL INFORMATION Merrill Lynch Growth Fund P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800 ----------------------------- The investment objective of Merrill Lynch Growth Fund (the "Fund") is to seek growth of capital and, secondarily, income. In other words, it tries to choose investments that will increase in value. The Fund may also select certain investments based on their ability to produce current income. However, the Fund's investments emphasize growth of capital more than current income. There can be no assurance that the investment objective of the Fund will be realized. For more information on the Fund's investment objective and policies, see "Investment Objective and Policies." Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. The Merrill Lynch Select PricingSM System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. See "Purchase of Shares." ----------------------------- This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated February 16, 2001 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling 1-800-MER-FUND or by writing the Fund at the above address. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund's audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day. ----------------------------- Merrill Lynch Investment Managers -- Investment Adviser FAM Distributors, Inc. -- Distributor ----------------------------- The date of this Statement of Additional Information is February 16, 2001. TABLE OF CONTENTS Page Investment Objective and Policies 2 Other Investment Policies, Practices and Risk Factors 3 Convertible Securities 3 Non-Diversification Risk 4 Foreign Investment Risks 4 Securities of Smaller Companies 6 Derivatives 6 When Issued Securities, Delayed Delivery Securities and Forward Commitments 11 Borrowing and Leverage 12 Standby Commitment Agreements 12 Junk Bonds 13 Investment Restrictions 15 Portfolio Turnover 17 Management of the Fund 17 Trustees and Officers 17 Compensation of Trustees 19 Management and Advisory Arrangements 19 Code of Ethics 21 Purchase of Shares 21 Initial Sales Charge Alternatives-- Class A and Class D Shares 22 Reduced Initial Sales Charges 24 Deferred Sales Charge Alternatives-- Class B and Class C Shares 27 Closed-End Fund Reinvestment Options 30 Distribution Plans 30 Limitations on the Payment of Deferred Sales Charges 32 Redemption of Shares 33 Redemption 33 Repurchase 34 Reinstatement Privilege-- Class A and Class D Shares 35 Pricing of Shares 35 Determination of Net Asset Value 35 Computation of Offering Price Per Share 36 Portfolio Transactions and Brokerage 37 Shareholder Services 39 Investment Account 39 Exchange Privilege 40 Fee-Based Programs 42 Retirement and Education Savings Plans 42 Automatic Investment Plans 43 Automatic Dividend Reinvestment Plan 43 Systematic Withdrawal Plan 43 Dividends and Taxes 44 Dividends 44 Taxes 45 Tax Treatment of Options and Futures Transactions 46 Special Rules for Certain Foreign Currency Transactions 47 Performance Data 47 General Information 49 Description of Shares 49 Independent Auditors 50 Custodian 50 Transfer Agent 50 Legal Counsel 50 Reports to Shareholders 50 Shareholder Inquiries 50 Additional Information 50 Financial Statements 51 Appendix-Rating of Fixed Income Securities A-1 Table of Contents INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek growth of capital and, secondarily, income. In other words, it tries to choose investments that will increase in value. The Fund may also select certain investments based on their ability to produce current income. However, the Fund's investments emphasize growth of capital more than current income. There can be no assurance that the investment objective of the Fund will be realized. The investment objective of the Fund as set forth in the first sentence of this paragraph is a fundamental policy of the Fund, which may not be changed without a vote of a majority of its outstanding shares as defined below. Reference is made to "How the Fund Invests" and "Investment Risks" in the Prospectus. The Fund is classified as an open-end, non-diversified management investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act") and, accordingly, is not subject to the diversification requirements of the Investment Company Act. This policy is fundamental and may be changed only by shareholder vote. Accordingly, the Fund may invest more than 5% of the value of its assets in the obligations of a single issuer and may acquire more than 10% of the voting securities of a single issuer. However, the Fund remains subject to the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), in order to qualify as a regulated investment company (a "RIC") for U.S. federal income tax purposes. In order to qualify as a RIC under the Code, the Fund must comply with certain requirements, including limiting its investments so that at the close of each quarter of the taxable year (i) not more than 25% of the market value of the Fund's total assets are invested in the securities of a single issuer, or any two or more issuers which are controlled by the Fund and engaged in the same, similar or related businesses, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets are invested in the securities of a single issuer, and the Fund does not own more than 10% of the outstanding voting securities of a single issuer. Investment in the securities of the U.S. Government, its agencies and instrumentalities are not included within the definition of "issuer" for purposes of the diversification requirements of the Code, while foreign government securities are included within such definition. Although operating as a non-diversified fund increases the flexibility with which Merrill Lynch Investment Managers, L.P. ("MLIM" or the "Investment Adviser") manages the Fund's assets, to the extent the Fund invests a relatively high percentage of its assets in obligations of a limited number of issuers, the Fund may be more susceptible than would be a more widely diversified fund to any single economic, political or regulatory occurrence or to changes in an issuer's financial condition or in the market's assessment of the issuers. The Fund may invest in the securities of foreign issuers in the form of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe that evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designed for use in the United States securities markets and EDRs, which are issued in bearer form, are designed for use in European securities markets. GDRs are tradeable both in the U.S. and Europe and are designed for use throughout the world. The Fund generally will invest without regard to tax considerations applicable to distributions to shareholders and therefore its shares may appeal particularly to investors for whom current tax liability is not a major consideration such as employee benefit plans and individual retirement accounts ("IRAs"). Because the Fund is designed for investors for whom current tax liability is not a consideration, the Fund has the flexibility to take advantage of short term investment opportunities when determined appropriate by the Investment Adviser. Investment emphasis will be on equities, primarily common stocks and, to a lesser extent, securities convertible into common stocks, preferred stock and other instruments the return on which is linked to the 2 Table of Contents performance of a common stock or a basket or index of common stocks ("equity securities"). The Fund may invest up to 5% of its total assets in debt securities rated below investment grade by a nationally recognized rating agency (e.g., rated below Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P")) or in unrated debt securities that, in the judgment of the Investment Adviser, possess similar credit characteristics as debt securities rated investment grade or debt securities rated below investment grade (commonly known as "junk bonds"). The Fund will not invest in debt securities rated in the lowest rating categories (Ca or lower for Moody's and CC or lower for S&P) unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. For a description of ratings of debt securities, see the Appendix. The Fund will at all times, except during temporary defensive periods, or during extraordinary periods to meet redemptions, maintain at least 65% of its total assets invested in equity securities. The Fund may also invest up to 35% of its total assets under normal circumstances and in excess of 35% of its total assets during temporary defensive periods, or during extraordinary periods to meet redemptions, in other types of securities, including debt securities, short term U.S. Government securities, money market securities, and repurchase agreements, and cash or cash equivalents, in such proportions as, in the opinion of the Investment Adviser, prevailing market or economic conditions warrant. Inasmuch as the Fund is authorized to invest in bonds and other fixed-income securities, it is important to note that the portion of the Fund's net asset value attributable to such securities may fall when interest rates rise and may rise when interest rates fall. In general, fixed-income securities with longer maturities will be subject to greater volatility resulting from interest rate fluctuations than will fixed-income securities with shorter maturities. Other Investment Policies, Practices and Risk Factors Convertible Securities Convertible securities entitle the holder to receive interest payments paid on corporate debt securities or the dividend preference on a preferred stock until such time as the convertible security matures or is redeemed or until the holder elects to exercise the conversion privilege. The characteristics of convertible securities make them appropriate investments for an investment company seeking growth of capital and income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were issued in nonconvertible form. In analyzing convertible securities, the Investment Adviser will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered by the underlying common stock, among other things. Convertible securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by the Fund is denominated in U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. As described below, the Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of such fluctuations. 3 Table of Contents Apart from currency considerations, the value of convertible securities is influenced by both the yield of nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its "investment value." To the extent interest rates change, the investment value of the convertible security typically will fluctuate. However, at the same time, the value of the convertible security will be influenced by its "conversion value," which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock. If, because of a low price of the underlying common stock the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value. To the extent the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities' investment value. Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision, indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances. Non-Diversification Risk The Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that the Fund is not limited by the Investment Company Act with respect to the proportion of its assets that it may invest in securities of a single issuer. To the extent that the Fund assumes large positions in the securities of a small number of issuers, the Fund's net asset value may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the market's assessment of the issuers, and the Fund may be more susceptible to any single economic or regulatory occurrence than a diversified company. Foreign Investment Risks Foreign Market Risk. Since the Fund may invest up to 40% of its total assets in foreign securities, it offers the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than securities in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States. Foreign Economy Risk. The economies of certain foreign markets often do not compare favorably with that of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and 4 Table of Contents other protectionist or retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets, or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair the Fund's ability to purchase or sell foreign securities or transfer the Fund's assets or income back into the United States, or otherwise adversely affect the Fund's operations. Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts and political and social instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. Currency Risk and Exchange Risk. Securities in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund's portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as "currency risk," means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns. European Economic and Monetary Union. For a number of years, certain European countries have been seeking economic unification that would, among other things, reduce barriers between countries, increase competition among companies, reduce government subsidies in certain industries, and reduce or eliminate currency fluctuations among these European countries. The Treaty on European Union (the "Maastricht Treaty") set out a framework for the European Economic and Monetary Union ("EMU") among the countries that comprise the European Union ("EU"). EMU established a single common European currency (the "euro") that was introduced on January 1, 1999 and is expected to replace the existing national currencies of all EMU participants by July 1, 2002. Certain securities issued in participating EU countries (beginning with government and corporate bonds) have been redenominated in the euro, and are listed, traded, and make dividend and other payments only in euros. No assurance can be given that EMU will take full effect, that all the changes planned for the EU can be successfully implemented, or that these changes will result in the economic and monetary unity and stability intended. There is a possibility that EMU will not be completed, or will be completed but then partially or completely unwound. Because any participating country may opt out of EMU within the first three years, it is also possible that a significant participant could choose to abandon EMU, which could diminish EMU's credibility and influence. Any of these occurrences could have adverse effects on the markets of both participating and non-participating countries, including sharp appreciation or depreciation of the participants' national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the European markets, an undermining of European economic stability, the collapse or slowdown of the drive toward European economic unity, and/or reversion of the attempts to lower government debt and inflation rates that were introduced in anticipation of EMU. Also, withdrawal from EMU by an initial participant could cause disruption of the financial markets as securities redenominated in euros are transferred back into that country's national currency, particularly if the withdrawing country is a major economic power. Such developments could have an adverse impact on the Fund's investments in Europe generally or in specific countries participating in EMU. Gains or losses from euro conversions may be taxable to Fund shareholders under foreign or, in certain limited circumstances, U.S. tax laws. Governmental Supervision and Regulation/Accounting Standards. Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than the United States does. Other countries may not have laws to protect investors the way that the U.S. securities laws do. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company's securities based on non-public information about that company. Accounting standards in 5 Table of Contents other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a company's financial condition. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments. Certain Risks of Holding Fund Assets Outside the United States. The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the U.S. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than investment companies invested only in the U.S. Settlement Risk. Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes. Securities of Smaller Companies The Fund may invest in securities of smaller capitalization issuers. The securities of smaller companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. While smaller companies may offer greater opportunities for capital appreciation than large cap issuers, investments in smaller companies may involve greater risks and thus may be considered speculative. Small companies are generally little known to most individual investors although some may be dominant in their respective industries. Management of the Fund believes that relatively small companies will continue to have the opportunity to develop into significant business enterprises. The Fund may invest in securities of small issuers in the relatively early stages of business development which have a new technology, a unique or proprietary product or service or a favorable market position. Such companies may not be counted upon to develop into major industrial companies, but management believes that eventual recognition of their special value characteristics by the investment community may provide above-average long-term growth. Derivatives The Fund may use instruments referred to as Derivatives. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency, or an index (a measure of value or rates, such as the Standard & Poor's 500 Index or the prime lending rate). Derivatives 6 Table of Contents allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Hedging. The Fund may use Derivatives for hedging purposes (other than options on securities that may be used to seek increased return). Hedging is a strategy in which a Derivative is used to offset the risk that other Fund holdings may decrease in value. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. The Fund may use Derivative instruments and trading strategies including the following: Options on Securities and Securities Indices Purchasing Put Options. The Fund may purchase put options on securities held in its portfolio or on securities indices which are correlated with securities held in its portfolio. When the Fund purchases a put option, in consideration for an upfront payment (the "option premium") the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the "exercise price") on or before a specified date (the "expiration date"), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund's risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option's expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. Purchasing a put option may involve correlation risk and may also involve liquidity and credit risk. The Fund will not purchase put options on securities or securities indices if, as a result of such purchase, the aggregate cost of all outstanding options on securities and securities indices held by the Fund would exceed 5% of the market value of the Fund's total assets. Purchasing Call Options. The Fund may also purchase call options on securities it intends to purchase or securities indices, which are correlated with the types of securities it intends to purchase. When the Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an "anticipatory hedge"). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. Purchasing a call option involves correlation risk, and may also involve liquidity and credit risk. The Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. Writing Call Options. The Fund may write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which correlates with securities held in its portfolio. When the Fund writes a call option, in return for an option premium, the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond 7 Table of Contents a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options on securities to earn income, through the receipt of option premiums; the Fund may write call options on securities indices for hedging purposes. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. Writing a call option may involve correlation risk. The Fund may not write covered call options in underlying securities in an amount exceeding 15% of its total assets, taken at market value. Writing Put Options. The Fund may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options on securities to earn income, through the receipt of option premiums; the Fund may write put options on securities indices for hedging purposes. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options -- for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a "spread"). Writing a put option may involve substantial leverage risk. The Fund is also authorized to sell put or call options in connection with closing out call options it has previously purchased. Other than with respect to closing transactions, the Fund will write only call or put options that are "covered." A call or put option will be considered covered if the Fund has segregated costs with respect to such option in the manner described in "Risk Factors in Derivatives" below. A call option will also be considered covered if the Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of an option on a securities index, securities which substantially correlate with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security. Types of Options. The Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter ("OTC") markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties' obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and seller, but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater liquidity risk. See "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives" below. 8 Table of Contents Futures The Fund may engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral ("margin") equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk. The sale of a futures contract limits the Fund's risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract's expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract. The purchase of a futures contract may protect the Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position. The Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying asset is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). The Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a "commodity pool operator" under regulations of the Commodity Futures Trading Commission. Foreign Exchange Transactions The Fund may engage in spot and forward foreign exchange transactions, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, "Currency Instruments") for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar. Such transactions could be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. Forward Foreign Exchange Transactions. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. The Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. The Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and liquidity risk. Currency Futures. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts. See "Futures" above. Currency futures involve substantial currency risk, and also involve leverage risk. 9 Table of Contents Currency Options. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See "Types of Options" above and "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives" below. Currency options involve substantial currency risk, and may involve credit, leverage or liquidity risk. Limitations on Currency Hedging. The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund will not incur potential net liabilities of more than 20% of its total assets from Currency Instruments. The Fund will not necessarily attempt to hedge all of its foreign portfolio positions. Risk Factors in Hedging Foreign Currency Risks. Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Fund's use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund's shares, the net asset value of the Fund's shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund's hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses, and decrease its total return, as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur. It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging. Risk Factors in Derivatives Derivatives are volatile and involve significant risks, including: Credit risk-- the risk that the counterparty on a Derivative transaction will be unable to honor its financial obligation to the Fund. Currency risk-- the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment. Leverage risk -- the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. Liquidity Risk -- the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. Use of Derivatives for hedging purposes involves correlation risk. If the value of the Derivative moves more or less than the value of the hedged instruments the Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments. 10 Table of Contents The Fund intends to enter into transactions involving Derivatives only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under "Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives." However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Derivative without incurring substantial losses, if at all. Certain transactions in Derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Fund to potential losses, which exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund's exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund's exposure to loss. Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives Certain Derivatives traded in OTC markets, including OTC options involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Investment Adviser anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer's quotation may be used. Because Derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparty, the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Derivatives traded in OTC markets only with financial institutions which have substantial capital or have provided the Fund with a third-party guaranty or other credit enhancement. Additional Limitations on the Use of Derivatives The Fund may not use any Derivative to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly. When Issued Securities, Delayed Delivery Securities and Forward Commitments The Fund may purchase or sell securities that it is entitled to receive on a when issued basis. The Fund may also purchase or sell securities on a delayed delivery basis. The Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction. The Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. When the Fund purchases securities in these transactions, the Fund segregates liquid securities in an amount equal to the amount of its purchase commitments. There can be no assurance that a security purchased on a when issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. The value of securities in these transactions on the delivery date may be more or less than the Fund's purchase price. The Fund may bear the 11 Table of Contents risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period. Borrowing and Leverage The use of leverage by the Fund creates an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund's portfolio. Although the principal of such borrowings will be fixed, the Fund's assets may change in value during the time the borrowings are outstanding. Borrowings will create interest expenses of the Fund that can exceed the income from the assets purchased with the borrowings. To the extent the income or capital appreciation derived from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Fund's return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to shareholders as dividends and other distributions will be reduced. In the latter case, the Investment Adviser in its best judgment nevertheless may determine to maintain the Fund's leveraged position if it expects that the benefits to the Fund's shareholders of maintaining the leveraged position will outweigh the current reduced return. Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Investment Adviser from managing the Fund's portfolio in accordance with the Fund's investment objective and policies. However, a breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so. The Fund at times may borrow from affiliates of the Investment Adviser, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace. Standby Commitment Agreements The Fund may enter into standby commitment agreements. These agreements commit the Fund, for a stated period of time, to purchase a stated amount of securities which may be issued and sold to the Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued. The Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to the Fund. The Fund will not enter into a standby commitment with a remaining term in excess of 90 days and will limit its investment in such commitments so that the aggregate purchase price of securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale that affect their marketability, will not exceed 15% of its net assets taken at the time of the commitment. The Fund segregates liquid securities in an aggregate amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security thereafter will be reflected in the calculation of the Fund's net asset value. The cost basis of the 12 Table of Contents security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. Junk Bonds Junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of comparable quality. Although junk bonds generally pay higher rates of interest than investment grade bonds, they are high risk investments that may cause income and principal losses for the Fund. The major risks in junk bond investments include the following: Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuer's industry and to general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer development or the unavailability of additional financing. The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The issuer's ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Junk bonds are frequently ranked junior in claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally paid off before the junior obligations. Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems the junk bonds, the Fund may have to invest the proceeds in bonds with lower yields and may lose income. Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds than on other higher rated fixed income securities. Junk bonds may be less liquid than higher rated fixed income securities even under normal economic conditions. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the Fund's portfolio securities than in the case of securities trading in a more liquid market. The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer. Repurchase Agreements. The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the bank or primary dealer or an affiliate thereof agrees, upon entering into the contract with the Fund, to repurchase the security at a mutually agreed upon time and price in a specified currency, thereby determining the yield during the term of the agreement. This insulates the Fund from fluctuations in the market value of the underlying security during such period. Although, to the extent the repurchase agreement is not denominated in U.S. dollars, the Fund's return may be affected by currency fluctuations. The Fund may not invest more than 15% of its net assets in repurchase agreements maturing in more than seven days (together with other illiquid securities). Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. The Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the collateral. In the event of a default under such a repurchase agreement, instead of the contractual fixed rate of return, the rate of return to the Fund shall be dependent upon intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. 13 Table of Contents Securities Lending. The Fund may lend securities with a value not exceeding 33 1/3% of its total assets (subject to investment restriction (5) below) to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. Government, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. During the period of such a loan, the Fund typically receives the income on both the loaned securities and the collateral and thereby increases its yield. In certain circumstances, the Fund may receive a flat fee for its loans. Such loans are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral and could suffer a loss to the extent the value of the collateral falls below the market value of the borrowed securities. Illiquid or Restricted Securities. The Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund's assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund's operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short term cash requirements or incurring capital losses on the sale of illiquid investments. The Fund may invest in securities that are not registered under the Securities Act of 1933, as amended ("Securities Act") or that are subject to trading restrictions under the laws of a foreign jurisdiction ("restricted securities"). Restricted securities may be sold in private placement transactions between the issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund's investments in private placements may consist of direct investments and may include investments in smaller, less-seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material non public information which may restrict the Fund's ability to conduct portfolio transactions in such securities. 144A Securities. The Fund may purchase restricted securities that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act. The Board has determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund's Board. The Board has adopted guidelines and delegated to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will continue to develop, the Board will carefully monitor the Fund's investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities. 14 Table of Contents Suitability. The economic benefit of an investment in the Fund depends upon many factors beyond the control of the Fund, the Investment Adviser and its affiliates. The Fund should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in the Fund will depend upon, among other things, such investor's investment objectives and such investor's ability to accept the risks associated with investing in equity securities, including the risk of loss of principal. Investment Restrictions The Fund has adopted a number of fundamental and non-fundamental restrictions and policies relating to the investment of its assets and its activities. The fundamental policies set forth below may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the Fund's shares present at a meeting at which more than 50% of the outstanding shares of the Fund are represented or (ii) more than 50% of the Fund's outstanding shares). Under the fundamental investment restrictions the Fund may not: (1) Make any investment inconsistent with the Fund's classification as a non-diversified company under the Investment Company Act. (2) Invest more than 25% of its total assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). (3) Make investments for the purpose of exercising control or management. (4) Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies that invest in real estate or interests therein. (5) Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time. (6) Issue senior securities to the extent such issuance would violate applicable law. (7) Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when issued and forward commitment transactions and similar investment strategies. (8) Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act in selling portfolio securities. (9) Purchase or sell commodities or contracts on commodities, except to the extent that the Fund may do so in accordance with applicable law and the Prospectus and this Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. 15 Table of Contents Under the Fund's non-fundamental investment restrictions, which may be changed by the Board without shareholder approval, the Fund may not: (a) Purchase securities of other investment companies, except to the extent permitted by applicable law. As a matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the Investment Company Act at any time the Fund's shares are owned by another investment company that is part of the same group of investment companies as the Fund. (b) Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund currently does not intend to engage in short sales, except short sales "against the box." (c) Invest in securities that cannot be readily resold because of legal or contractual restrictions or that cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its net assets would be invested in such securities. This restriction shall not apply to securities that mature within seven days or securities which the Board of the Fund has otherwise determined to be liquid pursuant to applicable law. Securities purchased in accordance with Rule 144A under the Securities Act and determined to be liquid by the Fund's Board are not subject to the limitations set forth in this investment restriction. (d) Notwithstanding fundamental investment restriction (7) above, borrow amounts in excess of 20% of its total assets taken at market value (including the amount borrowed), and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. In addition, the Fund will not purchase securities while borrowings are outstanding except to honor prior commitments and to exercise subscription rights. The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceed 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if an OTC option is sold by the Fund to a primary U.S. government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Board of Trustees of the Fund, without the approval of the Fund's shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position. Portfolio securities of the Fund generally may not be purchased from, sold or loaned to the Investment Adviser or its affiliates or any of their directors, general partners, officers or employees, acting as principal, unless pursuant to a rule or exemptive order under the Investment Company Act. Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is prohibited from engaging in certain transactions involving such firm or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions pursuant to an exemptive order under the Investment Company Act. See "Portfolio Transactions and Brokerage." Without such an exemptive order the Fund would be prohibited from engaging in portfolio transactions with Merrill Lynch or any of its affiliates acting as principal. 16 Table of Contents Non-Diversified Status. The Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that the Fund is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. The Fund's investments are limited, however, in order to allow the Fund to qualify as a "regulated investment company" under the Code. See "Dividends and Taxes -- Taxes." To qualify, the Fund complies with certain requirements, including limiting its investments so that at the close of each quarter of each taxable year, (a) not more than 25% of the Fund's total assets are invested in the securities of a single issuer, and (b) with regard to at least 50% of the Fund's total assets, not more than 5% of its total assets are invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. For purposes of this restriction, the Fund will regard each state and each political subdivision, agency or instrumentality of such state and each multi-state agency of which such state is a member and each public authority which issues securities on behalf of a private entity as a separate issuer, except that if the security is backed only by the assets and revenues of a non-government entity then the entity with the ultimate responsibility for the payment of interest and principal may be regarded as the sole issuer. These tax-related limitations may be changed by the Board of Trustees of the Fund to the extent necessary to comply with changes to the Federal tax requirements. A fund that elects to be classified as "diversified" under the Investment Company Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets. To the extent that the Fund assumes large positions in the securities of a small number of issuers, the Fund's net asset value may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the market's assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company. Portfolio Turnover The Investment Adviser will normally effect portfolio transactions without regard to the time securities have been held, if, in its judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, financial or economic conditions. As a result of its investment policies, under certain market conditions the Fund's portfolio turnover rate may be higher than that of other investment companies; however, it is extremely difficult to predict portfolio turnover rates with any degree of accuracy. The portfolio turnover rate is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high portfolio turnover may result in negative tax consequences, such as an increase in capital gains dividends. High portfolio turnover may also involve correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are born directly by the Fund. See "Dividends and Taxes." For the fiscal years ended October 31, 2000, 1999 and 1998, the Fund's portfolio turnover rate was 66.49%, 101.71% and 24.41%, respectively. The higher rate for 1999 was attributable to a restructuring of the Fund's portfolio by its new portfolio manager. MANAGEMENT OF THE FUND Trustees and Officers The Board of Trustees of the Fund consists of six individuals, five of whom are not "interested persons" of the Fund as defined in the Investment Company Act (the "non-interested Trustees"). The Trustees are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors or trustees of investment companies by the Investment Company Act. Information about the Trustees, executive officers and the portfolio manager of the Fund, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Trustee, executive officer and the portfolio manager is P.O. Box 9011, Princeton, New Jersey 08543-9011. 17 Table of Contents TERRY K. GLENN (60) -- President and Trustee(1)(2) -- Executive Vice President of the Investment Adviser and Fund Asset Management, L.P. ("FAM") (which terms as used herein include their corporate predecessors) since 1983; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of FAM Distributors, Inc. ("FAMD" or the "Distributor") since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. ("Princeton Services") since 1988. JAMES H. BODURTHA (56) -- Trustee(2)(3) -- 36 Popponesset Road, Cotuit, Massachusetts 02635. Director and Executive Vice President, The China Business Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993. HERBERT I. LONDON (61) -- Trustee(2)(3) -- 2 Washington Square Village, New York, New York 10012. John M. Olin Professor of Humanities, New York University since 1993 and Professor thereof since 1980; President, Hudson Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP from 1996 to 1997. JOSEPH L. MAY (71) -- Trustee(2)(3) -- 424 Church Street, Suite 2000, Nashville, Tennessee 37219. Attorney in private practice since 1984; President, May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983; Chairman, The May Corporation (personal holding company) from 1972 to 1983; Director, Signal Apparel Co. since 1972 to 1989. ANDRE F. PEROLD (48) -- Trustee(2)(3) -- Morgan Hall, Soldiers Field, Boston, Massachusetts 02163. George Gund Professor of Banking and Finance, Harvard Business School since 2000; Sylvan C. Coleman Professor of Financial Management, Harvard Business School from 1993 to 2000 and Professor thereof from 1989 to 1993; Trustee, The Common Fund, since 1989; Director, Quantec Limited from 1991 to 1999 and TIBCO from 1994 to 1996; Director, Genbel Securities Limited and Gensec Bank since 1999; Director, Gensec Asset Management since 2000; Director, Bulldogresearch.com since 2000; Director, Stockback.com since 2000. ROBERTA COOPER RAMO (58) -- Trustee(2)(3) -- P.O. Box 2168, 500 Fourth Street, N.W., Albuquerque, New Mexico 87103. Shareholder, Modrall, Sperling, Roehl, Harris & Sisk, P.A. since 1993; President, American Bar Association from 1995 to 1996 and member of the Board of Governors thereof from 1994 to 1997; Partner, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993; Director, Coopus, Inc. since 1999; Director, United New Mexico Bank (now Wells Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now First Security) from 1975 to 1976. STEPHEN I. SILVERMAN (50) -- Senior Vice President and Portfolio Manager of the Fund(1)(2) -- Portfolio Manager of the Fund since 1999 and Senior Portfolio Manager at MLIM since 1983; First Vice President of MLIM since 1997; Vice President of MLIM from 1983 to 1997. DONALD C. BURKE (40) -- Vice President and Treasurer(1)(2) -- Senior Vice President and Treasurer of the Investment Adviser and FAM since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; First Vice President of Investment Adviser from 1997 to 1999; Vice President of Investment Adviser from 1990 to 1997; Director of Taxation of Investment Adviser since 1990. ROBERT C. DOLL (46) -- Senior Vice President(1)(2) -- Senior Vice President of the Investment Adviser and FAM since 1999; Senior Vice President of Princeton Services since 1999; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999. LORI A. MARTIN (38) -- Secretary(1)(2) -- Director (Legal Advisory) of the Investment Adviser since 2000; Vice President of MLIM from 1998 to 2000; Attorney in private practice from 1989 to 1998. - --------------- (1) Interested person, as defined in the Investment Company Act, of the Fund. (2) Such Trustee or officer is a director, trustee or officer of certain other investment companies for which FAM or MLIM acts as the investment adviser or manager. (3) Member of the Fund's Audit and Nominating Committee, which is responsible for the selection of the independent auditors and the selection and nomination of non-interested Trustees. 18 Table of Contents As of February 1, 2001, the Trustees and officers of the Fund as a group (10 persons) owned an aggregate of less than 1% of the outstanding shares of the Fund. At such date, Mr. Glenn, a Trustee and officer of the Fund, and the other officers of the Fund owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co. Compensation of Trustees The Fund pays fees to each non-interested Trustee for service to the Fund. Each non-interested Trustee receives an aggregate annual retainer of $100,000 for his or her services to multiple investment companies advised by the Investment Adviser or its affiliate, FAM ("MLIM/FAM advised funds"). The portion of the annual retainer allocated to each MLIM/FAM advised fund is determined quarterly based on the relative net assets of each fund. In addition, each non-interested Trustee receives a fee per board meeting attended and per in-person Audit and Nominating Committee meeting attended. The annual per meeting fees paid to non-interested Trustees who attend each regular quarterly meeting of the Board and of the Audit and Nominating Committee aggregate $60,000 for all MLIM/FAM advised funds for which the Trustees serve and are allocated equally among those funds. The Fund also reimburses the non-interested Trustees for actual out-of-pocket expenses relating to attendance at meetings. The Audit and Nominating Committee consists of all of the non-interested Trustees of the Fund. The following table shows the compensation earned by the non-interested Trustees for the fiscal year ended October 31, 2000 and the aggregate compensation paid to them from all MLIM/ FAM-advised funds, for the calendar year ended December 31, 2000.
Total Compensation From Fund and Aggregate Pension or Retirement MLIM/FAM Advised Compensation Benefits Accrued as Funds Paid to Name of Trustee From Fund Part of Fund Expenses Trustee(1) - ----------------------------- -------------- ----------------------- -------------------- James H. Bodurtha $20,190 None $133,250 Herbert I. London $20,190 None $133,250 Joseph L. May $20,190 None $133,250 Andre F. Perold $20,190 None $133,250 Roberta Cooper Ramo(2) $ 0 None $169,000
- --------------- (1) The Trustees serve on the boards of MLIM/ FAM advised funds as follows: Mr. Bodurtha (31 registered investment companies consisting of 43 portfolios); Mr. London (31 registered investment companies consisting of 43 portfolios); Mr. May (31 registered investment companies consisting of 43 portfolios); Mr. Perold (31 registered investment companies consisting of 43 portfolios); and Ms. Ramo (31 registered investment companies consisting of 43 portfolios). (2) Ms. Ramo was elected Trustee of the Fund on December 21, 2000 and director/ trustee of certain other MLIM/FAM advised funds on December 15, 1999. Trustees of the Fund may purchase Class A shares of the Fund at net asset value. See "Purchase of Shares-- Initial Sales Charge Alternatives-- Class A and Class D Shares-- Reduced Initial Sales Charges-- Purchase Privilege of Certain Persons." Management and Advisory Arrangements Investment Advisory Services. The Investment Adviser provides the Fund with investment advisory and management services. Subject to the supervision of the Trustees, the Investment Adviser is responsible for the actual management of the Fund's portfolio and constantly reviews the Fund's holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Fund. Investment Advisory Fee. The Fund has entered into a management agreement with the Investment Adviser (the "Management Agreement"), pursuant to which the Investment Adviser receives for its services 19 Table of Contents to the Fund monthly compensation at the annual rate of 0.65% of the average daily net assets of the Fund. The Investment Adviser has voluntarily agreed to waive a portion of its investment advisory fee so that such fee is equal to 0.65% of average daily net assets not exceeding $1 billion; 0.625% of average daily net assets exceeding $1 billion but not exceeding $1.5 billion; and 0.60% of average daily net assets exceeding $1.5 billion but not exceeding $10 billion, and 0.575% of average daily net assets exceeding $10 billion. The table below sets forth information about the total investment advisory fees paid by the Fund to the Investment Adviser and the amount of any fee waiver for the periods indicated.
Fiscal Year Ended October 31, Investment Advisory Fee Investment Advisory Fee Waived ------------------------------- ------------------------- -------------------------------- 2000 $ 19,782,243 $ 943,188 1999 $ 22,175,519 $ 1,082,522 1998 $ 45,929,114 $ 2,909,721
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K." or the "Sub-Adviser") pursuant to which MLAM U.K. provides investment advisory services to the Investment Adviser with respect to the Fund. For the fiscal years ended October 31, 2000, 1999 and 1998, the Investment Adviser paid no fees to MLAM U.K. pursuant to this agreement. Payment of Fund Expenses. The Management Agreement obligates the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Trustees of the Fund who are affiliated persons of the Investment Adviser. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; charges of the custodian and sub-custodian, and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal, state or foreign laws; fees and expenses of non-interested Trustees; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. For the fiscal year ended October 31, 2000, the Investment Adviser provided accounting services to the Fund at its cost. For this period, the Fund reimbursed the Investment Adviser $254,181 for these services. As of January 1, 2001, accounting services are provided for the Fund by State Street Bank and Trust Company ("State Street") pursuant to an agreement between State Street and the Fund. The Fund will pay the cost of these services. In addition, the Fund will reimburse the Investment Adviser for the cost of certain additional accounting services. The Distributor will pay certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses will be financed by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of Shares -- Distribution Plans." Organization of the Investment Adviser. The Investment Adviser is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are "controlling persons" of the Investment Adviser as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its management or policies. The following entities may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co. Duration and Termination. Unless earlier terminated as described herein, the Management Agreement and Sub-Advisory Agreement will continue in effect from year to year if approved annually (a) by the Trustees of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Trustees who are not parties to such contract or interested persons (as defined in the Investment Company 20 Table of Contents Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days' written notice at the option of either party or by vote of the shareholders of the Fund. Transfer Agency Services. Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B or Class C account and is entitled to reimbursement for certain transaction charges and out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge will be assessed on all accounts that close during the calendar year. Application of this fee will commence the month following the month the account is closed. At the end of the calendar year, no further fees will be due. For purposes of the Transfer Agency Agreement, the term "account" includes a shareholder account maintained directly by the Transfer Agent and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system, provided the recordkeeping system is maintained by a subsidiary of ML & Co. Distribution Expenses. The Fund has entered a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund (the "Distribution Agreement"). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Management Agreement described above. Code of Ethics The Board of Trustees of the Fund has approved a Code of Ethics under Rule 17j-1 under the Investment Company Act that covers the Fund and the Fund's Investment Adviser, Sub-Adviser and Distributor (the "Code of Ethics"). The Code of Ethics significantly restricts the personal investing activities of all employees of the Investment Adviser, Sub-Adviser and Distributor and, as described below, imposes additional, more onerous, restrictions on Fund investment personnel. The Code of Ethics requires that all employees of the Investment Adviser, Sub-Adviser and Distributor preclear any personal securities investments (with limited exceptions such as mutual funds, high-quality short-term securities and direct obligations of the U.S. Government). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Investment Adviser, Sub-Adviser and Distributor include a ban on acquiring any securities in a "hot" initial public offering and investment personnel are prohibited from profiting on short term trading in securities. In addition, no employee may purchase or sell any security that at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Code of Ethics provides for trading "blackout periods" which prohibit trading by investment personnel of the Fund within seven calendar days before or after trading by the Fund in the same or an equivalent security. PURCHASE OF SHARES Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus. The Fund offers four classes of shares under the Merrill Lynch Select PricingSM System: shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Each Class A, Class B, 21 Table of Contents Class C or Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges ("CDSCs"), distribution fees and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services - -- Exchange Privilege." Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. The Merrill Lynch Select PricingSM System is used by more than 50 registered investment companies advised by the Investment Adviser or FAM. Funds advised by the Investment Adviser or FAM that use the Merrill Lynch Select PricingSM System are referred to herein as "Select Pricing Funds." The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers or other financial intermediaries prior to the close of business on the New York Stock Exchange (the "NYSE") (generally 4:00 p.m., Eastern time) which includes orders received after the determination of net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE in order to purchase shares at that day's offering price. The Fund or the Distributor may suspend the continuous offering of the Fund's shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Fund or the Distributor. Neither the Distributor nor the dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $5.35) to confirm a sale of shares to such customers. Purchases made directly through the Transfer Agent are not subject to the processing fee. Initial Sales Charge Alternatives -- Class A and Class D Shares Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because 22 Table of Contents over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charges, and, in the case of Class D shares, the account maintenance fee. Although some investors who previously purchased Class A shares may no longer be eligible to purchase Class A shares of other Select Pricing Funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares. The term "purchase," as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term "purchase" also includes purchases by any "company," as that term is defined in the Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. Eligible Class A Investors Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors who currently own Class A shares in a shareholder account, including participants in the Merrill Lynch BlueprintSM Program, are entitled to purchase additional Class A shares of the Fund in that account. Certain employer-sponsored retirement or savings plans, including eligible 401(k) plans, may purchase Class A shares at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by the Investment Adviser or any of its affiliates. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs and U.S. branches of foreign banking institutions provided that the program or bank has $3 million or more initially invested in Select Pricing Funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company serves as trustee and certain purchases made in connection with certain fee-based programs. In addition, Class A shares are offered at net asset value to ML & Co. and its subsidiaries and their directors and employees and to members of the Boards of MLIM/FAM-advised funds. Certain persons who acquired shares of certain MLIM/FAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions are met. In addition, Class A shares of the Fund and certain other Select Pricing Funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds in shares of the Fund and certain other Select Pricing Funds. 23 Table of Contents Class A and Class D Sales Charge Information
Class A Shares - --------------------------------------------------------------------------------------------------------- For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on Ended Charges Retained by Paid to Redemption of October 31, Collected Distributor Merrill Lynch Load-Waived Shares - --------------------- ------------ -------------- --------------- --------------------- 2000 $ 14,052 $1,241 $12,811 $176,709 1999 $ 12,109 $1,885 $10,224 $ 70,742 1998 $103,103 $6,709* $96,394 $177,033
- --------------- * Includes $118 in direct commissions.
Class D Shares - -------------------------------------------------------------------------------------------------------- For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on Ended Charges Retained by Paid to Redemption of October 31, Collected Distributor Merrill Lynch Load-Waived Shares - --------------------- ----------- -------------- --------------- -------------------- 2000 $ 119,434 $ 8,155 $ 111,279 $51,020 1999 $ 175,647 $25,575 $ 150,072 $ 8,476 1998 $1,420,604 $90,709* $1,329,895 $66,156
- --------------- * Includes $3,985 in direct commissions. The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act. Reduced Initial Sales Charges Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the reduced sales efforts that will be needed to obtain such investments. Reinvested Dividends. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends. Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of shares of the Fund and of any other Select Pricing Funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intent. Reduced sales charges are applicable to purchases aggregating $25,000 or more of the Class A or Class D shares of the Fund or any Select Pricing Funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intent. The Letter of Intent is available only to investors whose accounts are established and maintained at the Fund's Transfer Agent. The Letter of Intent is not available to employee benefit plans for which Merrill Lynch provides plan participant recordkeeping services. The Letter of Intent is not a binding obligation to purchase any amount of Class A or Class D shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A 24 Table of Contents purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Fund and of other Select Pricing Funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to at least 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the further reduced percentage sales charge that would be applicable to a single purchase equal to the total dollar value of the Class A or Class D shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charge on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund ("Summit") into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intent from the Fund. Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In addition, participants in Blueprint who own Class A shares of the Fund may purchase additional Class A shares of the Fund through Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions, trade associations and benefit plans. Investors placing orders to purchase Class A or Class D shares of the Fund through Blueprint will acquire the Class A or Class D shares at net asset value plus a sales charge calculated in accordance with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $300.01 up to $5,000 at 3.25% plus $3, and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class A or Class D shares of the Fund are being offered at net asset value plus a sales charge of 0.50 of 1% for corporate or group IRA programs placing orders to purchase their Class A or Class D shares through Blueprint. Services, including the exchange privilege, available to Class A and Class D investors through Blueprint, however, may differ from those available to other Class A or Class D share investors. Class A and Class D shares are offered at net asset value to participants in Blueprint through the Merrill Lynch Directed IRA Rollover Program (the "IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian rollover assets from employer-sponsored retirement and savings plans whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service Agreement. Orders for purchases and redemptions of Class A or Class D shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. TMA(SM) Managed Trusts. Class A shares are offered at net asset value to TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services. Employee Access(SM) Accounts. Provided applicable threshold requirements are met, either Class A or Class D shares are offered at net asset value to Employee Access(SM) Accounts available through authorized 25 Table of Contents employers. The initial minimum investment for such accounts is $500, except that the initial minimum investment for shares purchased for such accounts pursuant to the Automatic Investment Program is $50. Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class A or Class D shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at 1-800-237-7777. Purchase Privilege of Certain Persons. Trustees of the Fund, members of the Boards of other MLIM/FAM-advised investment companies, ML & Co. and its subsidiaries (the term "subsidiaries," when used herein with respect to ML & Co., includes MLIM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML & Co.) and their directors and employees, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund's suitability standards. Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Financial Consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the Financial Consultant's previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis; and, second, the investor must establish that such redemption had been made within 60 days prior to the investment in the Fund and the proceeds from the redemption had been maintained in the interim in cash or a money market fund. Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("notice") if the following conditions are satisfied: first, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and the shares of such other fund were subject to a sales charge either at the time of purchase or on a deferred basis; and, second, such purchase of Class D shares must be made within 90 days after such notice. Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Consultant and that has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of shares of such other mutual fund and that such shares have been outstanding for a period of no less than six months; and, second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund. Acquisition of Certain Investment Companies. Class D shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. Purchases Through Certain Financial Intermediaries. Reduced sales charges may be applicable for purchases of Class A or Class D shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to time. 26 Table of Contents Deferred Sales Charge Alternatives -- Class B and Class C Shares Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Select Pricing Funds. Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees. The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See "Pricing of Shares -- Determination of Net Asset Value" below. Contingent Deferred Sales Charges -- Class B Shares Class B shares that are redeemed within four years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the four-year period. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. The following table sets forth the Class B CDSC: CDSC as a Percentage of Dollar Amount Year Since Purchase Payment Made Subject to Charge -------------------------------------------------------------------- 0-1 4.0% 1-2 3.0% 2-3 2.0% 3-4 1.0% 4 and thereafter None To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because of dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the applicable rate in the third year after purchase). The Class B CDSC may be waived on redemptions of shares in connection with certain post-retirement withdrawals from an IRA or other retirement plan or following the death or disability (as defined in the Code) of a shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability or, if later, reasonably promptly following completion of probate. The Class B CDSC also may be waived on redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also be waived for any Class B 27 Table of Contents shares that are purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The Class B CDSC may also be waived for any Class B shares that are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan managed by the MLIM Private Portfolio Group and held in such account at the time of redemption. The Class B CDSC may also be waived or its terms may be modified in connection with certain fee-based programs. The Class B CDSC may also be waived in connection with involuntary termination of an account in which Fund shares are held or for withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services -- Fee-Based Programs" and "-- Systematic Withdrawal Plan." Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class B shares with a waiver of the CDSC upon redemption, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Such Class B shares will convert into Class D shares approximately ten years after the plan purchases the first share of any Select Pricing Fund. Minimum purchase requirements may be waived or varied for such plans. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at 1-800-237-7777. Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain participants in Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as trade associations and credit unions and benefit plans. Class B shares of the Fund are offered through Blueprint only to members of certain affinity groups. The CDSC is waived in connection with purchase orders placed through Blueprint. Services, including the exchange privilege, available to Class B investors through Blueprint, however, may differ from those available to other Class B investors. Orders for purchases and redemptions of Class B shares of the Fund will be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of a Blueprint automatic investment plan. Additional information concerning these Blueprint programs, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. Conversion of Class B Shares to Class D Shares. After approximately eight years (the "Conversion Period"), Class B shares will be converted automatically into Class D shares of the Fund. Class D shares are subject to an ongoing account maintenance fee of 0.25% of average daily net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the "Conversion Date") on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for federal income tax purposes. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at the Conversion Date the conversion of Class B shares to Class D shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the Fund. In general, Class B shares of equity Select Pricing Funds will convert approximately eight years after initial purchase and Class B shares of taxable and tax-exempt fixed income Select Pricing Funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply and the 28 Table of Contents holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified for investors that participate in certain fee-based programs. See "Shareholder Services -- Fee-Based Programs." Class B shareholders of the Fund exercising the exchange privilege described under "Shareholder Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered. Contingent Deferred Sales Charges -- Class C Shares Class C shares that are redeemed within one year of purchase may be subject to a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. The Class C CDSC may be waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services -- Systematic Withdrawal Plan." Class B and Class C Sales Charge Information Class B Shares* ---------------------------------------------------------------------- For the Fiscal Year CDSCs Received CDSCs Paid to Ended October 31, by Distributor Merrill Lynch ------------------------ --------------------- --------------------- 2000 $1,619,559 $1,619,559 1999 $5,430,219 $5,430,219 1998 $5,818,896 $5,818,896 * Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder's participation in certain fee-based programs. Class C Shares ---------------------------------------------------------------------- For the Fiscal Year CDSCs Received CDSCs Paid to Ended October 31, by Distributor Merrill Lynch ------------------------ -------------------- ---------------------- 2000 $ 18,505 $ 18,505 1999 $ 110,221 $ 110,221 1998 $ 247,792 $ 247,792 Merrill Lynch compensates its Financial Consultants for selling Class B and Class C shares at the time of purchase from its own funds. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers and other financial intermediaries (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares from a dealer's own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. See "Distribution Plans" below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities Dealers, Inc. (the "NASD") asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. 29 Table of Contents Closed-End Fund Reinvestment Options Class A shares of the Fund ("Eligible Class A Shares") are offered at net asset value to holders of the common stock of certain closed-end funds advised by the Investment Adviser or FAM who purchased such closed-end fund shares prior to October 21, 1994 (the date the Merrill Lynch Select PricingSM System commenced operations) and wish to reinvest the net proceeds from a sale of such shares in Eligible Class A Shares, if the conditions set forth below are satisfied. Alternatively, holders of the common stock of closed-end funds who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of those shares may purchase Class A shares (if eligible to buy Class A shares) or Class D shares of the Fund ("Eligible Class D Shares") at net asset value, if the following conditions are met. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Eligible Class D Shares. Second, the closed-end fund shares must either have been acquired in that Fund's initial public offering or represent dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Subject to the conditions set forth below, shares of the Fund are offered at net asset value to holders of the common stock of certain MLIM/ FAM-advised continuously offered closed-end funds who wish to reinvest the net proceeds from a sale of such shares. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc. will receive Class C shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except that shareholders of Merrill Lynch Municipal Strategies Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who already own Class A shares of the Fund may be eligible to purchase additional Class A shares pursuant to this option, if such additional Class A shares will be held in the same account as the existing Class A shares and the other requirements pertaining to the reinvestment privilege are met. In order to exercise this reinvestment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an "eligible fund") must sell his or her shares of common stock of the eligible fund (the "eligible shares") back to the eligible fund in connection with a tender offer conducted by the eligible fund and reinvest the proceeds immediately in the designated class of shares of the Fund. This investment option is available only with respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is applicable. Purchase orders from eligible fund shareholders who wish to exercise this reinvestment option will be accepted only on the day that the related tender offer terminates and will be effected at the net asset value of the designated class of shares of the Fund on such day. The Class C CDSC may be waived upon redemption of Class C shares purchased by an investor pursuant to this closed-end fund reinvestment option. Such waiver is subject to the requirement that the investor have held the tendered shares for a minimum of one year and to such other conditions as are set forth in the prospectus for the related closed-end fund. Distribution Plans Reference is made to "Fees and Expenses" in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. The Distribution Plans for Class B, Class C and Class D shares each provides that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class B, Class C and Class D shares. Each of those classes has exclusive voting rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or 30 Table of Contents distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan). The Distribution Plans for Class B and Class C shares each provides that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services and bearing certain distribution-related expenses of the Fund, including payments to financial consultants or other financial intermediaries for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through selected securities dealers and other financial intermediaries without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants, a selected securities dealer or other financial intermediary in connection with the sale of the Class B and Class C shares. The Fund's Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of each Distribution Plan, the Trustees must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and each related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Trustees shall be committed to the discretion of the non-interested Trustees then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the non-interested Trustees concluded that there is reasonable likelihood that each Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the non-interested Trustees or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders and all material amendments are required to be approved by the vote of Trustees, including a majority of the non-interested Trustees who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of the Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Distribution Plan or such report, the first two years in an easily accessible place. Among other things, each Distribution Plan provides that the Distributor shall provide and the Trustees shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Trustees for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans annually, as of December 31 of each year, on a "fully allocated accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On the fully allocated accrual basis, revenues consist of the account maintenance fees, distribution fees, the CDSCs and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and CDSCs and the expenses consist of financial consultant compensation. As of December 31, 1999, the fully allocated accrual revenues of the Distributor and Merrill Lynch for the period since the commencement of operations of Class B shares exceeded the fully allocated accrual expenses by approximately $10,091,000 (0.73% of Class B net assets at that date). As of October 31, 2000, direct cash revenues for the period since the commencement of operations of Class B shares exceeded direct cash expenses by $150,401,194 (14.26% of Class B net assets at that date). As of December 31, 1999, the fully allocated accrual expenses incurred by the Distributor and Merrill Lynch for the period since the commencement of operations of Class C shares exceeded the fully allocated accrual revenues by approximately $1,459,000 (1.24% of Class C net assets at that date). As of October 31, 2000, direct cash revenues for the 31 Table of Contents period since the commencement of operations of Class C shares exceeded direct cash expenses by $7,658,650 (8.16% of Class C net assets at that date). For the fiscal year ended October 31, 2000, the Fund paid the Distributor $12,729,452 pursuant to the Class B Distribution Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $1.3 billion), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class B shares. For the fiscal year ended October 31, 2000, the Fund paid the Distributor $1,105,562 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of approximately $109.9 million), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class C shares. For the fiscal year ended October 31, 2000, the Fund paid the Distributor $2,077,024 pursuant to the Class D Distribution Plan (based on average daily net assets subject to such Class D Distribution Plan of approximately $826.3 million), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class D shares. Limitations on the Payment of Deferred Sales Charges The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the "voluntary maximum") in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made. The following table sets forth comparative information as of October 31, 2000 with respect to the Class B and Class C shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and, with respect to the Class B shares, the Distributor's voluntary maximum.
Data Calculated as of October 31, 2000 (in thousands) ---------------------------------------------------------------------------------------------------- Annual Distribution Allowable Amounts Fee at Eligible Allowable Interest on Maximum Previously Aggregate Current Net Gross Aggregate Unpaid Amount Paid to Unpaid Asset Sales(1) Sales Charge(2) Balance(3) Payable Distributor(4) Balance Level(5) ---------------------------------------------------------------------------------------------------- Class B Shares for the period March 27, 1987 (commencement of operations) to October 31, 2000 Under NASD Rule as Adopted $5,134,459 $318,433 $139,571 $458,004 $184,781 $273,223 $7,908 Under Distributor's Voluntary Waiver $5,134,459 $318,433 $ 28,143 $346,576 $184,781 $161,795 $7,908 Class C Shares, for the period October 21, 1994 (commencement of operations) to October 31, 2000 Under NASD Rule as Adopted $487,843 $30,231 $ 10,110 $40,341 $ 8,624 $ 31,717 $ 704 32
Table of Contents - --------------- (1) Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares acquired through dividend reinvestment and the exchange privilege. (2) Includes amounts attributable to exchanges from Summit which are not reflected in Eligible Gross Sales. Shares of Summit can only be purchased by exchange from another fund (the "redeemed fund"). Upon such an exchange, the maximum allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption. This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made. (3) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule. (4) Consists of CDSC payments, distribution fee payments and accruals. See "Fees and Expenses" in the Prospectus. Of the distribution fee payments made with respect to Class B shares prior to July 6, 1993 under the distribution plan in effect at that time, at a 1.0% rate, 0.75% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in Class A shares in conjunction with the shareholder's participation in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFA SM ) Program (the "MFA Program"). The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA Program. (5) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B and Class C shares). REDEMPTION OF SHARES Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus. The Fund is required to redeem for cash all shares of the Fund upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption. The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than seven days only for any period during which trading on the NYSE is restricted as determined by the Commission or the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of the Fund. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending in part on the market value of the securities held by the Fund at such time. The Fund has entered into a joint committed line of credit with other investment companies advised by the Investment Adviser and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary emergency circumstances. Because of the high cost of maintaining smaller shareholder accounts, the Fund may redeem the shares in a shareholder's account (without charging any deferred sales charge) if the net asset value of the account falls below $500 due to redemptions the shareholder has made. The shareholder will be notified that the value of the account is less than $500 before the Fund makes an involuntary redemption. The shareholder will then have 60 days to make an additional investment to bring the value of the account to at least $500 before the Fund takes any action. The involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts. Redemption A shareholder wishing to redeem shares held with the Transfer Agent may do so without charge by tendering the shares directly to the Transfer Agent at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to 33 Table of Contents Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. Redemption requests should not be sent to the Fund. The redemption request in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent's register. The signatures on the redemption request may require a guarantee by an "eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. In the event a signature guarantee is required, notarized signatures are not sufficient. In general, signature guarantees are waived on redemptions of less than $50,000 as long as the following requirements are met: (i) all requests require the signature(s) of all persons whose name(s) shares are recorded on the Transfer Agent's register, (ii) all checks must be mailed to the stencil address of record on the Transfer Agent's register and (iii) the stencil address must not have changed within 30 days. Certain rules may apply regarding certain account types such as, but not limited to, UGMA/UTMA accounts, Joint Tenancies with Rights of Survivorship, contra broker transactions, and institutional accounts. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. A shareholder may also redeem shares held with the Transfer Agent by telephone request. To request a redemption from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder of record and be for an amount less than $50,000. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The shares being redeemed must have been held for at least 15 days. Telephone redemption requests will not be honored in the following situations: the accountholder is deceased, the proceeds are to be sent to someone other than the shareholder of record, funds are to be wired to the client's bank account, a systematic withdrawal plan is in effect, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced, the address on the account has changed within the last 30 days or share certificates have been issued on the account. Since this account feature involves a risk of loss from unauthorized or fraudulent transactions, the Transfer Agent will take certain precautions to protect your account from fraud. Telephone redemption may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time. For shareholders redeeming directly with the Transfer Agent, payments will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of such Fund shares, which will usually not exceed 10 days. In the event that a shareholder account held directly with the Transfer Agent contains a fractional share balance, such fractional share balance will be automatically redeemed by the Fund. Repurchase The Fund also will repurchase Fund shares through a shareholder's listed selected securities dealer or other financial intermediary. The Fund normally will accept orders to repurchase Fund shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the regular close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of 34 Table of Contents submitting such repurchase requests to the Fund not later than 30 minutes after the close of business on the NYSE, in order to obtain that day's closing price. The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch, selected securities dealers or other financial intermediaries may charge customers a processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase of shares to such customers. Repurchases made directly through the Transfer Agent on accounts held at the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. However, a shareholder whose order for repurchase is rejected by the Fund may redeem Fund shares as set forth above. Reinstatement Privilege -- Class A and Class D Shares Shareholders who have redeemed their Class A or Class D shares of the Fund have a privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor's Merrill Lynch Financial Consultant within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. PRICING OF SHARES Determination of Net Asset Value Reference is made to "How Shares are Priced" in the Prospectus. The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Investment Adviser and Distributor, are accrued daily. The per share net asset value of Class B, Class C and Class D shares generally will be lower than the per share net asset value of Class A shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares, and the daily expense accruals of the account maintenance fees applicable with respect to the Class D shares; moreover, the per share net asset value of the Class B and Class C shares generally will be lower than the per share net asset value of Class D shares reflecting the daily expense accruals of the distribution fees and higher transfer agency fees applicable with respect to Class B and Class C shares of the Fund. It is expected, however, that the per share net asset value of the four classes will tend to converge (although not necessarily meet) immediately after the payment of dividends, which will differ by approximately the amount of the expense accrual differentials between the classes. 35 Table of Contents Portfolio securities including ADRs, EDRs and GDRs that are traded on stock exchanges are valued at the last sale price (regular way) on the exchange on which such securities are traded as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available ask price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Trustees as the primary market. Long positions in securities traded in the OTC market are valued at the last available bid price in the OTC market prior to the time of valuation. Short positions in securities traded in the OTC market are valued at the last available ask price in the OTC market prior to the time of valuation. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Other investments, including financial futures contracts and related options, are stated at market value. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Investment Adviser believes that this method no longer produces fair valuations. Repurchase agreements will be valued at cost plus accrued interest. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Trustees of the Fund. Such valuations and procedures will be reviewed periodically by the Trustees. Generally, trading in foreign securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that will not be reflected in the computation of the Fund's net asset value. Computation of Offering Price Per Share An illustration of the computation of the offering price for Class A, Class B, Class C and Class D shares of the Fund based on the value of the Fund's net assets and number of shares outstanding on October 31, 2000 is set forth below.
Class A Class B Class C Class D -------------- ---------------- ------------- -------------- Net Assets $701,996,556 $1,052,704,873 $93,549,189 $732,495,542 Number of Shares Outstanding 26,737,856 44,282,595 3,964,498 28,100,338 Net Asset Value Per Share (net assets divided by number of shares outstanding) $ 26.25 $23.77 $ 23.60 $ 26.07 Sales Charge (for Class A and Class D shares: 5.25% of offering price; 5.54% of net asset value per share)* 1.45 ** ** 1.44 Offering Price $ 27.70 $ 23.77 $ 23.60 $ 27.51
- --------------- * Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable. ** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" herein. 36 Table of Contents PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to policies established by the Board of Trustees of the Fund, the Investment Adviser is primarily responsible for the execution of the Fund's portfolio transactions and the allocation of brokerage. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities and does not use any particular broker or dealer. In executing transactions with brokers and dealers, the Investment Adviser seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and the firm's risk in positioning a block of securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund does not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, the Investment Adviser may select a broker based upon brokerage or research services provided to the Investment Adviser and its clients, including the Fund. The Investment Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided. Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits an investment adviser, such as the Investment Adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. Brokerage and research services include (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In the case of research services, the Investment Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund. To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation of investments. Examples of research-oriented services for which the Investment Adviser might utilize Fund commissions include research reports and other information on the economy, industries, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. Except as noted immediately below, research services furnished by brokers may be used in servicing all client accounts and not all services may be used in connection with the account that paid commissions to the broker providing such services. In some cases, research information received from brokers by mutual fund management personnel or personnel principally responsible for the Investment Adviser's individually managed portfolios is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Fund to the Investment Adviser are not reduced as a result of the Investment Adviser's receipt of research services. In some cases the Investment Adviser may receive a service from a broker that has both a "research" and a "non-research" use. When this occurs, the Investment Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Investment Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Investment Adviser faces a potential conflict of interest, but the Investment Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses. From time to time, the Fund may purchase new issues of securities for clients in a fixed price offering. In these situations, the seller may be a member of the selling group that will, in addition to selling securities, provide the Investment Adviser with research services. The NASD has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the seller will provide research "credits" 37 Table of Contents in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e). In addition, consistent with the Conduct Rules of the NASD and policies established by the Board of Trustees of the Fund and subject to best execution, the Investment Adviser may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the Fund neither qualifies nor disqualifies such broker or dealer to execute transactions for the Fund. The Fund anticipates that its brokerage transactions involving securities of issuers domiciled in countries other than the United States generally will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transaction costs on foreign stock exchange transactions generally are higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States. Foreign equity securities may be held by the Fund in the form of ADRs, EDRs, GDRs or other securities convertible into foreign equity securities. ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in over-the-counter markets in the United States or Europe, as the case may be. ADRs, like other securities traded in the United States, will be subject to negotiated commission rates. The Fund's ability and decisions to purchase or sell portfolio securities of foreign issuers may be affected by laws or regulations relating to the convertibility and repatriation of assets. Because the shares of the Fund are redeemable on a daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary to meet anticipated redemptions. Under present conditions, it is not believed that these considerations will have any significant effect on its portfolio strategy. Information about the brokerage commissions paid by the Fund, including commissions paid to Merrill Lynch, is set forth in the following table: Aggregate Brokerage Commissions Paid Fiscal Year Ended Commissions Paid to Merrill Lynch ------------------------------------------------------------------ 2000 $ 3,130,066 $ 388,643 1999 $11,630,069 $1,178,615 1998 $ 5,236,696 $ 147,538 For the fiscal year ended October 31, 2000, brokerage commissions paid to Merrill Lynch represented 12.42% of the Fund's aggregate brokerage commissions paid and involved 10.36% of the Fund's dollar amount of transactions involving payment of commissions during the year. The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Fund will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which Merrill Lynch is a member or in a private placement in which Merrill Lynch serves as placement agent except pursuant to procedures approved by the Board of Trustees of the Fund that either comply with rules adopted by the Commission or with interpretations of the Commission staff. See "Investment Objective and Policies -- Investment Restrictions." 38 Table of Contents Section 11(a) of the Exchange Act generally prohibits members of the United States national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Fund and annual statements as to aggregate compensation will be provided to the Fund. The Board of Trustees of the Fund has considered the possibility of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Fund to the Investment Adviser. After considering all factors deemed relevant, the Board of Trustees made a determination not to seek such recapture. The Board will reconsider this matter from time to time. Because of different objectives or other factors, a particular security may be bought for one or more clients of the Investment Adviser or an affiliate when one or more clients of the Investment Adviser or an affiliate are selling the same security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Investment Adviser or an affiliate acts as manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or an affiliate during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. SHAREHOLDER SERVICES The Fund offers a number of shareholder services and investment plans described below that are designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans and instructions as to how to participate in the various services or plans, or how to change options with respect thereto, can be obtained from the Fund, by calling the telephone number on the cover page hereof, or from the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors and certain of these services are not available to investors who place purchase orders for the Fund's shares through the Merrill Lynch Blueprint(SM) Program. Investment Account Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of dividends. The statements will also show any other activity in the account since the preceding statement. Shareholders will also receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of dividends. A shareholder with an account held at the Transfer Agent may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. A shareholder may also maintain an account through Merrill Lynch, a selected securities dealer or other financial intermediary. Upon the transfer of shares out of a Merrill Lynch brokerage account or an account maintained with a selected securities dealer or other financial intermediary, an Investment Account in the transferring shareholder's name may be opened automatically at the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of a shareholder who has an Investment Account. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. Shareholders may transfer their Fund shares from Merrill Lynch, a selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into a selected dealer agreement with Merrill Lynch. Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may purchase additional shares of funds owned before 39 Table of Contents the transfer and all future trading of these assets must be coordinated by the new firm. If a shareholder wishes to transfer his or her shares to a securities dealer or other financial intermediary that has not entered into a selected dealer agreement with Merrill Lynch, the shareholder must either (i) redeem his or her shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. The shareholder may also request the new securities dealer to maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer for the benefit of the shareholder whether the securities dealer has entered into a selected dealer agreement or not. Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from Merrill Lynch to another securities dealer or other financial intermediary should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares, paying any applicable CDSC, so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares. Exchange Privilege U.S. shareholders of each class of shares of the Fund have an exchange privilege with other Select Pricing Funds and Summit, a series of Financial Institutions Series Trust, which is a Merrill Lynch-sponsored money market fund specifically designated for exchange by holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes. Such treatment may also apply for state and local tax purposes. Exchanges of Class A and Class D Shares. Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second Select Pricing Fund if the shareholder holds any Class A shares of the second fund in the account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second Select Pricing Fund, but does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second Select Pricing Fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class D shares are exchangeable with shares of the same class of other Select Pricing Funds. Exchanges of Class A or Class D shares outstanding ("outstanding Class A or Class D shares") for Class A or Class D shares of other Select Pricing Funds or Class A shares of Summit ("new Class A or Class D shares"), are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A or Class D shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class A or Class D shares on which the dividend was paid. Based on this formula, Class A and Class D shares generally may be exchanged into the Class A or Class D shares, respectively, of the other funds with a reduced sales charge or without a sales charge. Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with Class B or Class C shares outstanding ("outstanding Class B or Class C shares") offer to exchange their Class B or Class C shares for Class B or Class C shares, respectively, of certain other Select Pricing Funds or for Class B shares of Summit 40 Table of Contents ("new Class B or Class C shares") on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the CDSC that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Small Cap Value Fund, Inc. ("Small Cap Value Fund") after having held the Fund's Class B shares for two and a half years. The 2% CDSC that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of Small Cap Value Fund and receive cash. There will be no CDSC due on this redemption, since by "tacking" the two and a half year holding period of Fund Class B shares to the three-year holding period for the Small Cap Value Fund Class B shares, the investor will be deemed to have held the Small Cap Value Fund Class B shares for more than five years. Exchanges for Shares of a Money Market Fund. Class A and Class D shares are exchangeable for Class A shares of Summit and Class B and Class C shares are exchangeable for Class B shares of Summit. Class A shares of Summit have an exchange privilege back into Class A or Class D shares of Select Pricing Funds; Class B shares of Summit have an exchange privilege back into Class B or Class C shares of Select Pricing Funds and, in the event of such an exchange, the period of time that Class B shares of Summit are held will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Class B shares. Class B shares of Summit will be subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Class B shares. This exchange privilege does not apply with respect to certain Merrill Lynch fee-based programs for which alternative exchange arrangements may exist. Please see your Merrill Lynch Financial Consultant for further information. Prior to October 12, 1998, exchanges from the Fund and other Select Pricing Funds into a money market fund were directed to certain Merrill Lynch-sponsored money market funds other than Summit. Shareholders who exchanged Select Pricing Fund shares for shares of such other money market funds and subsequently wish to exchange those money market fund shares for shares of the Fund will be subject to the CDSC schedule applicable to such Fund shares, if any. The holding period for the money market fund shares will not count toward satisfaction of the holding period requirement for reduction of the CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. However, the holding period for Class B or Class C shares of the Fund received in exchange for such money market fund shares will be aggregated with the holding period for the fund shares originally exchanged for such money market fund shares for purposes of reducing the CDSC or satisfying the Conversion Period. Exchanges by Participants in the MFA Program. The exchange privilege is modified with respect to certain retirement plans that participate in the MFA Program. Such retirement plans may exchange Class B, Class C or Class D shares that have been held for at least one year for Class A shares of the same fund on the basis of relative net asset values in connection with the commencement of participation in the MFA Program, i.e., no CDSC will apply. The one year holding period does not apply to shares acquired through reinvestment of dividends. Upon termination of participation in the MFA Program, Class A shares will be re-exchanged for the class of shares originally held. For purposes of computing any CDSC that may be payable upon redemption of Class B or Class C shares so reacquired, or the Conversion Period for Class B shares so reacquired, the holding period for the Class A shares will be "tacked" to the holding period for the Class B or Class C shares originally held. The Fund's exchange privilege is also modified with respect to purchases of Class A and Class D shares by non-retirement plan investors under the MFA Program. First, the initial allocation of assets is made under the MFA Program. Then, any subsequent exchange under the MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will 41 Table of Contents not be a charge for any difference between the sales charge previously paid on the shares of the other Select Pricing Fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA Program. Exercise of the Exchange Privilege. To exercise the exchange privilege, a shareholder should contact his or her Merrill Lynch Financial Consultant, who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other Select Pricing Funds with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealers or other financial intermediaries. The Fund reserves the right to require a properly completed exchange application. Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To request an exchange from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the account holder is deceased, the request is by an individual other than the account holder of record, the account is held by joint tenants who are divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time. This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. Fee-Based Programs Certain fee based programs offered by Merrill Lynch and other financial intermediaries, including pricing alternatives for securities transactions (each referred to in this paragraph as a "Program"), may permit the purchase of Class A shares at net asset value. Under specified circumstances, participants in certain Programs may deposit other classes of shares which will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another financial intermediary, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program's client agreement and from the Transfer Agent at 1-800-MER-FUND or 1-800-637-3863. Retirement and Education Savings Plans Individual retirement accounts and other retirement and education savings plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. Merrill Lynch may charge an initial establishment fee and an annual custodial fee for each account. There may be fees associated with investing through these plans. Information with respect to these plans is available on request from Merrill Lynch. 42 Table of Contents Capital gains and ordinary income received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans. Different tax rules apply to Roth IRA plans and education savings plans. Investors considering participation in any retirement or education savings plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. Automatic Investment Plans A shareholder may make additions to an Investment Account at any time by purchasing Class A shares (if he or she is an eligible Class A investor) or Class B, Class C or Class D shares at the applicable public offering price. These purchases may be made either through the shareholder's securities dealer, or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Fund's Automatic Investment Plan. The Fund would be authorized, on a regular basis, to provide systematic additions to the Investment Account of such shareholder through charges of $50 or more to the regular bank account of the shareholder by either pre-authorized checks or automated clearing house debits. Alternatively, an investor that maintains a CMA(R) or CBA(R) Account may arrange to have periodic investments made in the Fund in amounts of $100 ($1 or more for retirement accounts) or more through the CMA(R) or CBA(R) Automatic Investment Program. Automatic Dividend Reinvestment Plan Unless specific instructions are given as to the method of payment, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund determined as of the close of business on the NYSE on the monthly payment date for such dividends. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends. Shareholders may, at any time, elect to have subsequent dividends, paid in cash, rather than reinvested in shares of the Fund or vice versa (provided that, in the event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). If the shareholder's account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-800-MER-FUND). For other accounts, the shareholder should contact his or her Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder's address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder's bank account. Systematic Withdrawal Plan A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders that have acquired shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more. At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and the class of shares to be redeemed. Redemptions will be made at net asset value as determined as of the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the shares will be redeemed as of the close of business on the NYSE on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends on all shares in the Investment Account are reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor. 43 Table of Contents With respect to redemptions of Class B or Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares." Where the systematic withdrawal plan is applied to Class B shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will be applied thereafter to Class D shares if the shareholder so elects. If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Merrill Lynch Financial Consultant. Withdrawal payments should not be considered as dividends. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors that maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Automatic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount redeemable is $50. The proceeds of systematic redemptions will be posted to the shareholder's account three business days after the date the shares are redeemed. All redemptions are made at net asset value. A shareholder may elect to have his or her shares redeemed on the first, second, third or fourth Monday of each month, in the case of monthly redemptions, or of every other month, in the case of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the shareholder may select the month in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch Financial Consultant. Capital gains and ordinary income received in each of the retirement plans referred to above are exempt from Federal taxation until distributed from the plan. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. DIVIDENDS AND TAXES Dividends The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such net investment income will be paid at least annually. All net realized capital gains, if any, will be distributed to the Fund's shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the calendar year. If in any fiscal year, the Fund has net income from certain foreign currency transactions, such income will be distributed at least annually. See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for information concerning the manner in which dividends may be reinvested automatically in shares of the Fund. A shareholder may also elect to receive any such dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on Class B and Class C 44 Table of Contents shares will be lower than the per share dividends on Class A and Class D shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends on Class D shares will be lower than the per share dividends on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See "Pricing of Shares-- Determination of Net Asset Value." Taxes The Fund intends to continue to qualify for the special tax treatment afforded RICs under the Code. As long as it so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). The Fund intends to distribute substantially all of such income. In order to qualify, the Fund must among other things, (i) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of securities, certain gains from foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; (ii) distribute at least 90% of its dividend, interest and certain other taxable income each year; (iii) at the end of each fiscal quarter maintain at least 50% of the value of its total assets in cash, government securities, securities of other RICs, and other securities of issuers which represent, with respect to each issuer, no more than 5% of the value of the Fund's total assets and 10% of the outstanding voting securities of such issuer; and (iv) at the end of each fiscal quarter have no more than 25% of its assets invested in the securities (other than those of the government or other RICs) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar or related trades and businesses. Dividends paid by the Fund from its ordinary income and distributions of the Fund's net realized short term capital gains (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Any net capital gains (i.e., the excess of net capital gains from the sale of assets held for more than 12 months over net short-term capital losses, and including such gains from certain transactions in futures and options) ("capital gains dividends") distributed to shareholders will be taxable as capital gains to the shareholders, whether or not reinvested and regardless of the length of time a shareholder has owned his or her shares. The maximum capital gains rate for individuals is 20%. The maximum capital gains rate for corporate shareholders currently is the same as the maximum tax rate for ordinary income. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction between the Class A, Class B, Class C and Class D shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of stock) that is based on the gross income allocable to the Class A, Class B, Class C and Class D shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. If the Fund pays a dividend in January that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend or distribution will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. Pursuant to the Fund's investment objective, the Fund may invest in foreign securities. Foreign taxes may be paid by the Fund as a result of tax laws of countries in which the Fund may invest. Income tax treaties between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine in advance the effective rate of foreign tax to which the Fund will be subject, since the amount of Fund assets to be invested in various countries is not known. Because the Fund limits its investment in foreign securities, shareholders will not be entitled to claim foreign tax credits with respect to their share of foreign taxes paid by the Fund on income from investments of foreign securities held by the Fund. 45 Table of Contents Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom a certified taxpayer identification number is not on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such shareholder is not otherwise subject to backup withholding. Ordinary income dividends paid by the Fund to shareholders who are non-resident aliens or foreign entities generally will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period of the converted Class B shares. Upon a sale or exchange of its shares, a shareholder will realize a taxable gain or loss depending on its basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands. In the case of an individual, any such capital gain will be treated as short term capital gain if the shares were held for not more than 12 months and long term capital gain taxable at the maximum of 20% if such shares were held for more than 12 months. In the case of a corporation, any such capital gain will be treated as long term capital gain, taxable at the same rates as ordinary income, if such shares were held for more than 12 months. Any such capital loss will be treated as long term capital loss if such shares were held for more than 12 months. Any loss from a sale or exchange of shares held for six months or less, however, will be treated as long term capital loss to the extent of any long term capital gains dividends with respect to such shares. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares, and after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Generally, any loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. If a shareholder exercises the exchange privilege within 90 days of acquiring shares of the Fund, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund anticipates that it will make sufficient timely distributions to avoid imposition of the excise tax there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. Tax Treatment of Options and Futures Transactions The Fund may purchase or sell options and futures and foreign currency options and futures, and related options on such futures. Options and futures contracts that are "Section 1256 contracts" will be "marked to market" for Federal income tax purposes at the end of each taxable year, i.e., each option or futures contract will be treated as sold for its fair market value on the last day of the taxable year. Unless such contract is a 46 Table of Contents forward foreign exchange contract, or is a non-equity option or a regulated futures contract for a non-U.S. currency for which the Fund elects to have gain or loss treated as ordinary gain or loss under Code Section 988 (as described below), gain or loss from transactions in such option and futures contracts will be 60% long-term and 40% short-term capital gain or loss. Code Section 1092, which applies to certain "straddles", may affect the taxation of the Fund's transactions in options, futures and forward foreign exchange contracts. Under Section 1092, the Fund may be required to postpone recognition for tax purposes of losses incurred in certain closing transactions in options, futures and forward foreign exchange. Similarly, Code Section 1091, which deals with "wash sales," may cause the Fund to postpone recognition of certain losses for tax purposes; and Code Section 1258, which deals with "conversion transactions," may apply to recharacterize certain capital gains as ordinary income for tax purposes, and Code Section 1259, which deals with "constructive sales" of appreciated financial positions (e.g. stock), may treat the Fund as having recognized income before the time that such income is economically recognized by the Fund. Special Rules for Certain Foreign Currency Transactions In general, gains from "foreign currencies" and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, futures or forward foreign exchange contracts will be valued for purposes of the RIC diversification requirements applicable to the Fund. Under Code Section 988, special rules are provided for certain transactions in a foreign currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from futures contracts that are not "regulated futures contracts" and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment for such transactions. In general, however, Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income dividends. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary income dividends and all or a portion of distributions made before the losses were realized but in the same taxable year would be treated as a return of capital to shareholders, thereby reducing the basis of each shareholder's Fund shares and resulting in a capital gain for any shareholder who received a distribution greater than such shareholder's basis in Fund shares (assuming the shares were held as a capital asset). The foregoing is a general and abbreviated summary of the applicable provisions of the Code and the Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively. Ordinary income and capital gains dividends and gains on the sale or exchange of shares in the Fund may also be subject to state and local taxes. Shareholders are urged to consult their own tax advisers regarding specific questions as to Federal, state, local or foreign taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. PERFORMANCE DATA From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A, Class B, Class C and Class D shares in accordance with formulas specified by the Commission. 47 Table of Contents Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period as in the case of Class B and Class C shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. Set forth in the tables below is total return information for the Class A, Class B, Class C and Class D shares of the Fund for the periods indicated. Class A Shares Class B Shares ----------------- ----------------- Expressed as Expressed as a percentage a percentage based on a based on a hypothetical hypothetical Period $1,000 investment $1,000 investment ---------------------------------------------------------------------------- Average Annual Total Return (including maximum applicable sales charges) One Year Ended October 31, 2000 7.30% 8.07% Five Years Ended October 31, 2000 7.10% 7.16% Ten Years Ended October 31, 2000 14.92% 14.36%
Class C Shares Class D Shares ----------------- ----------------- Expressed as Expressed as a percentage a percentage based on a based on a hypothetical hypothetical Period $1,000 investment $1,000 investment --------------------------------------------------------------------------------------- Average Annual Total Return (including maximum applicable sales charges) One Year Ended October 31, 2000 11.11% 7.07% Five Years Ended October 31, 2000 7.15% 6.84% Inception (October 21, 1994) to October 31, 2000 10.03% 9.91%
Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. In order to reflect the reduced sales charges in the case of Class A or Class D shares, or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under "Purchase of Shares," the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC, and 48 Table of Contents therefore may reflect greater total return since, due to the reduced sales charges or the waiver of CDSCs, a lower amount of expenses may be deducted. On occasion, the Fund may compare its performance to various indices including the S&P 500 Composite Stock Price Index, the Value Line Composite Index, the Dow Jones Industrial Average or performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar"), CDA Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine or other industry publications. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard deviation and beta. In addition, from time to time the Fund may include the Fund's Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature. The Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance, discussion of the Fund's portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund's performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. GENERAL INFORMATION Description of Shares The Fund, an open-end management investment company, was organized under Massachusetts law on December 11, 1986 under the name Merrill Lynch Retirement Equity Fund and is a business entity commonly known as a "Massachusetts business trust." On March 1, 1991, the name of the Fund was changed to Merrill Lynch Growth Fund for Investment and Retirement. On June 27, 1996, the name of the Fund was changed to Merrill Lynch Growth Fund. The Declaration of Trust of the Fund (the "Declaration") permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest, par value $0.10 per share, of different classes and to divide or combine the shares of each class into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in the Fund. At the date of this Statement of Additional Information, the shares of the Fund are divided into Class A, Class B, Class C and Class D shares. Under the Declaration, the Trustees have the authority to issue separate classes of shares that represent interests in the assets of the Fund and have identical voting, dividend, liquidation and other rights and the same terms and conditions except that expenses related to the account maintenance and distribution of the shares of a class may be borne solely by such class and a class may have exclusive voting rights with respect to matters relating to the expenses being borne only by such class. The Trustees of the Fund may classify and reclassify the shares of the Fund into additional classes of shares at a future date. Upon liquidation of the Fund, shareholders of each class are entitled to share pro rata in the net assets of the Fund available for distribution to shareholders, except for any expenses which may be attributable only to one class. Shares have no preemptive rights. The rights of redemption and conversion rights are described elsewhere herein and in the Prospectus. Shares are fully paid and non-assessable by the Fund. The Declaration does not require that the Fund hold an annual meeting of shareholders. However, the Fund will be required to call special meetings of shareholders in accordance with the requirements of the Investment Company Act to seek approval of new management and advisory arrangements, of a material increase in distribution fees, or of a change in the fundamental policies, objectives or restrictions of the Fund. The Fund also would be required to hold a special shareholders' meeting to elect new Trustees at such time as less than a majority of the Trustees holding office have been elected by shareholders. The Declaration provides that a shareholders' meeting may be called for any reason at the request of 10% of the outstanding shares of the Fund or by majority of the Trustees. 49 Table of Contents Shareholders are entitled to one vote for each full share held and fractional votes for fractional shares held in the election of Trustees (to the extent hereinafter provided) and on other matters submitted to vote of shareholders, except that shareholders of the class bearing distribution expenses as provided above shall have exclusive voting rights with respect to matters relating to such distribution expenditures (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan). Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Trustees can, if they choose to do so, elect all the Trustees of the Fund, in which event the holders of the remaining shares are unable to elect any person as a Trustee. Generally, no amendment may be made to the Declaration without the affirmative vote of not less than a majority of the outstanding shares of the Fund. Independent Auditors Deloitte & Touche LLP, Princeton Forrestal Village, 116-300 Village Boulevard, Princeton, New Jersey 08540-6400, has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to approval by the non-interested Trustees of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund. Custodian State Street Bank and Trust Company (the "Custodian"), One Heritage Drive P2N, North Quincy, Massachusetts 02171, acts as custodian of the Fund's assets. Under its contract with the Fund, the Custodian is authorized, among other things, to establish separate accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside of the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Fund's cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund's investments. Transfer Agent Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See "How to Buy, Sell, Transfer and Exchange Shares" in the Prospectus. Legal Counsel Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405 Lexington Avenue, New York, New York 10174, is counsel for the Fund. Reports to Shareholders The fiscal year of the Fund ends on October 31 of each year. The Fund sends to its shareholders, at least semi-annually, reports showing the Fund's portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year, shareholders will receive federal income tax information regarding dividends. Shareholder Inquiries Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Statement of Additional Information. Additional Information The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made. Under a separate agreement, ML & Co. has granted the Fund the right to use the "Merrill Lynch" name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant 50 Table of Contents the use of such name to any other company, and the Fund has granted ML & Co., under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by ML & Co. To the knowledge of the Fund, the following persons or entities owned beneficially 5% or more of a class of the Fund's shares as of February 2, 2001:
Name Address Percent of Class ----------------------------------------------------------------------------------- Merrill Lynch Trust Company P.O. Box 30532 14.86% of Class A Trustee FBO MLSIP New Brunswick, NJ Investment Account 08989-0532 Attn: East Region Merrill Lynch Trust Company P.O. Box 30532 6.07% of Class A Trustee FBO MLSIP New Brunswick, NJ Investment Account 08989-0532 Attn: East Region
The Declaration a copy of which, together with all amendments thereto, is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name "Merrill Lynch Growth Fund" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally, and no Trustee, shareholder, officer, employee or agent of the Fund shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim of said Fund but the "Trust Property" only shall be liable. FINANCIAL STATEMENTS The Fund's audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day. 51 Table of Contents APPENDIX RATINGS OF FIXED INCOME SECURITIES Description of Moody's Investors Services, Inc.'s ("Moody's") Corporate Ratings Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds whichare rated B generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates that the issue ranks in the lower end of its generic category. Description of Moody's Commercial Paper Ratings The term "commercial paper" as used by Moody's means promissory obligations not having an original maturity in excess of nine months. Moody's makes no representations as to whether such commercial paper is by any other definition "commercial paper" or is exempt from registration under the Securities Act of 1933, as amended. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that A-1 Table of Contents such obligations are exempt from registration under the Securities Act of 1933, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: -- Leading market positions in well-established industries -- High rates of return on funds employed -- Conservative capitalization structures with moderate reliance on debt and ample asset protection -- Broad margins in earnings coverage of fixed financial charges and higher internal cash generation -- Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternative liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. If an issuer represents to Moody's that its commercial paper obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within parentheses beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement. You are cautioned to review with your counsel any questions regarding particular support arrangements. Description of Moody's Preferred Stock Ratings Because of the fundamental differences between preferred stocks and bonds, a variation of the bond rating symbols is being used in the quality ranking of preferred stocks. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stocks occupy a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks. Preferred stock rating symbols and their definitions are as follows: aaa An issue rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. aa An issue rated "aa" is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. A-2 Table of Contents a An issue rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. baa An issue rated "baa" is considered to be medium grade, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. ba An issue rated "ba" is considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. b An issue rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. caa An issue rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. ca An issue rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payment. c This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating classification from "aa" through "b" in its preferred stock rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Description of Standard & Poor's Ratings Group's ("Standard & Poor's") Corporate Debt Ratings A Standard & Poor's corporate or municipal rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. A-3 Table of Contents BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. Debt rated BB, B, CCC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB-rating. B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest or repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-rating. CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B-rating. CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC-debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued. CI The rating CI is reserved for income bonds on which no interest is being paid. D Debt rated D is in default. The D rating is assigned on the day an interest or principal payment is missed. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major ratings categories. Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood or risk of default upon failure of such completion. The investor should exercise judgment with respect to such likelihood and risk. L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and interest is adequately collateralized. * Continuance of the rating is contingent upon Standard & Poor's receipt of an expected copy of the escrow agreement or closing documentation confirming investments and cash flows. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. A-4 Table of Contents Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties. Bond Investment Quality Standards: Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade" ratings) are generally regarded as eligible for bank investment. In addition, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries generally. Description of Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The four categories are as follows: A Issuers assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-1." A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only adequate capacity for timely payment. However, such capacity may be damaged by changing conditions or short-term adversities. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D This rating indicates that the issue is either in default or is expected to be in default upon maturity. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Description of Standard & Poor's Preferred Stock Ratings A Standard & Poor's preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock dividends and any applicable sinking fund obligations. A preferred stock rating differs from a bond rating inasmuch as it is assigned to an equity issue, which issue is intrinsically different from, and subordinated to, a debt issue. Therefore, to reflect this difference, the preferred stock rating symbol will normally not be higher than the bond rating symbol assigned to, or that would be assigned to, the senior debt of the same issuer. The preferred stock ratings are based on the following considerations: I. Likelihood of payment-capacity and willingness of the issuer to meet the timely payment of preferred stock dividends and any applicable sinking fund requirements in accordance with the terms of the obligation. II. Nature of, and provisions of, the issue. III. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangements affecting creditors' rights. A-5 Table of Contents AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations. AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated "AAA." A An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this category than for issues in the "A" category. BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay B, preferred stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the highest degree of speculation. While such CCC issues will likely have some quality and protection characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or sinking fund payments but that is currently paying. C A preferred stock rated "C" is a non-paying issue. D A preferred stock rated "D" is a non-paying issue in default on debt instruments. NR indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy. Plus (+) or minus (-): To provide more detailed indications of preferred stock quality, the ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. The preferred stock ratings are not a recommendation to purchase or sell a security, inasmuch as market price is not considered in arriving at the rating. Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and dividend rankings for common stocks. The ratings are based on current information furnished to Standard & Poor's by the issuer, and obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information. A-6 Table of Contents (This page intentionally left blank.) Table of Contents (This page intentionally left blank.) Table of Contents Code #10480-0201 Table of Contents EX-17.C 7 efc1-0730_n30dex17c.txt Exhibit 17(c) MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FUND LOGO Annual Report August 31, 2000 This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Fundamental Growth Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. DEAR SHAREHOLDER Fiscal Year in Review For the year ended August 31, 2000, Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total returns of +47.01%, +45.55%, +45.53% and +46.67%, respectively. (Investment results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 3--5 of this report to shareholders.) The Fund's annual total returns were significantly ahead of the Lipper Analytical Services, Inc.'s Large Cap Growth Average return of +39.53% for the same period. Also, the Fund's performance was meaningfully ahead of the total return for the unmanaged Standard & Poor's 500 (S&P 500) Index of +16.32% for the year ended August 31, 2000. The primary positive reason for the outperformance in the year ended August 31, 2000 was the change in investment strategy near the start of the fiscal period. We shifted the industry structure of the portfolio from a concentration on bank and financial, insurance, pharmaceutical, financial services, wireline communications and household product companies to corporations in the communications equipment, computers and electronics industries. We have maintained a significant investment exposure in communications equipment for most of the fiscal year ended August 31, 2000. During the third and fourth quarters of calendar year 1999, public statements by the management of communication service companies reflected plans to implement major capital investments in Internet communication infrastructure and in new optical switching and routing systems in upcoming years. These capital investments were viewed as likely to help optimize fiber optic communications. We have focused the technology investments of the Fund on what we believe are the leading systems and components companies in the communications equipment industry. Consequently, we kept an overall weighting in technology companies of 45%--50% of net assets for most of the fiscal year. Near the end of August 2000, we reduced our investment weighting in the technology sector so that it would be closer to the weighting in the S&P 500 Index. However, we continue to focus on the corporations that we believe are the leading suppliers of computers, software and electronic components and communications equipment for providing the Internet Web site and communications infrastructure around the globe. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 The Fund's top five equity holdings in the portfolio at fiscal year ended August 31, 2000 contributed significantly during the fiscal year to the investment outperformance in absolute and relative terms to our benchmarks. These companies were: Cisco Systems, Inc., Nortel Networks Corporation, General Electric Company, Sun Microsystems, Inc. and Citigroup Inc. Market Outlook In our opinion, the outlook for the US equity market is positive. Corporate profit growth in the second calendar quarter of 2000 appears to be around 20% above a year ago. The Federal Reserve Board, which started to tighten monetary policy by raising the Federal Funds target rate in late June 1999, appears to have achieved its objective of slowing the rate of real growth of the US economy. Real consumer spending in the second calendar quarter of 2000 was growing at less than one-half the annualized rate of gain in the first quarter of 2000. Real consumer spending on housing, household appliances and transportation vehicles appears to have peaked and may be in a downtrend in absolute terms. However, service sector employment appears strong, and levels of Government spending have elevated as they typically do in a national election year. Consequently, wage rate increases and the higher energy costs that we are experiencing could be a problem going forward. It appears to us that the strongest sector for capital spending continues to be the communications equipment industry as households and corporations shift their communication services from the regulated, legacy systems to the new and evolving Internet infrastructure. Corporate productivity could benefit substantially from these new capital investments. In Conclusion We thank you for your continued investment in Merrill Lynch Fundamental Growth Fund, Inc., and we look forward to sharing our outlook and strategy in our upcoming semi-annual report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Senior Vice President and Portfolio Manager September 22, 2000 5-Star Overall Morningstar Rating TM-- Domestic Equity Funds as of 8/31/00 Merrill Lynch Fundamental Growth Fund, Inc. Class A, B, C & D Shares Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares received a five-star overall rating in the Morningstar Domestic Equity Funds class of 3,839 funds. Morningstar proprietary ratings on US-domiciled funds reflect historical risk-adjusted performance as of 8/31/00. The ratings are subject to change every month. Past performance is no guarantee of future results. The Overall Morningstar Rating TM is a weighted average of the Fund's three-, five-, and 10-year (if applicable) risk-adjusted performance. Morningstar ratings are calculated from a fund's three-, five-, and 10-year (if applicable) average annual returns in excess of 90-day US Treasury-bill returns with appropriate fee adjustments, and a risk factor that reflects Fund performance below 90-day US Treasury-bill returns. Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares received four stars for the three-year period and five stars for the five-year period ended August 31, 2000. The top 10% of the funds in a broad asset class receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the last 10% receive one star. The Fund was rated among 3,839 and 2,375 funds in the Morningstar Domestic Equity Funds class for the three- and five-year periods, respectively. The Fund was rated exclusively against US-domiciled funds. All share classes of the Fund are invested in a common portfolio. OFFICERS AND DIRECTORS Terry K. Glenn, President and Director Joe Grills, Director Walter Mintz, Director Robert S. Salomon Jr., Director Melvin R. Seiden, Director Stephen B. Swensrud, Director Arthur Zeikel, Director Robert C. Doll Jr., Senior Vice President Lawrence R. Fuller, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Allan J. Oster, Secretary Custodian The Chase Manhattan Bank Global Securities Services Chase MetroTech Center, 18th Floor Brooklyn, NY 11245 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 Barbara G. Fraser, Secretary of Merrill Lynch Fundamental Growth Fund, Inc. has recently retired. The Fund's Board of Directors wishes Ms. Fraser well in her retirement. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors, as detailed in the Fund's prospectus. If you were a Class A shareholder prior to October 21, 1994, your Class A Shares were redesignated to Class D Shares on October 21, 1994. However, in the case of certain eligible investors, the shares were simultaneously exchanged for Class A Shares. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after 8 years. (There is no initial sales charge for automatic share conversions.) If you were a Class B shareholder prior to October 21, 1994, your Class B Shares were redesignated to Class C Shares on October 21, 1994. * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Recent Performance Results
6 Month 12 Month Since Inception As of August 31, 2000 Total Return Total Return Total Return ML Fundamental Growth Fund, Inc. Class A Shares* + 4.21% +47.01% +340.71% ML Fundamental Growth Fund, Inc. Class B Shares* + 3.70 +45.55 +314.97 ML Fundamental Growth Fund, Inc. Class C Shares* + 3.67 +45.53 +308.67 ML Fundamental Growth Fund, Inc. Class D Shares* + 4.07 +46.67 +333.83 Standard & Poor's 500 Index** +11.73 +16.32 +263.40/+304.01 *Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's inception dates are from 10/21/94 for Class A & Class B Shares and from 12/24/92 for Class C & Class D Shares. **An unmanaged broad-based Index comprised of common stocks. Since inception total returns are from 10/21/94 and from 12/24/92, respectively.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 PERFORMANCE DATA (continued) Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment of Merrill Lynch Fundamental Growth Fund's Class A and Class B Shares compared to growth of the S&P 500 Total Return Index++++. Beginning and ending values are: 10/21/94** 8/00 ML Fundamental Growth Fund-- Class A Shares* $10,000 $41,760 ML Fundamental Growth Fund-- Class B Shares* $10,000 $41,497 S&P 500 Total Return Index++++ $10,000 $36,340 A line graph depicting the growth of an investment of Merrill Lynch Fundamental Growth Fund's Class C and Class D Shares compared to growth of the S&P 500 Total Return Index++++. Beginning and ending values are: 12/24/92** 8/00 ML Fundamental Growth Fund-- Class C Shares* $10,000 $40,868 ML Fundamental Growth Fund-- Class D Shares* $10,000 $41,106 S&P 500 Total Return Index++++ $10,000 $40,402 *Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of operations. ++ML Fundamental Growth Fund, Inc. invests primarily in equity securities with a particular emphasis on companies that have exhibited above-average growth rates in earnings. ++++This unmanaged broad-based Index is comprised of common stocks. Past performance is not predictive of future performance. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 PERFORMANCE DATA (concluded) Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 6/30/00 +26.76% +20.10% Five Years Ended 6/30/00 +28.89 +27.50 Inception (10/21/94) through 6/30/00 +28.04 +26.84 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* One Year Ended 6/30/00 +25.50% +21.50% Five Years Ended 6/30/00 +27.55 +27.55 Inception (10/21/94) through 6/30/00 +26.74 +26.74 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without CDSC With CDSC** Class C Shares* One Year Ended 6/30/00 +25.46% +24.46% Five Years Ended 6/30/00 +27.54 +27.54 Inception (12/24/92) through 6/30/00 +19.41 +19.41 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* One Year Ended 6/30/00 +26.44% +19.80% Five Years Ended 6/30/00 +28.54 +27.16 Inception (12/24/92) through 6/30/00 +20.34 +19.48 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class D Shares (formerly Class A Shares) were offered at a higher than maximum sales charge. Thus, actual returns would have been somewhat lower than noted for the inception period.) **Assuming maximum sales charge. PORTFOLIO INFORMATION As of August 31, 2000 Percent of Ten Largest Holdings Net Assets Cisco Systems, Inc. 4.7% Nortel Networks Corporation 4.6 General Electric Company 4.5 Sun Microsystems, Inc. 4.2 Citigroup Inc. 3.1 Exodus Communications, Inc. 2.9 America Online, Inc. 2.7 Enron Corp. 2.7 STMicroelectronics NV 2.5 Pfizer Inc. 2.4 Percent of Ten Largest Industries Net Assets Communications Equipment 12.6% Energy 9.0 Information Processing 7.4 Computers 6.2 Oil Services 5.0 Software--Computer 4.9 Electrical Equipment 4.5 Electronics 4.3 Banking & Financial 4.1 Insurance 4.0 Percent of Geographic Allocation Net Assets++ United States 70.4% Canada 4.6 United Kingdom 2.7 France 2.6 Netherlands 1.6 Sweden 1.5 Japan 1.3 ++Total may not equal 100%. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets Advertising 600,000 The Interpublic Group of Companies, Inc. $ 18,003,596 $ 22,950,000 0.3% Automobile 225,000 Toyota Motor Corporation (ADR)(a) 20,726,060 19,631,250 0.3 Banking & 3,466,667 Citigroup Inc. 128,264,642 202,366,667 3.1 Financial 425,000 Northern Trust Corporation 31,220,408 35,832,812 0.5 270,000 State Street Corporation 26,972,859 31,792,500 0.5 -------------- -------------- ------ 186,457,909 269,991,979 4.1 Beverages 1,425,000 The Coca-Cola Company 87,989,897 74,990,625 1.1 Biotechnology 320,000 ++Affymetrix, Inc. 26,151,406 25,300,000 0.4 1,600,000 ++Immunex Corporation 45,227,679 80,300,000 1.2 -------------- -------------- ------ 71,379,085 105,600,000 1.6 Broadcasting-- 445,000 ++AMFM Inc. 20,378,648 30,274,462 0.4 Radio & Television 625,000 ++Clear Channel Communications, Inc. 28,637,184 45,234,375 0.7 1,200,000 ++Infinity Broadcasting Corporation (Class A) 29,172,154 45,450,000 0.7 -------------- -------------- ------ 78,187,986 120,958,837 1.8 Communications 1,250,000 ++3Com Corporation 9,724,876 20,703,125 0.3 Equipment 260,000 ++Alteon Websystems, Inc. 22,362,582 38,480,000 0.6 4,500,000 ++Cisco Systems, Inc. 109,036,094 309,093,750 4.7 500,000 ++JDS Uniphase Corporation 20,248,070 62,250,000 0.9 3,768,300 Nortel Networks Corporation 176,965,953 307,351,969 4.6 4,900,000 Telefonaktiebolaget LM Ericsson (ADR)(a) 47,574,993 100,450,000 1.5 -------------- -------------- ------ 385,912,568 838,328,844 12.6 Computers 1,349,950 ++EMC Corporation 40,586,493 132,295,100 2.0 2,200,000 ++Sun Microsystems, Inc. 95,862,400 279,262,500 4.2 -------------- -------------- ------ 136,448,893 411,557,600 6.2 Electrical 5,100,000 General Electric Company 162,364,734 299,306,250 4.5 Equipment Electronics 1,500,000 ++LSI Logic Corporation 41,298,872 53,906,250 0.8 2,760,000 STMicroelectronics NV 68,268,551 169,320,204 2.5 950,000 Texas Instruments Incorporated 31,839,053 63,590,625 1.0 -------------- -------------- ------ 141,406,476 286,817,079 4.3 Energy 500,000 Anadarko Petroleum Corporation 29,321,182 32,885,000 0.5 1,430,000 BP Amoco PLC (ADR)(a) 82,966,142 79,007,500 1.2 1,200,000 El Paso Energy Corporation 43,940,242 69,900,000 1.0 2,100,000 Enron Corp. 83,181,411 178,237,500 2.7 1,630,000 Exxon Mobil Corporation 137,253,599 133,048,750 2.0 1,300,000 Royal Dutch Petroleum Company (NY Registered Shares) 77,558,570 79,543,750 1.2 869,300 Tosco Corporation 26,628,248 26,513,650 0.4 -------------- -------------- ------ 480,849,394 599,136,150 9.0
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets Entertainment 750,000 Time Warner Inc. $ 64,511,400 $ 64,125,000 1.0% 850,000 ++Viacom, Inc. (Class B) 36,563,342 57,215,625 0.9 2,000,000 The Walt Disney Company 66,982,792 77,875,000 1.2 -------------- -------------- ------ 168,057,534 199,215,625 3.1 Financial Services 1,150,000 T. Rowe Price Associates, Inc. 42,981,576 52,037,500 0.8 Household Products 1,300,000 Colgate-Palmolive Company 77,923,338 66,218,750 1.0 Information 3,050,000 ++America Online, Inc. 119,292,476 178,806,250 2.7 Processing 2,805,000 ++Exodus Communications, Inc. 141,759,672 191,967,187 2.9 2,654,064 ++Palm, Inc. 62,297,243 116,612,934 1.8 -------------- -------------- ------ 323,349,391 487,386,371 7.4 Insurance 1,520,000 American International Group, Inc. 112,040,897 135,470,000 2.1 2,350,900 Lincoln National Corporation 114,772,757 126,948,600 1.9 -------------- -------------- ------ 226,813,654 262,418,600 4.0 Leisure 580,000 Sony Corporation (ADR)(a) 74,096,671 66,265,000 1.0 Medical Technology 540,000 Medtronic, Inc. 20,016,504 27,675,000 0.4 Oil Services 2,300,000 Baker Hughes Incorporated 69,809,430 84,093,750 1.3 720,000 Diamond Offshore Drilling, Inc. 28,140,089 32,265,000 0.5 1,200,000 Halliburton Company 61,926,199 63,600,000 0.9 1,400,000 Schlumberger Limited 85,828,412 119,437,500 1.8 675,000 ++Weatherford International, Inc. 29,994,288 31,682,813 0.5 -------------- -------------- ------ 275,698,418 331,079,063 5.0 Pharmaceuticals 1,000,000 Merck & Co., Inc. 59,950,766 69,875,000 1.1 3,700,000 Pfizer Inc. 122,289,015 160,025,000 2.4 -------------- -------------- ------ 182,239,781 229,900,000 3.5 Restaurants 400,000 McDonald's Corporation 13,894,474 11,950,000 0.2 Retail 1,500,000 ++Amazon.com, Inc. 90,900,881 62,250,000 0.9 Retail--Specialty 300,000 CVS Corporation 10,427,074 11,137,500 0.1 300,000 ++Staples, Inc. 5,224,129 4,612,500 0.1 400,000 Walgreen Co. 6,022,423 13,150,000 0.2 -------------- -------------- ------ 21,673,626 28,900,000 0.4 Semiconductors 544,000 ++ASM Lithography Holding NV 12,238,445 20,570,502 0.3 179,400 ++ASM Lithography Holding NV (NY Registered Shares) 6,704,112 6,839,625 0.1 410,000 ++Applied Materials, Inc. 10,963,287 35,388,125 0.5 -------------- -------------- ------ 29,905,844 62,798,252 0.9 Software-- 1,450,000 ++Commerce One, Inc. 96,041,973 90,806,250 1.4 Computer 1,600,000 ++Oracle Corporation 113,098,811 145,400,000 2.2 220,000 ++Rational Software Corporation 17,415,686 28,297,500 0.4 300,000 ++Siebel Systems, Inc. 33,340,209 59,343,750 0.9 -------------- -------------- ------ 259,896,679 323,847,500 4.9
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets Wireless 575,000 ++Sprint Corp. (PCS Group) $ 16,948,636 $ 28,857,813 0.4% Communications 2,500,000 Vodafone Group PLC (ADR)(a) 111,856,561 102,343,750 1.6 1,000,000 ++Western Wireless Corporation (Class A) 57,103,625 51,125,000 0.8 -------------- -------------- ------ 185,908,822 182,326,563 2.8 Wireline 2,060,000 ++Infonet Services Corporation (Class B) 37,390,708 26,908,750 0.4 Communications 1,800,000 ++NorthPoint Communications Group, Inc. 52,705,535 20,475,000 0.3 3,500,000 ++WorldCom, Inc. 162,285,470 127,750,000 1.9 -------------- -------------- ------ 252,381,713 175,133,750 2.6 Total Stocks 4,015,465,504 5,618,670,588 84.7 Face Amount Short-Term Securities Commercial American Home Products, Inc.: Paper* $ 25,000,000 6.50% due 9/07/2000 24,972,917 24,972,917 0.4 16,674,000 6.50% due 9/21/2000 16,613,788 16,613,788 0.2 40,000,000 Bell South Capital, 6.50% due 9/20/2000 39,862,778 39,862,778 0.6 50,000,000 The CIT Group Holdings, Inc., 6.49% due 10/10/2000 49,648,458 49,648,458 0.7 30,000,000 CSW Credit, Inc., 6.48% due 9/12/2000 29,940,600 29,940,600 0.5 50,000,000 FCE Bank PLC, 6.50% due 10/06/2000 49,684,028 49,684,028 0.7 50,000,000 Ford Motor Credit Company, 6.48% due 10/12/2000 49,631,000 49,631,000 0.7 25,000,000 Gannett Company, 6.49% due 10/05/2000 24,846,764 24,846,764 0.4 99,160,000 General Motors Acceptance Corp., 6.69% due 9/01/2000 99,160,000 99,160,000 1.5 12,609,000 Heinz (H.J.) Company, 6.47% due 9/28/2000 12,547,815 12,547,815 0.2 50,000,000 Motorola, Inc., 6.49% due 9/19/2000 49,837,750 49,837,750 0.8 20,100,000 Paccar Financial, 6.47% due 9/07/2000 20,078,325 20,078,325 0.3 45,000,000 Target Corporation, 6.48% due 10/16/2000 44,635,500 44,635,500 0.7 20,000,000 USAA Capital Corporation, 6.50% due 9/05/2000 19,985,555 19,985,555 0.3 -------------- -------------- ------ 531,445,278 531,445,278 8.0 US Government Federal Home Loan Mortgage Corporation: Agency 50,000,000 6.42% due 9/12/2000 49,901,917 49,901,917 0.8 Obligations* 10,000,000 6.40% due 9/19/2000 9,968,000 9,968,000 0.1 31,100,000 6.44% due 10/03/2000 30,921,970 30,921,970 0.5 Federal National Mortgage Association: 100,000,000 6.415% due 9/25/2000 99,570,167 99,570,167 1.5 100,000,000 6.45% due 9/29/2000 99,497,944 99,497,944 1.5 289,859,998 289,859,998 4.4 Total Short-Term Securities 821,305,276 821,305,276 12.4 Total Investments $4,836,770,780 6,439,975,864 97.1 ============== Other Assets Less Liabilities 193,292,499 2.9 -------------- ------ Net Assets $6,633,268,363 100.0% ============== ====== *Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Fund. ++Non-income producing security. (a)American Depositary Receipts (ADR). See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION Statement of Assets and Liabilities as of August 31, 2000 Assets: Investments, at value (identified cost--$4,836,770,780) $6,439,975,864 Cash 23,955,447 Foreign cash 1,075 Receivables: Securities sold $ 229,977,068 Capital shares sold 25,758,347 Dividends 3,114,309 258,849,724 -------------- Prepaid registration fees and other assets 219,065 -------------- Total assets 6,723,001,175 -------------- Liabilities: Payables: Securities purchased 69,867,453 Capital shares redeemed 10,588,129 Distributor 3,575,540 Investment adviser 2,819,377 86,850,499 -------------- Accrued expenses and other liabilities 2,882,313 -------------- Total liabilities 89,732,812 -------------- Net Assets: Net assets $6,633,268,363 ============== Net Assets Class A Shares of capital stock, $.10 par value, 100,000,000 shares Consist of: authorized $ 2,941,834 Class B Shares of capital stock, $.10 par value, 250,000,000 shares authorized 12,155,976 Class C Shares of capital stock, $.10 par value, 100,000,000 shares authorized 2,218,440 Class D Shares of capital stock, $.10 par value, 100,000,000 shares authorized 5,779,830 Paid-in capital in excess of par 4,584,576,903 Undistributed realized capital gains on investments--net 422,411,190 Unrealized appreciation on investments--net 1,603,184,190 -------------- Net assets $6,633,268,363 ============== Net Asset Value: Class A--Based on net assets of $882,072,040 and 29,418,341 shares outstanding $ 29.98 ============== Class B--Based on net assets of $3,411,474,588 and 121,559,761 shares outstanding $ 28.06 ============== Class C--Based on net assets of $627,021,108 and 22,184,399 shares outstanding $ 28.26 ============== Class D--Based on net assets of $1,712,700,627 and 57,798,298 shares outstanding $ 29.63 ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended August 31, 2000 Investment Dividends (net of $562,569 foreign withholding tax) $ 27,565,513 Income: Interest and discount earned 15,723,555 -------------- Total income 43,289,068 -------------- Expenses: Investment advisory fees $ 31,124,064 Account maintenance and distribution fees--Class B 27,067,662 Account maintenance and distribution fees--Class C 4,434,385 Transfer agent fees--Class B 3,483,298 Account maintenance fees--Class D 3,188,884 Transfer agent fees--Class D 1,428,698 Transfer agent fees--Class A 755,553 Transfer agent fees--Class C 599,098 Registration fees 543,280 Accounting services 372,148 Custodian fees 360,378 Printing and shareholder reports 220,910 Professional fees 193,970 Directors' fees and expenses 100,430 Pricing fees 30,864 Other 88,657 -------------- Total expenses 73,992,279 -------------- Investment loss--net (30,703,211) -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net 454,404,633 (Loss) on Foreign currency transactions--net (936,792) 453,467,841 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation: Transactions-- Investments--net 1,358,803,401 Net: Foreign currency transactions--net (20,894) 1,358,782,507 -------------- -------------- Net Increase in Net Assets Resulting from Operations $1,781,547,137 ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended August 31, Increase (Decrease) in Net Assets: 2000 1999 Operations: Investment loss--net $ (30,703,211) $ (2,747,160) Realized gain on investments--net 453,467,841 323,151,944 Change in unrealized appreciation/depreciation on investments--net 1,358,782,507 223,488,173 -------------- -------------- Net increase in net assets resulting from operations 1,781,547,137 543,892,957 -------------- -------------- Distributions to Realized gain on investments--net: Shareholders: Class A (43,750,779) (9,138,117) Class B (170,903,218) (28,020,289) Class C (26,261,623) (5,194,883) Class D (79,730,301) (7,743,304) -------------- -------------- Net decrease in net assets resulting from distributions to shareholders (320,645,921) (50,096,593) -------------- -------------- Capital Share Net increase in net assets derived from capital share Transactions: transactions 1,595,773,254 1,985,425,196 -------------- -------------- Net Assets: Total increase in net assets 3,056,674,470 2,479,221,560 Beginning of year 3,576,593,893 1,097,372,333 -------------- -------------- End of year $6,633,268,363 $3,576,593,893 ============== ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION (continued) Financial Highlights
The following per share data and ratios have been derived Class A++ from information provided in the financial statements. For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 21.99 $ 16.19 $ 17.37 $ 13.60 $ 11.66 Operating ---------- ---------- ---------- --------- --------- Performance: Investment income--net .02 .13 .07 .07 .07 Realized and unrealized gain on investments and foreign currency transactions--net 9.91 6.37 1.09 4.95 2.13 ---------- ---------- ---------- --------- --------- Total from investment operations 9.93 6.50 1.16 5.02 2.20 ---------- ---------- ---------- --------- --------- Less distributions from realized gain on investments--net (1.94) (.70) (2.34) (1.25) (.26) ---------- ---------- ---------- --------- --------- Net asset value, end of year $ 29.98 $ 21.99 $ 16.19 $ 17.37 $ 13.60 ========== ========== ========== ========= ========= Total Investment Based on net asset value per share 47.01% 41.08% 6.37% 39.24% 19.02% Return:* ========== ========== ========== ========= ========= Ratios to Average Expenses .76% .81% .87% .99% 1.12% Net Assets: ========== ========== ========== ========= ========= Investment income--net .09% .60% .37% .47% .51% ========== ========== ========== ========= ========= Supplemental Net assets, end of year (in Data: thousands) $ 882,072 $ 472,464 $ 167,133 $ 62,049 $ 47,048 ========== ========== ========== ========= ========= Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% ========== ========== ========== ========= ========= *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
The following per share data and ratios have been derived Class B++ from information provided in the financial statements. For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 20.75 $ 15.39 $ 16.69 $ 13.14 $ 11.40 Operating ---------- ---------- ---------- --------- --------- Performance: Investment loss--net (.23) (.08) (.11) (.09) (.07) Realized and unrealized gain on investments and foreign currency transactions--net 9.32 6.05 1.05 4.79 2.07 ---------- ---------- ---------- --------- --------- Total from investment operations 9.09 5.97 .94 4.70 2.00 ---------- ---------- ---------- --------- --------- Less distributions from realized gain on investments--net (1.78) (.61) (2.24) (1.15) (.26) ---------- ---------- ---------- --------- --------- Net asset value, end of year $ 28.06 $ 20.75 $ 15.39 $ 16.69 $ 13.14 ========== ========== ========== ========= ========= Total Investment Based on net asset value per share 45.55% 39.58% 5.21% 37.95% 17.68% Return:* ========== ========== ========== ========= ========= Ratios to Average Expenses 1.77% 1.83% 1.88% 2.02% 2.16% Net Assets: ========== ========== ========== ========= ========= Investment loss--net (.92%) (.41%) (.64%) (.59%) (.54%) ========== ========== ========== ========= ========= Supplemental Net assets, end of year (in Data: thousands) $3,411,474 $2,000,535 $ 641,688 $ 216,636 $ 116,641 ========== ========== ========== ========= ========= Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% ========== ========== ========== ========= ========= The following per share data and ratios have been derived Class C++ from information provided in the financial statements. For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 20.88 $ 15.45 $ 16.72 $ 13.14 $ 11.40 Operating ---------- ---------- ---------- --------- --------- Performance: Investment loss--net (.24) (.09) (.11) (.09) (.07) Realized and unrealized gain on investments and foreign currency transactions--net 9.39 6.10 1.05 4.79 2.07 ---------- ---------- ---------- --------- --------- Total from investment operations 9.15 6.01 .94 4.70 2.00 ---------- ---------- ---------- --------- --------- Less distributions from realized gain on investments--net (1.77) (.58) (2.21) (1.12) (.26) ---------- ---------- ---------- --------- --------- Net asset value, end of year $ 28.26 $ 20.88 $ 15.45 $ 16.72 $ 13.14 ========== ========== ========== ========= ========= Total Investment Based on net asset value per share 45.53% 39.65% 5.19% 37.90% 17.68% Return:* ========== ========== ========== ========= ========= Ratios to Average Expenses 1.78% 1.83% 1.89% 2.02% 2.15% Net Assets: ========== ========== ========== ========= ========= Investment loss--net (.93%) (.43%) (.63%) (.58%) (.57%) ========== ========== ========== ========= ========= Supplemental Net assets, end of year (in Data: thousands) $ 627,021 $ 307,988 $ 130,652 $ 74,732 $ 54,052 ========== ========== ========== ========= ========= Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% ========== ========== ========== ========= ========= *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
The following per share data and ratios have been derived Class D++ from information provided in the financial statements. For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 21.77 $ 16.06 $ 17.27 $ 13.54 $ 11.64 Operating ---------- ---------- ---------- --------- --------- Performance: Investment income(loss)--net (.04) .08 .02 .03 .03 Realized and unrealized gain on investments and foreign currency transactions--net 9.80 6.31 1.09 4.93 2.13 ---------- ---------- ---------- --------- --------- Total from investment operations 9.76 6.39 1.11 4.96 2.16 ---------- ---------- ---------- --------- --------- Less distributions from realized gain on investments--net (1.90) (.68) (2.32) (1.23) (.26) ---------- ---------- ---------- --------- --------- Net asset value, end of year $ 29.63 $ 21.77 $ 16.06 $ 17.27 $ 13.54 ========== ========== ========== ========= ========= Total Investment Based on net asset value per share 46.67% 40.67% 6.08% 38.90% 18.70% Return:* ========== ========== ========== ========= ========= Ratios to Average Expenses 1.01% 1.05% 1.11% 1.24% 1.37% Net Assets: ========== ========== ========== ========= ========= Investment income(loss)--net (.17%) .36% .12% .17% .24% ========== ========== ========== ========= ========= Supplemental Net assets, end of year (in Data: thousands) $1,712,701 $ 795,607 $ 157,899 $ 53,101 $ 22,892 ========== ========== ========== ========= ========= Portfolio turnover 98.71% 52.72% 40.27% 94.38% 82.10% ========== ========== ========== ========= ========= *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. 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 that are traded both in the over-the- counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange- traded options. In the case of options traded in the over-the- counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 NOTES TO FINANCIAL STATEMENTS (continued) (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex- dividend dates. Dividends from foreign securities where the ex- dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income (including amortization of discount) is recognized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) 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 adjusted to reflect permanent differences between financial and tax reporting. Accordingly, current year's permanent book/tax differences of $30,703,211 have been reclassified between undistributed net realized capital gains and accumulated net investment loss. These reclassifications have no effect on net assets or net asset values per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at the annual rate of .65% of the average net assets of the Fund not exceeding $1 billion, .625% of average net assets of the Fund in excess of $1 billion but not exceeding $1.5 billion, .60% of net assets in excess of $1.5 billion but not exceeding $5 billion and .575% of net assets in excess of $5 billion. Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fee Fee Class B .25% .75% Class C .25% .75% Class D .25% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended August 31, 2000, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $ 1,264 $ 17,304 Class D $85,151 $1,265,020 Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 For the year ended August 31, 2000, MLPF&S received contingent deferred sales charges of $2,803,938 and $113,340 relating to transactions in Class B and Class C Shares, respectively. Further- more, MLPF&S received contingent deferred sales charges of $198,968 and $54,503 relating to transactions subject to front-end sales charge waivers in Class A and Class D Shares, respectively. In addition, MLPF&S received $947,213 in commissions on the execution of portfolio security transactions for the Fund for the year ended August 31, 2000. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLIM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, FDS, PSI, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended August 31, 2000 were $5,117,137,203 and $4,640,408,479, respectively. Net realized gains (losses) for the year ended August 31, 2000 and net unrealized gains (losses) as of August 31, 2000 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) Long-term investments $454,426,883 $1,603,205,084 Short-term investments (22,250) -- Foreign currency transactions (936,792) (20,894) ------------ -------------- Total $453,467,841 $1,603,184,190 ============ ============== As of August 31, 2000, net unrealized appreciation for Federal income tax purposes aggregated $1,603,101,888, of which $1,795,728,192 related to appreciated securities and $192,626,304 related to depreciated securities. At August 31, 2000, the aggregate cost of investments for Federal income tax purposes was $4,836,873,976. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $1,595,773,254 and $1,985,425,196 for the years ended August 31, 2000 and August 31, 1999, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 13,954,826 $ 374,057,263 Shares issued to share- holders in reinvestment of distributions 1,247,247 30,869,352 ------------ -------------- Total issued 15,202,073 404,926,615 Shares redeemed (7,273,977) (192,459,722) ------------ -------------- Net increase 7,928,096 $ 212,466,893 ============ ============== Class A Shares for the Year Dollar Ended August 31, 1999 Shares Amount Shares sold 16,482,160 $ 342,447,904 Shares issued to share- holders in reinvestment of distributions 321,175 5,813,284 Shares issued resulting from reorganization 473,544 8,961,244 ------------ -------------- Total issued 17,276,879 357,222,432 Shares redeemed (6,109,276) (131,189,396) ------------ -------------- Net increase 11,167,603 $ 226,033,036 ============ ============== Class B Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 46,742,875 $1,183,282,271 Shares issued to share- holders in reinvestment of distributions 6,702,197 156,429,267 ------------ -------------- Total issued 53,445,072 1,339,711,538 Automatic conversion of shares (6,990,131) (171,422,234) Shares redeemed (21,307,246) (528,575,323) ------------ -------------- Net increase 25,147,695 $ 639,713,981 ============ ============== Class B Shares for the Year Dollar Ended August 31, 1999 Shares Amount Shares sold 68,982,103 $1,395,097,045 Shares issued to share- holders in reinvestment of distributions 1,508,070 25,968,991 Shares issued resulting from reorganization 2,156,337 38,818,026 ------------ -------------- Total issued 72,646,510 1,459,884,062 Automatic conversion of shares (1,056,963) (20,611,014) Shares redeemed (16,882,536) (340,776,855) ------------ -------------- Net increase 54,707,011 $1,098,496,193 ============ ============== Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 NOTES TO FINANCIAL STATEMENTS (concluded) Class C Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 9,791,460 $ 253,121,222 Shares issued to share- holders in reinvestment of distributions 1,005,364 23,636,119 ------------ -------------- Total issued 10,796,824 276,757,341 Shares redeemed (3,363,502) (83,902,865) ------------ -------------- Net increase 7,433,322 $ 192,854,476 ============ ============== Class C Shares for the Year Dollar Ended August 31, 1999 Shares Amount Shares sold 9,035,252 $ 183,385,732 Shares issued to share- holders in reinvestment of distributions 273,509 4,739,909 Shares issued resulting from reorganization 82,042 1,486,191 ------------ -------------- Total issued 9,390,803 189,611,832 Shares redeemed (3,093,540) (62,175,064) ------------ -------------- Net increase 6,297,263 $ 127,436,768 ============ ============== Class D Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 21,376,393 $ 562,677,915 Automatic conversion of shares 6,644,211 171,422,234 Shares issued to share- holders in reinvestment of distributions 2,964,749 72,666,009 ------------ -------------- Total issued 30,985,353 806,766,158 Shares redeemed (9,735,407) (256,028,254) ------------ -------------- Net increase 21,249,946 $ 550,737,904 ============ ============== Class D Shares for the Year Dollar Ended August 31, 1999 Shares Amount Shares sold 20,333,829 $ 428,555,461 Automatic conversion of shares 1,012,397 20,611,014 Shares issued to share- holders in reinvestment of distributions 397,154 7,132,878 Shares issued resulting from reorganization 11,158,555 209,477,356 ------------ -------------- Total issued 32,901,935 665,776,709 Shares redeemed (6,187,633) (132,317,510) ------------ -------------- Net increase 26,714,302 $ 533,459,199 ============ ============== 5. Commitments: At August 31, 2000, the Fund had entered into foreign exchange contracts, under which it had agreed to sell various foreign currencies with an approximate value of $4,128,000. 6. Short-Term Borrowings: On December 3, 1999, the Fund, along with certain other funds managed by MLIM and its affiliates, entered into a one-year, unsecured $1,000,000,000 credit agreement with Bank of America and other lenders. The funds may borrow money for temporary or emergency purposes to meet shareholder redemptions. Each fund may borrow up to the maximum amount allowable under the fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The funds collectively pay a commitment fee of .09% per annum on the available portion of the facility. Amounts borrowed under the facility bear interest at the Federal Funds rate plus .50%. The Fund did not borrow from the facility during the year ended August 31, 2000. Merrill Lynch Fundamental Growth Fund, Inc. August 31, 2000 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors, Merrill Lynch Fundamental Growth Fund, Inc. We have audited the accompanying statement of assets and liabilities of Merrill Lynch Fundamental Growth Fund, Inc., including the schedule of investments, as of August 31, 2000, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of August 31, 2000 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Merrill Lynch Fundamental Growth Fund, Inc. at August 31, 2000, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the indicated periods in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP MetroPark, New Jersey October 5, 2000 IMPORTANT TAX INFORMATION (unaudited) The following information summarizes all per share distributions paid by Merrill Lynch Fundamental Growth Fund, Inc. during its taxable year ended August 31, 2000:
Record Payable Qualifying Non-Qualifying Total Long-Term Date Date Ordinary Income Ordinary Income Ordinary Income Capital Gains* Class A Shares 12/06/99 12/10/99 $.141427 $.742988 $ .88445 $1.052744 Class B Shares 12/06/99 12/10/99 $.116448 $.611756 $.728204 $1.052744 Class C Shares 12/06/99 12/10/99 $.114628 $.602195 $.716823 $1.052744 Class D Shares 12/06/99 12/10/99 $.135836 $.713611 $.849447 $1.052744 *This entire distribution is subject to a maximum 20% tax rate. The qualifying ordinary income qualifies for the dividends received deduction for corporations. Please retain this information for your records.
EX-17.D 8 efc1-0730_n30daprilex17d.txt Exhibit 17(d) (BULL LOGO) Semi-Annual Report February 28, 2001 Merrill Lynch Fundamental Growth Fund, Inc. www.mlim.ml.com This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Fundamental Growth Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. DEAR SHAREHOLDER Portfolio Matters For the six months ended February 28, 2001, Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total returns of -24.10%, -24.48%, -24.51% and -24.21%, respectively. (Investment results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 3 and 4 of this report to shareholders.) Over the six-month period, the Fund declined less than the average return of comparable mutual funds as measured by the Lipper, Inc. Large Cap Growth Funds Average of -27.24%. Overall, the US equity markets have been in a declining value trend since the start of the six-month period ended February 28, 2001. The primary reason for the Fund's relative outperformance compared to other actively managed large cap growth funds is that we began to significantly reduce our exposure to technology stocks in late August 2000 and into September 2000. Prior to this, the percentage of the Fund's net assets invested in technology companies ranged from 40% to 50%. As of February 28, 2001, our exposure to companies in technology industries represented less than 3% of net assets. While moving away from technology companies, we shifted our focus to stocks of companies in the pharmaceutical, bank, insurance, beverage, media, food and drug retailing, multiline and specialty retail, and energy equipment and services industries. Our investments in the pharmaceutical, bank, insurance, food and drug retailing, beverage, and energy equipment and services areas contributed to the Fund's relative outperformance compared to other large cap growth funds. The Fund's five largest industries at February 28, 2001 were: pharmaceuticals, energy equipment and services, insurance, banks and media. Our ten largest equity holdings were: General Electric Company, Pfizer Inc., AOL Time Warner Inc., The Home Depot, Inc., Merck & Co., Inc., Wal-Mart Stores, Inc., American International Group, Inc., Enron Corp., Wells Fargo Company and PepsiCo, Inc. (For complete details, see page 19 of this report to shareholders.) Market Outlook The US Federal Reserve Board Open Market Committee finally took steps to ease monetary policy with two policy actions in January 2001. The Federal Reserve Board had started to tighten monetary policy in late June 1999. We believe that the duration and degree of the downturn in US stock prices over the past six months reflects this extended tightening bias and that the start of an easing program could be positive for the US stock market for the remainder of 2001. In addition, the new Administration in the White House is proposing reductions in personal income tax rates. If there is some front-end loading of these reductions, this policy change could mean a nearer-term positive uplift to rates of real growth and profitability for the US economy. Consequently, the fiscal and monetary policy environment could favorably support diversified US stock market investment returns in 2001. In Conclusion The six-month period ended February 28, 2001 was a challenging one, as the US stock markets were in a downtrend throughout the entire period. We believe the most optimistic factor in the outlook for the remainder of 2001 is the easing monetary policy by the Federal Reserve Board. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 We thank you for your investment in Merrill Lynch Fundamental Growth Fund, Inc., and we look forward to sharing our outlook and strategies with you again in our annual report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Senior Vice President and Portfolio Manager March 13, 2001 OFFICERS AND DIRECTORS Terry K. Glenn, President and Director Joe Grills, Director Walter Mintz, Director Robert S. Salomon Jr., Director Melvin R. Seiden, Director Stephen B. Swensrud, Director Robert C. Doll, Jr., Senior Vice President Lawrence R. Fuller, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Allan J. Oster, Secretary Arthur Zeikel, Director of Merrill Lynch Fundamental Growth Fund, Inc., has recently retired. The Fund's Board of Directors wishes Mr. Zeikel well in his retirement. Custodian The Chase Manhattan Bank Global Securities Services Chase MetroTech Center, 18th Floor Brooklyn, NY 11245 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors, as detailed in the Fund's prospectus. If you were a Class A shareholder prior to October 21, 1994, your Class A Shares were redesignated to Class D Shares on October 21, 1994. However, in the case of certain eligible investors, the shares were simultaneously exchanged for Class A Shares. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after 8 years. (There is no initial sales charge for automatic share conversions.) If you were a Class B shareholder prior to October 21, 1994, your Class B Shares were redesignated to Class C Shares on October 21, 1994. * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Recent Performance Results
6 Month 12 Month Since Inception As of February 28, 2001 Total Return Total Return Total Return ML Fundamental Growth Fund, Inc. Class A Shares* -24.10% -20.90% +234.52% ML Fundamental Growth Fund, Inc. Class B Shares* -24.48 -21.69 +213.38 ML Fundamental Growth Fund, Inc. Class C Shares* -24.51 -21.74 +208.51 ML Fundamental Growth Fund, Inc. Class D Shares* -24.21 -21.12 +228.81 Standard & Poor's 500 Index** -17.84 - 8.20 +198.58/+231.95 *Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's inception dates are from 10/21/94 for Class A & Class B Shares and from 12/24/92 for Class C & Class D Shares. **An unmanaged broad-based Index comprised of common stocks. Since inception total returns are from 10/21/94 and from 12/24/92, respectively.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 PERFORMANCE DATA (concluded) Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* Year Ended 12/31/00 - 6.55% -11.45% Five Years Ended 12/31/00 +21.96 +20.65 Inception (10/21/94) through 12/31/00 +22.91 +21.85 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* Year Ended 12/31/00 - 7.51% -10.92% Five Years Ended 12/31/00 +20.70 +20.70 Inception (10/21/94) through 12/31/00 +21.66 +21.66 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without CDSC With CDSC** Class C Shares* Year Ended 12/31/00 - 7.47% - 8.32% Five Years Ended 12/31/00 +20.70 +20.70 Inception (12/24/92) through 12/31/00 +16.13 +16.13 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* Year Ended 12/31/00 - 6.77% -11.67% Five Years Ended 12/31/00 +21.64 +20.34 Inception (12/24/92) through 12/31/00 +17.04 +16.25 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class D Shares (formerly Class A Shares) were offered at a higher than maximum sales charge. Thus, actual returns would have been somewhat lower than noted for the inception period.) **Assuming maximum sales charge. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets Banks 735,000 BB&T Corporation $ 26,791,033 $ 26,555,550 0.5% 1,280,000 Northern Trust Corporation 104,192,053 90,960,000 1.5 750,000 PNC Bank Corp. 54,304,662 52,125,000 0.9 3,825,000 Wells Fargo Company 179,187,087 189,873,000 3.2 -------------- -------------- ------ 364,474,835 359,513,550 6.1 Beverages 2,900,000 The Coca-Cola Company 171,507,227 153,787,000 2.6 3,890,000 PepsiCo, Inc. 186,676,313 179,251,200 3.0 -------------- -------------- ------ 358,183,540 333,038,200 5.6 Biotechnology 1,750,000 ++Amgen Inc. 116,028,106 126,000,000 2.1 Computers & 420,800 ++Palm, Inc. 7,202,385 7,285,100 0.1 Peripherals Diversified 1,000,000 Countrywide Credit Industries, Inc. 47,297,469 44,230,000 0.8 Financials 720,000 State Street Corporation 78,853,112 72,324,000 1.2 1,524,700 T. Rowe Price Group Inc. 58,689,822 54,317,437 0.9 -------------- -------------- ------ 184,840,403 170,871,437 2.9 Diversified 4,120,000 ++Infonet Services Corporation (Class B) 51,258,962 21,712,400 0.4 Telecommunication Services Energy Equipment 2,800,000 Baker Hughes Incorporated 88,764,633 109,760,000 1.9 & Services 1,620,000 Diamond Offshore Drilling, Inc. 59,142,458 67,878,000 1.2 3,025,000 Halliburton Company 139,260,978 120,455,500 2.0 680,000 ++Noble Drilling Corporation 28,693,447 31,654,000 0.5 2,050,000 ++Rowan Companies, Inc. 61,762,800 58,527,500 1.0 1,340,000 Transocean Sedco Forex Inc. 62,810,081 64,494,200 1.1 2,415,000 ++Weatherford International, Inc. 117,788,091 125,652,450 2.1 -------------- -------------- ------ 558,222,488 578,421,650 9.8 Food & Drug 2,640,920 CVS Corporation 140,554,863 161,096,120 2.7 Retailing 2,135,000 Koninklijke Ahold NV 66,070,996 68,795,644 1.2 2,822,500 Walgreen Co. 107,145,430 125,093,200 2.1 -------------- -------------- ------ 313,771,289 354,984,964 6.0 Food Products 300,000 The Quaker Oats Company 28,921,741 29,256,000 0.5 Gas Utilities 2,105,000 El Paso Corporation 106,707,670 147,981,500 2.5 Hotels, 730,000 McDonald's Corporation 23,811,832 21,462,000 0.4 Restaurants & Leisure Household 1,526,850 Sony Corporation (ADR)(a) 160,603,502 109,185,044 1.8 Durables Household 750,000 Colgate-Palmolive Company 42,083,011 44,287,500 0.8 Products Industrial 6,256,300 General Electric Company 222,048,793 290,917,950 4.9 Conglomerates Insurance 835,000 AFLAC Incorporated 60,046,907 50,233,600 0.8 2,475,000 American International Group, Inc. 205,728,607 202,455,000 3.4 900,000 Everest Re Group, Ltd. 62,826,063 56,925,000 1.0 3,240,000 Lincoln National Corporation 160,801,957 142,138,800 2.4 13,700 ++Markel Corporation 2,409,632 2,462,575 0.0 477,000 Marsh & McLennan Companies, Inc. 62,698,323 51,039,000 0.9 -------------- -------------- ------ 554,511,489 505,253,975 8.5
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets Internet & Catalog 250,000 ++Amazon.com, Inc. $ 9,018,920 $ 2,531,250 0.0% Retail Internet 2,050,000 ++Commerce One, Inc. 122,694,634 35,746,875 0.6 Software & 3,485,000 ++Exodus Communications, Inc. 161,622,128 50,968,125 0.9 Services -------------- -------------- ------ 284,316,762 86,715,000 1.5 Media 5,500,000 ++AOL Time Warner Inc. 239,767,678 242,165,000 4.1 1,243,300 ++Clear Channel Communications, Inc. 60,277,213 71,054,595 1.2 1,660,300 ++Hispanic Broadcasting Corporation 47,463,966 37,356,750 0.6 350,000 The Interpublic Group of Companies, Inc. 8,415,569 13,160,000 0.2 1,237,100 ++Viacom, Inc. (Class B) 44,152,324 61,483,870 1.0 3,412,300 The Walt Disney Company 120,473,479 105,610,685 1.8 -------------- -------------- ------ 520,550,229 530,830,900 8.9 Multi-Utilities 2,834,100 Enron Corp. 140,170,237 194,135,850 3.3 Multiline Retail 1,100,000 ++Kohl's Corporation 74,052,106 72,501,000 1.2 4,265,000 Wal-Mart Stores, Inc. 212,079,983 213,633,850 3.6 -------------- -------------- ------ 286,132,089 286,134,850 4.8 Personal 725,000 The Estee Lauder Companies Inc. (Class A) 30,950,145 28,014,000 0.5 Products 800,000 The Gillette Company 28,748,469 26,008,000 0.4 -------------- -------------- ------ 59,698,614 54,022,000 0.9 Pharmaceuticals 1,100,000 Aventis SA 94,590,245 88,612,656 1.5 2,603,900 Bristol-Myers Squibb Company 189,605,092 165,113,299 2.8 1,350,000 Eli Lilly and Company 124,407,506 107,271,000 1.8 2,835,000 ++Immunex Corporation 92,775,777 92,137,500 1.6 2,745,000 Merck & Co., Inc. 207,463,759 220,149,000 3.7 6,075,200 Pfizer Inc. 228,818,117 273,384,000 4.6 2,500,100 Pharmacia Corporation 146,800,938 129,255,170 2.2 1,500,000 Sanofi-Synthelabo SA 97,273,391 80,832,840 1.4 -------------- -------------- ------ 1,181,734,825 1,156,755,465 19.6 Semiconductor 400,000 ++ASM Lithography Holding NV 9,012,793 8,721,486 0.2 Equipment & 467,000 ++Transmeta Corporation 13,930,788 9,515,125 0.1 Products 22,943,581 18,236,611 0.3 Software 1,290,000 ++Rational Software Corporation 56,009,770 45,069,375 0.8 Specialty Retail 5,635,600 The Home Depot, Inc. 237,507,150 239,513,000 4.0 Wireless 1,000,000 Vodafone Group PLC (ADR)(a) 36,451,121 27,310,000 0.5 Telecommunication Services Total Stocks 5,927,203,344 5,741,425,571 97.0
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS (concluded)
Shares Percent of Industries Held Short-Term Securities Cost Value Net Assets Commercial $50,000,000 CBA (Delaware) Finance, 5.46% Paper* due 3/05/2001 $ 49,969,667 $ 49,969,667 0.8% 39,887,000 General Motors Acceptance Corp., 5.56% due 3/01/2001 39,887,000 39,887,000 0.7 50,000,000 Morgan (J.P.) & Company, 5.50% due 3/01/2001 50,000,000 50,000,000 0.8 45,000,000 Verizon Global Funding, 5.33% due 4/16/2001 44,693,525 44,693,525 0.8 Total Short-Term Securities 184,550,192 184,550,192 3.1 Total Investments $6,111,753,536 5,925,975,763 100.1 ============== Liabilities in Excess of Other Assets (4,889,345) (0.1) --------------- ------ Net Assets $ 5,921,086,418 100.0% =============== ====== ++Non-income producing security. *Commercial Paper is traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Fund. (a)American Depositary Receipts (ADR). See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION Statement of Assets and Liabilities as of February 28, 2001 Assets: Investments, at value (identified cost--$6,111,753,536) $5,925,975,763 Cash 773,119 Foreign cash 1,279 Receivables: Securities sold $ 52,050,553 Capital shares sold 45,630,052 Dividends 3,567,786 101,248,391 ------------- Prepaid registration fees and other assets 219,065 -------------- Total assets 6,028,217,617 -------------- Liabilities: Payables: Securities purchased 86,823,876 Capital shares redeemed 11,823,493 Distributor 2,960,935 Investment adviser 2,596,036 104,204,340 -------------- Accrued expenses and other liabilities 2,926,859 -------------- Total liabilities 107,131,199 -------------- Net Assets: Net assets $5,921,086,418 ============== Net Assets Class A Shares of capital stock, $.10 par value, Consist of: 100,000,000 shares authorized $ 49,126,759 Class B Shares of capital stock, $.10 par value, 250,000,000 shares authorized 143,042,022 Class C Shares of capital stock, $.10 par value, 100,000,000 shares authorized 31,454,824 Class D Shares of capital stock, $.10 par value, 100,000,000 shares authorized 71,176,520 Paid-in capital in excess of par 5,745,093,666 Accumulated investment loss--net (1,736,840) Undistributed realized capital gains on investments and foreign currency transactions--net 68,707,240 Unrealized depreciation on investments--net (185,777,773) -------------- Net assets $5,921,086,418 ============== Net Asset Value: Class A--Based on net assets of $1,028,534,852 and 49,126,759 shares outstanding $ 20.94 ============== Class B--Based on net assets of $2,800,424,387 and 143,042,022 shares outstanding $ 19.58 ============== Class C--Based on net assets of $619,472,942 and 31,454,824 shares outstanding $ 19.69 ============== Class D--Based on net assets of $1,472,654,237 and 71,176,520 shares outstanding $ 20.69 ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Statement of Operations for the Six Months Ended February 28, 2001 Investment Dividends (net of $257,720 foreign withholding tax) $ 20,713,186 Income: Interest and discount earned 19,673,898 -------------- Total income 40,387,084 -------------- Expenses: Investment advisory fees $ 18,001,215 Account maintenance and distribution fees--Class B 14,798,487 Account maintenance and distribution fees--Class C 2,957,010 Account maintenance fees--Class D 1,912,333 Transfer agent fees--Class B 1,817,312 Transfer agent fees--Class D 798,728 Transfer agent fees--Class A 453,157 Transfer agent fees--Class C 386,007 Accounting services 364,409 Registration fees 231,208 Custodian fees 125,628 Printing and shareholder reports 95,780 Professional fees 67,714 Directors' fees and expenses 45,440 Pricing fees 16,038 Other 53,458 -------------- Total expenses 42,123,924 -------------- Investment loss--net (1,736,840) -------------- Realized & Realized gain (loss)from: Unrealized Gain Investments--net 91,376,206 (Loss) on Foreign currency transactions--net (1,102,204) 90,274,002 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation: Transactions-- Investments--net (1,788,982,857) Net: Foreign currency transactions--net 20,894 (1,788,961,963) -------------- ---------------- Net Decrease in Net Assets Resulting from Operations $(1,700,424,801) ================ See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the SixFor the Months EndedYear Ended Increase (Decrease) in Net Assets: Feb. 28, 2001 Aug. 31, 2000 Operations: Investment loss--net $ (1,736,840) $ (30,703,211) Realized gain on investments--net 90,274,002 453,467,841 Change in unrealized appreciation/depreciation on investments--net (1,788,961,963) 1,358,782,507 --------------- --------------- Net increase (decrease) in net assets resulting from operations (1,700,424,801) 1,781,547,137 --------------- --------------- Distributions to Realized gain on investments--net: Shareholders: Class A (61,586,116) (43,750,779) Class B (219,451,798) (170,903,218) Class C (44,434,619) (26,261,623) Class D (118,505,419) (79,730,301) --------------- --------------- Net decrease in net assets resulting from distributions to shareholders (443,977,952) (320,645,921) --------------- --------------- Capital Share Net increase in net assets derived from Transactions: capital share transactions 1,432,220,808 1,595,773,254 --------------- --------------- Net Assets: Total increase (decrease) in net assets (712,181,945) 3,056,674,470 Beginning of period 6,633,268,363 3,576,593,893 --------------- --------------- End of period $ 5,921,086,418 $6,633,268,363 =============== ============== *Accumulated investment loss--net $ (1,736,840) $ -- =============== ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights
Class A For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, Operating beginning of period $ 29.98 $ 21.99 $ 16.19 $ 17.37 $ 13.60 Performance: --------- --------- --------- --------- --------- Investment income--net++ .07 .02 .13 .07 .07 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (7.15) 9.91 6.37 1.09 4.95 --------- --------- --------- --------- --------- Total from investment operations (7.08) 9.93 6.50 1.16 5.02 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.96) (1.94) (.70) (2.34) (1.25) --------- --------- --------- --------- --------- Net asset value, end of period $ 20.94 $ 29.98 $ 21.99 $ 16.19 $ 17.37 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.10%+++ 47.01% 41.08% 6.37% 39.24% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses .75%* .76% .81% .87% .99% Net Assets: ========= ========= ========= ========= ========= Investment income--net .60%* .09% .60% .37% .47% ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $1,028,535 $ 882,072 $ 472,464 $ 167,133 $ 62,049 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class B For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 28.06 $ 20.75 $ 15.39 $ 16.69 $ 13.14 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.05) (.23) (.08) (.11) (.09) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (6.69) 9.32 6.05 1.05 4.79 --------- --------- --------- --------- --------- Total from investment operations (6.74) 9.09 5.97 .94 4.70 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.74) (1.78) (.61) (2.24) (1.15) --------- --------- --------- --------- --------- Net asset value, end of period $ 19.58 $ 28.06 $ 20.75 $ 15.39 $ 16.69 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.48%+++ 45.55% 39.58% 5.21% 37.95% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses 1.76%* 1.77% 1.83% 1.88% 2.02% Net Assets: ========= ========= ========= ========= ========= Investment loss--net (.40%)* (.92%) (.41%) (.64%) (.59%) ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $2,800,424 $3,411,474 $2,000,535 $ 641,688 $ 216,636 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class C For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 28.26 $ 20.88 $ 15.45 $ 16.72 $ 13.14 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.05) (.24) (.09) (.11) (.09) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (6.74) 9.39 6.10 1.05 4.79 --------- --------- --------- --------- --------- Total from investment operations (6.79) 9.15 6.01 .94 4.70 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.78) (1.77) (.58) (2.21) (1.12) --------- --------- --------- --------- --------- Net asset value, end of period $ 19.69 $ 28.26 $ 20.88 $ 15.45 $ 16.72 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.51%+++ 45.53% 39.65% 5.19% 37.90% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses 1.77%* 1.78% 1.83% 1.89% 2.02% Net Assets: ========= ========= ========= ========= ========= Investment loss--net (.41%)* (.93%) (.43%) (.63%) (.58%) ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $ 619,473 $ 627,021 $ 307,988 $ 130,652 $ 74,732 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class D For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 29.63 $ 21.77 $ 16.06 $ 17.27 $ 13.54 Operating --------- --------- --------- --------- --------- Performance: Investment income (loss)--net++ .04 (.04) .08 .02 .03 Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (7.07) 9.80 6.31 1.09 4.93 --------- --------- --------- --------- --------- Total from investment operations (7.03) 9.76 6.39 1.11 4.96 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.91) (1.90) (.68) (2.32) (1.23) --------- --------- --------- --------- --------- Net asset value, end of period $ 20.69 $ 29.63 $ 21.77 $ 16.06 $ 17.27 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.21%+++ 46.67% 40.67% 6.08% 38.90% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses .99%* 1.01% 1.05% 1.11% 1.24% Net Assets: ========= ========= ========= ========= ========= Investment income (loss)--net .37%* (.17%) .36% .12% .17% ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $1,472,654 $1,712,701 $ 795,607 $ 157,899 $ 53,101 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. 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 that are traded both in the over-the- counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange- traded options. In the case of options traded in the over-the- counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or for the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS (continued) (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the exdividend date may have passed are subsequently recorded when the Fund has determined the exdividend date. Interest income is recognized on the accrual basis. The Fund will adopt the provisions to amortize all premiums and discounts on debt securities effective September 1, 2001, as now required under the new AICPA Audit and Accounting Guide for Investment Companies. The cumulative effect of this accounting change will have no impact on the total net assets of the Fund. The impact of this accounting change has not been determined, but will result in an adjustment to the cost of securities and a corresponding adjustment to net unrealized appreciation/depreciation, based on securities held as of August 31, 2001. (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) Security loans--The Fund receives compensation in the form of fees, or it retains a portion of the interest on the investment of any cash received as collateral. The Fund also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at the annual rate of .65% of the average net assets of the Fund not exceeding $1 billion, .625% of average net assets of the Fund in excess of $1 billion but not exceeding $1.5 billion, .60% of net assets in excess of $1.5 billion but not exceeding $5 billion, .575% of net assets in excess of $5 billion but not exceeding $7.5 billion and .55% of net assets in excess of $7.5 billion. Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fee Fee Class B .25% .75% Class C .25% .75% Class D .25% -- Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended February 28, 2001, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $ 1,057 $ 15,107 Class D $79,139 $1,189,409 For the six months ended February 28, 2001, MLPF&S received contingent deferred sales charges of $1,047,558 and $61,132 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $1,474 relating to transactions subject to front-end sales charge waivers in Class D Shares. In addition, MLPF&S received $855,409 in commissions on the execution of portfolio security transactions for the Fund for the six months ended February 28, 2001. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services were provided to the Fund by MLIM through December 31, 2000. Up to this date, the Fund reimbursed MLIM $226,724 for these services. As of January 1, 2001, accounting services are provided for the Fund by State Street Bank and Trust Company ("State Street") pursuant to an agreement between State Street and the Fund. The Fund will pay the cost of these services. In addition, the Fund will reimburse MLIM for the cost of certain additional accounting services. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, FDS, PSI, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended February 28, 2001 were $4,962,711,385 and $3,142,146,378, respectively. Net realized gains (losses) for the six months ended February 28, 2001 and net unrealized losses as of February 28, 2001 were as follows: Realized Unrealized Gains (Losses) Losses Long-term investments $ 91,290,509 $(185,777,773) Short-term investments 85,697 -- Foreign currency transactions (1,102,204) -- ------------ ------------- Total $ 90,274,002 $(185,777,773) ============ ============= As of February 28, 2001, net unrealized depreciation for Federal income tax purposes aggregated $185,777,773, of which $474,201,810 related to appreciated securities and $659,979,583 related to depreciated securities. At February 28, 2001, the aggregate cost of investments for Federal income tax purposes was $6,111,753,536. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $1,432,220,808 and $1,595,773,254 for the six months ended February 28, 2001 and for the year ended August 31, 2000, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 21,233,214 $ 479,845,876 Shares issued to shareholders in reinvestment of distributions 2,082,703 47,006,601 -------------- ------------- Total issued 23,315,917 526,852,477 Shares redeemed (3,607,499) (85,952,634) -------------- ------------- Net increase 19,708,418 $ 440,899,843 ============== ============= Class A Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 13,954,826 $ 374,057,263 Shares issued to shareholders in reinvestment of distributions 1,247,247 30,869,352 -------------- ------------- Total issued 15,202,073 404,926,615 Shares redeemed (7,273,977) (192,459,722) -------------- ------------- Net increase 7,928,096 $ 212,466,893 ============== ============= Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS (concluded) Class B Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 26,742,988 $ 601,089,032 Shares issued to shareholders in reinvestment of distributions 9,397,456 198,756,190 -------------- ------------- Total issued 36,140,444 799,845,222 Automatic conversion of shares (2,730,697) (62,737,297) Shares redeemed (11,927,486) (266,573,161) -------------- ------------- Net increase 21,482,261 $ 470,534,764 ============== ============= Class B Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 46,742,875 $1,183,282,271 Shares issued to shareholders in reinvestment of distributions 6,702,197 156,429,267 -------------- ------------- Total issued 53,445,072 1,339,711,538 Automatic conversion of shares (6,990,131) (171,422,234) Shares redeemed (21,307,246) (528,575,323) -------------- ------------- Net increase 25,147,695 $ 639,713,981 ============== ============= Class C Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 9,584,056 $ 215,236,943 Shares issued to shareholders in reinvestment of distributions 1,883,024 40,070,750 -------------- ------------- Total issued 11,467,080 255,307,693 Shares redeemed (2,196,655) (48,997,468) -------------- ------------- Net increase 9,270,425 $ 206,310,225 ============== ============= Class C Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 9,791,460 $ 253,121,222 Shares issued to shareholders in reinvestment of distributions 1,005,364 23,636,119 -------------- ------------- Total issued 10,796,824 276,757,341 Shares redeemed (3,363,502) (83,902,865) -------------- ------------- Net increase 7,433,322 $ 192,854,476 ============== ============= Class D Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 12,661,886 $ 303,412,504 Automatic conversion of shares 2,584,516 62,737,297 Shares issued to shareholders in reinvestment of distributions 4,891,364 109,175,246 -------------- ------------- Total issued 20,137,766 475,325,047 Shares redeemed (6,759,544) (160,849,071) -------------- ------------- Net increase 13,378,222 $ 314,475,976 ============== ============= Class D Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 21,376,393 $ 562,677,915 Automatic conversion of shares 6,644,211 171,422,234 Shares issued to shareholders in reinvestment of distributions 2,964,749 72,666,009 -------------- ------------- Total issued 30,985,353 806,766,158 Shares redeemed (9,735,407) (256,028,254) -------------- ------------- Net increase 21,249,946 $ 550,737,904 ============== ============= 5. Short-Term Borrowings: On December 1, 2000, the Fund, along with certain other funds managed by MLIM and its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the facility. Amounts borrowed under the facility bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow under the facility during the six months ended February 28, 2001. 6. Security Loans: At February 28, 2001, the Fund held collateral having an aggregate value of approximately $24,987,000 for portfolio securities loaned having a market value of approximately $24,160,000. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 PORTFOLIO INFORMATION As of February 28, 2001 Percent of Ten Largest Holdings Net Assets General Electric Company 4.9% Pfizer Inc. 4.6 AOL Time Warner Inc. 4.1 The Home Depot, Inc. 4.0 Merck & Co., Inc. 3.7 Wal-Mart Stores, Inc. 3.6 American International Group, Inc. 3.4 Enron Corp. 3.3 Wells Fargo Company 3.2 PepsiCo, Inc. 3.0 Percent of Geographic Allocation Net Assets++ United States 90.4% France 2.9 Japan 1.8 Netherlands 1.4 United Kingdom 0.5 ++Total may not equal 100%. Percent of Ten Largest Industries Net Assets Pharmaceuticals 19.6% Energy Equipment & Services 9.8 Media 8.9 Insurance 8.5 Banks 6.1 Food & Drug Retailing 6.0 Beverages 5.6 Industrial Conglomerates 4.9 Multiline Retail 4.8 Specialty Retail 4.0 EX-17.E 9 efc1-0730_mlgn30dex17e.txt Exhibit 17(e) MERRILL LYNCH GROWTH FUND FUND LOGO Annual Report October 31, 2000 This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Growth Fund Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH GROWTH FUND DEAR SHAREHOLDER Fiscal Year in Review Merrill Lynch Growth Fund outperformed the unmanaged Standard & Poor's (S&P)/Barra Growth Index for the one-year period ended October 31, 2000. The Fund's Class A, Class B, Class C and Class D Shares had total returns of +13.24%, +12.07%, +12.11% and +13.00%, respectively, compared with an Index return of +2.07%. In addition, the Fund also outperformed the Index for the six-month period ended October 31, as the Fund's Class A and Class B Shares had total returns of -6.32% and -6.78%, respectively, compared with an Index return of -7.90%. (Fund performance shown does not reflect sales charges, and would be lower if sales charges were included. Complete performance information can be found on pages 4-6 of this report to shareholders.) Almost all of the Fund's outperformance for the fiscal year occurred during January and February, reflecting the strong appreciation of several of our biotechnology investments. Aside from these two months of exceptional performance, the Fund's results were relatively lackluster over the balance of the year. Only a few other positions had any meaningful positive impact on our performance over the course of the fiscal year: EMC Corporation, Enron Corp., Maxim Integrated Products, Inc. and Corning Incorporated. Analyzing Investment Performance When we compare the Fund's investment results with those of the unmanaged S&P/Barra Growth Index, we evaluate our performance in terms of "successes of commission" (as described below in #1); "successes of omission" (see #2); "errors of commission" (see #3) and "errors of omission" (see #4 & #5): 1. If a stock we own performs well--whether it is or is not included in the S&P/Barra Growth Index--it is a positive for the Fund's performance. The outperformance will be enhanced if we overweight the stock relative to the Index. Our investment decisions in this area made a significantly positive contribution to the Fund's performance relative to the Index during the fiscal year; for example, our overweighting of Corning, an Index stock, and the purchase of Enron, which is not an Index stock. 2. If a stock that we do not own performs poorly--and it is included in the S&P/Barra Growth Index--then it is a positive for the Fund's relative performance. The outperformance will be lessened if we merely underweight the stock relative to the Index instead of not owning it at all. Our investment decisions in this area made a significantly positive contribution to the Fund's performance relative to the Index during the fiscal year. An example of such a "success of omission" was our avoidance of Index stock Yahoo!, Inc., which fell sharply this year. Underweighting another poor performer, such as Lucent Technologies, Inc., helped performance relative to the Index, but with hindsight it would have been better not to own the stock at all. 3. If a stock that we own performs poorly--whether it is or is not included in the S&P/Barra Growth Index--it is a negative for the Fund's relative performance. If the stock is included in the Index, the underperformance will be magnified if we overweight the stock relative to the Index and lessened if we underweight the stock relative to the Index. Our investment decisions in this area hindered the Fund's performance relative to the Index during the fiscal year. For example, our experience in buying shares of the high-growth technology stocks Bookham Technology PLC and Netro Corporation in the belief that they would outperform the Index was a mistake, in hindsight. 4. If a stock that we do not own performs well--and it is included in the S&P/Barra Growth Index--then it is a negative for the Fund's relative performance. This underperformance will be lessened if we simply underweight the stock relative to the Index. Our investment decisions in this area had a lesser impact on the Fund's performance relative to the Index for the fiscal year, although we would have been better off if we had purchased shares of the strong performers Oracle Corporation and Sun Microsystems, Inc., both of which are in the Index and outperformed it. In addition, although we owned shares of General Electric Company, our position is a significant underweight relative to its exposure in the Index. Merrill Lynch Growth Fund October 31, 2000 5. If a stock that we do not own performs well--even if it is not included in the S&P/Barra Growth Index--it is a missed opportunity. Our investment decisions in this area had a negative impact on the Fund's absolute performance. For example, we missed opportunities to benefit from the extremely strong performances of Juniper Networks, Inc., Siebel Systems, Inc., BEA Systems, Inc. and CIENA Corp. The challenge in evaluating these companies is that their shares trade at well over 100 times prospective earnings. However, they are also growing at rates that are much faster than typical growth companies. We discuss our experience in areas #3 and #5 in the "Emerging High Tech Growth Companies" section of this letter to shareholders. Our Investment Universe Whether our investments are the same as or different from those stocks included in the Index, it is important to remember that our equity investments are growth stocks. A growth stock, as we define it, is one that is increasing in economic value at a rate that is appreciably faster than the average company. Ideally, our stock investments also tend to be toward the larger capitalization issues; that is, those that have market capitalizations of more than $10 billion. Since our investment universe is limited to growth stocks, we do not invest in stocks because we believe that their prices are simply too low to reflect the value of their respective companies. We also do not invest in companies that are likely to have slightly better- than-average earnings growth for several years, and subsequently revert to slower growth rates because of the cyclical nature of their industries. Furthermore, we do not seek to adapt our investment style based on the rotation of the stock market from out- of-favor companies/sectors to in-favor companies/sectors. This is important to remember because we are comparing the Fund's performance with that of the unmanaged S&P/Barra Growth Index. We strive to outperform this Index, no matter what the stock market conditions and not to outperform the stock market in general, or some other unmanaged index. In an environment in which value stocks outperform growth stocks, our performance will probably be inferior to that of many value-oriented funds. Similarly, in an environment in which growth outperforms value, our performance should be better than many value funds. However, even if we outperform all value funds, we have not done well unless we outperform relative to our investable universe, which is the S&P/Barra Growth Index. Emerging High Tech Growth Companies During the fiscal year, emerging high tech growth companies caused the worst relative underperformance for the Fund. However, there were a number of companies (some with very large market capitalizations) that provided truly extraordinary investment returns. These companies are growing rapidly in very fast-growing businesses. For these emerging high tech growth companies, security analysts' expectations--and the companies' ability to meet/beat them- - -seem to be of paramount importance. We observe that the security analysts are focusing not on net income, return on equity, or other typical measures of value or profitability, but on revenue. In particular, revenue growth (and typically as it is measured from one quarter to the next) appears to be viewed by the market as the most important indicator of growth. The investment "stars" in the emerging high tech area are those companies with very high and expanding rates of sequential revenue growth. In many respects, such companies are logical candidates for investment for us, since we have come to believe that above-average revenue growth is one of the hallmarks of growth companies. This type of company has the potential to exhibit sustained growth. Improving operating margins are not very sustainable. However, these stocks are also extremely volatile. For example, it is not uncommon to see these stocks double or triple in a few months, then decline by over 50%, then double again, only to decline subsequently by as much as 70%--all in one year. Such erratic stock price movements are not representative of fundamental changes in the companies' business prospects, but of the rapidly changing investor sentiment to which the stock prices are subjected. Merrill Lynch Growth Fund October 31, 2000 Our forays into emerging high tech growth companies have not yielded successful results thus far. However, since we continue to believe that such companies fit our investment profile, we will seek to incorporate more investments like them into the portfolio. We continue to believe that over the long-term, emerging high tech growth companies will offer the Fund attractive opportunities for capital appreciation, albeit with much volatility along the way. Current Investment Strategy At October 31, 2000, the Fund was positioned with significant exposure to growth stocks in the financial sector (shares of Associates First Capital Corporation were purchased as a means to establish a position in Citigroup Inc. when Associates First was acquired by Citigroup after the close of the period on November 30, 2000) and in electronic management systems (EMS) companies (Solectron Corporation and Sanmina Corporation). We also have a significant exposure to Enron Corp., a group of power technology companies, two programmable logic device companies (Xilinx, Inc. and Lattice Semiconductor Corporation), two wireless telecommunications providers (Vodaphone AirTouch PLC and McLeodUSA Incorporated), Corning Incorporated, and a number of pharmaceutical investments that are different from the pharmaceutical stocks in the S&P/Barra Growth Index. If these investments are successful, then the Fund will outperform relative to the Index. However, if these investments are not successful, then the Fund will underperform relative to the Index. In Conclusion We thank you for your investment in Merrill Lynch Growth Fund, and we look forward to reviewing our outlook and strategy with you again in our next semi-annual report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Trustee (Stephen I. Silverman) Stephen I. Silverman Senior Vice President and Portfolio Manager December 13, 2000 Merrill Lynch Growth Fund October 31, 2000 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after approximately 8 years. (There is no initial sales charge for automatic share conversions.) * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. The Fund's Investment Adviser voluntarily waived a portion of its management fee. Without such a waiver, the Fund's performance would have been lower. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 9/30/00 +26.02% +19.41% Five Years Ended 9/30/00 + 8.36 + 7.20 Ten Years Ended 9/30/00 +15.93 +15.30 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares were offered at a higher sales charge. Thus, actual returns would have been lower than shown for the ten-year period.) **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* One Year Ended 9/30/00 +24.75% +20.75% Five Years Ended 9/30/00 + 7.26 + 7.26 Ten Years Ended 9/30/00 +14.74 +14.74 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without CDSC With CDSC** Class C Shares* One Year Ended 9/30/00 +24.74% +23.74% Five Years Ended 9/30/00 + 7.24 + 7.24 Inception (10/21/94) through 9/30/00 +11.22 +11.22 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* One Year Ended 9/30/00 +25.73% +19.13% Five Years Ended 9/30/00 + 8.10 + 6.94 Inception (10/21/94) through 9/30/00 +12.10 +11.09 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. Merrill Lynch Growth Fund October 31, 2000 PERFORMANCE DATA (continued) Total Return Based on a $10,000 Investment A line graph depicting the growth of Class A & Class B Shares* in comparison to the growth of a $10,000 investment in the S&P/Barra Growth Index++++ and the S&P 500 Total Return Index++++++. Beginning and ending values are: 10/90 10/00 ML Growth Fund Class A Shares* $ 9,475 $40,175 ML Growth Fund Class B Shares* $10,000 $38,274 S&P/Barra Growth Index++++ $10,000 $64,723 S&P 500 Total Return Index++++++ $10,000 $59,083 A line graph depicting the growth of Class C & Class D Shares* in comparison to the growth of a $10,000 investment in the S&P/Barra Growth Index++++ and the S&P 500 Total Return Index++++++. Beginning and ending values are: 12/21/94 10/00 ML Growth Fund Class C Shares* $10,000 $17,795 ML Growth Fund Class D Shares* $ 9,475 $17,676 S&P/Barra Growth Index++++ $10,000 $38,182 S&P 500 Total Return Index++++++ $10,000 $34,275 *Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of operations. ++ML Growth Fund invests in a non-diversified portfolio of equity securities that Fund management believes has the potential to achieve above average growth rates in earnings, revenues, cash flow or earnings before interest, taxes, depreciation and amortization. ++++This unmanaged broad-based Index is a subset of the S&P 500 Index containing those companies with higher price-to-book ratios. ++++++This unmanaged broad-based Index is comprised of common stocks. Past performance is not predictive of future performance. Merrill Lynch Growth Fund October 31, 2000 PERFORMANCE DATA (concluded) Recent Performance Results
Ten-Year/ 6-Month 12-Month Since Inception As of October 31, 2000 Total Return Total Return Total Return ML Growth Fund Class A Shares* -6.32% +13.24% +324.04% ML Growth Fund Class B Shares* -6.78 +12.07 +282.71 ML Growth Fund Class C Shares* -6.76 +12.11 + 77.95 ML Growth Fund Class D Shares* -6.39 +13.00 + 86.59 Standard & Poor's/Barra Growth Index** -7.90 + 2.07 +547.23/+281.82 Standard & Poor's 500 Index*** -1.03 + 6.09 +490.83/+242.76 *Investment results shown do not reflect sales charges; results would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's ten-year/inception periods are ten years for Class A & Class B Shares and from 10/21/94 for Class C & Class D Shares. **This unmanaged broad-based Index is a subset of the S&P 500 Index, containing those companies with higher price-to-book ratios. ***An unmanaged broad-based index comprised of common stocks. Ten- year/since inception total returns are for ten years and from 10/21/94, respectively.
Merrill Lynch Growth Fund October 31, 2000 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Long-Term Investments Value Net Assets Beverages 679,000 The Coca-Cola Company $ 40,994,625 1.6% Broadcasting & 630,000 ++Clear Channel Communications, Inc. 37,839,375 1.5 Publishing Communication 1,915,308 ++Cisco Systems, Inc. 103,187,218 4.0 Equipment 648,200 ++Comverse Technology, Inc. 72,395,837 2.8 -------------- ------ 175,583,055 6.8 Computer Hardware 686,000 ++Dell Computer Corporation 20,194,125 0.8 1,130,800 ++EMC Corporation 100,711,875 3.9 387,200 International Business Machines Corporation 38,139,200 1.5 -------------- ------ 159,045,200 6.2 Computer Software 1,300,000 ++Gemstar-TV Guide International, Inc. 89,050,000 3.4 1,480,000 ++Microsoft Corporation 101,935,000 3.9 450,000 ++Quest Software, Inc. 19,659,375 0.8 270,000 ++VERITAS Software Corporation 38,053,125 1.5 -------------- ------ 248,697,500 9.6 Contract 500,000 ++Sanmina Corporation 57,156,250 2.2 Manufacturers 2,673,700 ++Solectron Corporation 117,642,800 4.6 -------------- ------ 174,799,050 6.8 Diversified 1,527,450 Corning Incorporated 116,849,925 4.6 Manufacturing 2,740,100 General Electric Company 150,191,731 5.8 -------------- ------ 267,041,656 10.4 Electrical 574,000 ++Bookham Technology PLC (ADR)(a) 19,264,875 0.7 Components/ Electronics Electrical 1,150,000 ++Lattice Semiconductor Corporation 33,637,500 1.3 Components/ Instruments Energy Equipment & 1,208,000 Enron Corp. 99,131,500 3.8 Services Energy Technology 575,100 ++Active Power, Inc. 21,889,744 0.8 14,300 ++Capstone Turbine Corporation 790,969 0.0 251,000 ++FuelCell Energy, Inc. 19,217,188 0.7 500,000 ++International Rectifier Corp. 22,312,500 0.9 343,600 ++Proton Energy Systems, Inc. 9,255,725 0.4 -------------- ------ 73,466,126 2.8
Merrill Lynch Growth Fund October 31, 2000 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Long-Term Investments Value Net Assets Financial Services 3,043,000 Associates First Capital Corporation (Class A) $ 112,971,375 4.4% Gas Pipeline & 3,848,434 ++TransMontaigne Inc.(b) 14,912,682 0.6 Transmission Insurance 693,000 American International Group, Inc. 67,914,000 2.6 Internet Services 950,000 ++America Online, Inc. 47,908,500 1.9 Life Sciences 460,000 ++Amgen Inc. 26,622,500 1.0 496,000 ++Millennium Pharmaceuticals, Inc. 35,991,000 1.4 -------------- ------ 62,613,500 2.4 Media 476,000 ++Viacom, Inc. (Class A) 27,251,000 1.0 Medical Technology 1,575,000 Medtronic, Inc. 85,542,188 3.3 Pharmaceuticals 330,800 Johnson & Johnson 30,474,950 1.2 719,000 Merck & Co., Inc. 64,665,063 2.5 2,572,150 Pfizer Inc. 111,084,728 4.3 1,470,510 Pharmacia Corporation 80,878,050 3.1 -------------- ------ 287,102,791 11.1 Retail 1,161,500 Lowe's Companies, Inc. 53,066,031 2.0 2,035,400 Wal-Mart Stores, Inc. 92,356,275 3.6 -------------- ------ 145,422,306 5.6 Semiconductors 1,962,060 Intel Corporation 88,170,071 3.4 500,000 ++Maxim Integrated Products, Inc. 33,125,000 1.3 1,026,500 Motorola, Inc. 25,598,344 1.0 1,080,000 Texas Instruments Incorporated 52,987,500 2.1 519,000 ++Xilinx, Inc. 37,562,625 1.5 -------------- ------ 237,443,540 9.3 Telecommunication 66,100 ++Corvis Corporation 4,337,812 0.2 Equipment 650,000 ++Finisar Corporation 18,728,125 0.7 77,100 ++TyCom, Ltd. 2,582,850 0.1 -------------- ------ 25,648,787 1.0 Telecommunication 1,495,600 ++McLeodUSA Incorporated (Class A) 28,790,300 1.1 Services 579,500 ++Metawave Communications Corporation 7,642,156 0.3 500,000 ++Netro Corporation 10,875,000 0.4 -------------- ------ 47,307,456 1.8 Wireless 12,056,786 Vodafone AirTouch PLC 50,203,212 2.0 Communication Total Long-Term Investments (Cost--$2,058,216,443) $2,541,741,799 98.5
Merrill Lynch Growth Fund October 31, 2000 SCHEDULE OF INVESTMENTS (concluded)
Face Percent of Amount Short-Term Investments Value Net Assets Commercial Paper* $ 37,635,000 General Motors Acceptance Corp., 6.63% due 11/01/2000 $ 37,635,000 1.4% Total Short-Term Investments (Cost--$37,635,000) 37,635,000 1.4 Total Investments (Cost--$2,095,851,443) 2,579,376,799 99.9 Other Assets Less Liabilities 1,369,361 0.1 -------------- ------ Net Assets $2,580,746,160 100.0% ============== ====== *Commercial paper is traded on a discount basis; the interest rate shown reflects the discount rate paid at the time of purchase by the Fund. ++Non-income producing security. (a)American Depositary Receipts (ADR). (b)Investment 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 Gas Trans- Pipeline & Montaigne Transmission Inc. -- -- ++ ++Non-income producing security. See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION Statement of Assets and Liabilities as of October 31, 2000 Assets: Investments, at value (identified cost--$2,095,851,443) $2,579,376,799 Foreign cash 460,175 Receivables: Securities sold $ 20,038,061 Beneficial interest sold 1,272,871 Dividends 489,956 21,800,888 -------------- Prepaid registration fees and other assets 130,854 -------------- Total assets 2,601,768,716 -------------- Liabilities: Payables: Beneficial interest redeemed 13,944,002 Securities purchased 1,595,550 Investment adviser 1,420,160 Distributor 1,172,283 18,131,995 -------------- Accrued expenses and other liabilities 2,890,561 -------------- Total liabilities 21,022,556 -------------- Net Assets: Net assets $2,580,746,160 ============== Net Assets Class A Shares of beneficial interest, $.10 par value, Consist of: unlimited number of shares authorized $ 2,673,786 Class B Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 4,428,259 Class C Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 396,450 Class D Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 2,810,034 Paid-in capital in excess of par 1,913,852,009 Undistributed realized capital gains on investments and foreign currency transactions--net 173,073,651 Unrealized appreciation on investments and foreign currency transactions--net 483,511,971 -------------- Net assets $2,580,746,160 ============== Net Asset Value: Class A--Based on net assets of $701,996,556 and 26,737,856 shares of beneficial interest outstanding $ 26.25 ============== Class B--Based on net assets of $1,052,704,873 and 44,282,595 shares of beneficial interest outstanding $ 23.77 ============== Class C--Based on net assets of $93,549,189 and 3,964,498 shares of beneficial interest outstanding $ 23.60 ============== Class D--Based on net assets of $732,495,542 and 28,100,338 shares of beneficial interest outstanding $ 26.07 ============== See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended October 31, 2000 Investment Dividends (net of $353,114 foreign withholding tax) $ 11,517,912 Income: Interest and discount earned 3,663,198 -------------- Total income 15,181,110 -------------- Expenses: Investment advisory fees $ 19,782,243 Account maintenance and distribution fees--Class B 12,729,452 Transfer agent fees--Class B 3,091,563 Account maintenance fees--Class D 2,077,024 Transfer agent fees--Class D 1,806,318 Transfer agent fees--Class A 1,795,949 Account maintenance and distribution fees--Class C 1,105,562 Custodian fees 320,468 Transfer agent fees--Class C 289,185 Printing and shareholder reports 285,443 Accounting services 254,181 Trustees' fees and expenses 115,378 Professional fees 106,998 Registration fees 48,730 Pricing fees 25,002 Other 76,870 -------------- Total expenses before reimbursement 43,910,366 Reimbursement of expenses (943,188) -------------- Total expenses after reimbursement 42,967,178 -------------- Investment loss--net (27,786,068) -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net 460,441,458 (Loss) on Foreign currency transactions--net (1,819,150) 458,622,308 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net: Investments--net (34,572,089) Foreign currency transactions--net (13,305) (34,585,394) -------------- --------------- Net Increase in Net Assets Resulting from Operations $ 396,250,846 =============== See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended October 31, Increase (Decrease) in Net Assets: 2000 1999 Operations: Investment loss--net $ (27,786,068) $ (19,595,562) Realized gain (loss) on investments and foreign currency transactions--net 458,622,308 (223,616,559) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net (34,585,394) 139,816,935 -------------- -------------- Net increase (decrease) in net assets resulting from operations 396,250,846 (103,395,186) -------------- -------------- Dividends to In excess of investment income--net: Shareholders: Class A -- (9,908,351) Class B -- (10,381,062) Class C -- (879,414) Class D -- (8,144,104) -------------- -------------- Net decrease in net assets resulting from dividends to shareholders -- (29,312,931) -------------- -------------- Beneficial Net decrease in net assets derived from beneficial Interest interest transactions (688,286,498) (1,972,727,295) Transactions: -------------- -------------- Net Assets: Total decrease in net assets (292,035,652) (2,105,435,412) Beginning of year 2,872,781,812 4,978,217,224 -------------- -------------- End of year $2,580,746,160 $2,872,781,812 ============== ============== See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION (continued) Financial Highlights
The following per share data and ratios have been derived Class A++ from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 23.18 $ 22.71 $ 33.13 $ 26.87 $ 23.13 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income (loss)--net (.11) (.01) .46 .53 .31 Realized and unrealized gain (loss) on investments and foreign currency transactions--net 3.18 .69 (8.47) 7.98 5.63 ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.07 .68 (8.01) 8.51 5.94 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- (.48) (.44) (.35) In excess of investment income--net -- (.21) -- -- -- Realized gain on investments--net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments--net -- -- (.23) -- -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions -- (.21) (2.41) (2.25) (2.20) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 26.25 $ 23.18 $ 22.71 $ 33.13 $ 26.87 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 13.24% 3.09% (25.83%) 34.03% 28.15% Return:* ========== ========== ========== ========== ========== Ratios to Expenses, net of reimbursement .88% .96% .81% .77% .80% Average ========== ========== ========== ========== ========== Net Assets: Expenses .91% .99% .85% .81% .84% ========== ========== ========== ========== ========== Investment income (loss)--net (.38%) (.03%) 1.72% 1.84% 1.28% ========== ========== ========== ========== ========== Supplemental Net assets, end of year Data: (in thousands) $ 701,997 $ 774,287 $1,111,166 $1,769,296 $1,056,870 ========== ========== ========== ========== ========== Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
The following per share data and ratios have been derived Class B++ from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 21.21 $ 20.88 $ 30.63 $ 25.03 $ 21.60 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income (loss)--net (.35) (.19) .17 .22 .06 Realized and unrealized gain (loss) on investments and foreign currency transactions--net 2.91 .61 (7.80) 7.39 5.26 ---------- ---------- ---------- ---------- ---------- Total from investment operations 2.56 .42 (7.63) 7.61 5.32 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- (.19) (.20) (.04) In excess of investment income--net -- (.09) -- -- -- Realized gain on investments--net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments--net -- -- (.23) -- -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions -- (.09) (2.12) (2.01) (1.89) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 23.77 $ 21.21 $ 20.88 $ 30.63 $ 25.03 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 12.07% 2.06% (26.57%) 32.62% 26.84% Return:* ========== ========== ========== ========== ========== Ratios to Expenses, net of reimbursement 1.90% 1.99% 1.83% 1.79% 1.82% Average ========== ========== ========== ========== ========== Net Assets: Expenses 1.93% 2.02% 1.87% 1.83% 1.85% ========== ========== ========== ========== ========== Investment income (loss)--net (1.40%) (.98%) .70% .82% .26% ========== ========== ========== ========== ========== Supplemental Net assets, end of year Data: (in thousands) $1,052,705 $1,247,547 $2,544,979 $4,687,523 $2,916,507 ========== ========== ========== ========== ========== Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
The following per share data and ratios have been derived Class C++ from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 21.05 $ 20.72 $ 30.43 $ 24.89 $ 21.59 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income(loss)--net (.36) (.18) .17 .22 .06 Realized and unrealized gain (loss) on investments and foreign currency transactions--net 2.91 .59 (7.75) 7.34 5.23 ---------- ---------- ---------- ---------- ---------- Total from investment operations 2.55 .41 (7.58) 7.56 5.29 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- (.20) (.21) (.14) In excess of investment income--net -- (.08) -- -- -- Realized gain on investments--net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments--net -- -- (.23) -- -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions -- (.08) (2.13) (2.02) (1.99) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 23.60 $ 21.05 $ 20.72 $ 30.43 $ 24.89 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 12.11% 2.04% (26.60%) 32.63% 26.84% Return:* ========== ========== ========== ========== ========== Ratios to Average Expenses, net of reimbursement 1.92% 2.02% 1.84% 1.80% 1.84% Net Assets: ========== ========== ========== ========== ========== Expenses 1.95% 2.05% 1.88% 1.84% 1.87% ========== ========== ========== ========== ========== Investment income (loss)--net (1.42%) (.96%) .68% .81% .25% ========== ========== ========== ========== ========== Supplemental Net assets, end of year Data: (in thousands) $ 93,549 $ 106,797 $ 239,445 $ 427,377 $ 187,221 ========== ========== ========== ========== ========== Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
The following per share data and ratios have been derived Class D++ from information provided in the financial statements. For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997 1996 Per Share Net asset value, beginning of year $ 23.07 $ 22.63 $ 33.01 $ 26.79 $ 23.06 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income(loss)--net (.17) (.06) .39 .46 .24 Realized and unrealized gain (loss) on investments and foreign currency transactions--net 3.17 .68 (8.43) 7.95 5.63 ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.00 .62 (8.04) 8.41 5.87 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- (.41) (.38) (.29) In excess of investment income--net -- (.18) -- -- -- Realized gain on investments--net -- -- (1.70) (1.81) (1.85) In excess of realized gain on investments--net -- -- (.23) -- -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions -- (.18) (2.34) (2.19) (2.14) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 26.07 $ 23.07 $ 22.63 $ 33.01 $ 26.79 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 13.00% 2.82% (26.00%) 33.67% 27.83% Return:* ========== ========== ========== ========== ========== Ratios to Average Expenses, net of reimbursement 1.13% 1.21% 1.06% 1.02% 1.05% Net Assets: ========== ========== ========== ========== ========== Expenses 1.16% 1.24% 1.10% 1.06% 1.08% ========== ========== ========== ========== ========== Investment income (loss)--net (.63%) (.26%) 1.47% 1.59% 1.03% ========== ========== ========== ========== ========== Supplemental Net assets, end of year Data: (in thousands) $ 732,495 $ 744,151 $1,082,627 $1,642,665 $ 932,811 ========== ========== ========== ========== ========== Portfolio turnover 66.49% 101.71% 24.41% 24.75% 30.01% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Growth Fund October 31, 2000 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Growth Fund (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. 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 Trustees as the primary market. Securities that are traded both in the over-the- counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange- traded options. In the case of options traded in the over-the- counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Trustees. (b) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses mayarise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Forward foreign exchange contracts--The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Fund's records. However, the effect on net operations is recorded from the date the Fund enters into such contracts. * Foreign currency options and futures--The Fund may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-US dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. * Options--The Fund is authorized to purchase and write covered call options and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current 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 proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums paid or received (or loss or gain to the extent the cost of the closing transaction is less than or greater than the premium paid or received). Merrill Lynch Growth Fund October 31, 2000 NOTES TO FINANCIAL STATEMENTS (continued) Written and purchased options are non-income producing investments. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk of existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex- dividend dates. Dividends from foreign securities where the ex- dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized 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. Distributions in excess of investment income net are due primarily to differing tax treatments for post-October losses. (h) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax differences of $1,819,150 have been reclassified between accumulated net investment loss and undistributed net realized capital gains and $29,605,218 has been reclassified between paid-in capital in excess of par and accumulated net investment loss. These reclassifications have no effect on net assets or net asset values per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund is required to pay a monthly fee based upon the average daily value of the Fund's net assets at an annual rate of .65%. As a result of a voluntary waiver of expenses, the Fund will pay a monthly fee based upon the average daily value of the Fund's net assets at the following annual rates: .65% of the average daily net assets on the first $1 billion; .625% of the average net assets on the next $500 million; and .60% of the average net assets over $1.5 billion but not exceeding $10 billion and .575% of average net assets in excess of $10 billion. For the year ended October 31, 2000, MLIM earned fees of $19,782,243, of which $943,188 was waived. Merrill Lynch Growth Fund October 31, 2000 Pursuant to 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 .25% .75% Class C .25% .75% Class D .25% -- Pursuant to a subagreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended October 31, 2000, FAMD earned underwriting discounts and direct commissions, and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $1,241 $ 12,811 Class D $8,155 $111,279 For the year ended October 31, 2000, MLPF&S received contingent deferred sales charges of $1,540,227 and $17,289 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $176,709 and $51,020 relating to transactions subject to front-end sales charge waivers in Class A and Class D Shares, respectively. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by MLIM. Certain officers and/or trustees of the Fund are officers and/or directors of MLIM, PSI, FDS, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended October 31, 2000 were $1,948,424,841 and $2,568,981,518, respectively. Net realized gains (losses) for the year ended October 31, 2000 and net unrealized gains (losses) as of October 31, 2000 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) Long-term investments $ 458,429,338 $ 483,525,356 Options written 2,012,120 -- Foreign currency transactions (1,819,150) (13,385) ------------- ------------- Total $ 458,622,308 $ 483,511,971 ============= ============= Transactions in options written for the year ended October 31, 2000, were as follows: Nominal Value Covered by Written Premiums Call Options Written Options Received Outstanding call options written, beginning of year 1,181,350 $ 3,471,380 Options exercised (300,000) (1,459,260) Options expired (881,350) (2,012,120) ------------- ------------- Outstanding call options written, end of year -- $ -- ============= ============= As of October 31, 2000, net unrealized appreciation for Federal income tax purposes aggregated $483,525,356, of which $636,121,796 related to appreciated securities and $152,596,440 related to depreciated securities. At October 31, 2000, the aggregate cost of investments for Federal income tax purposes was $2,095,851,443. Merrill Lynch Growth Fund October 31, 2000 NOTES TO FINANCIAL STATEMENTS (concluded) 4. Shares of Beneficial Interest: Net decrease in net assets derived from beneficial interest transactions was $688,286,498 and $1,972,727,295 for the years ended October 31, 2000 and October 31, 1999, respectively. Transactions in shares of beneficial interest for each class were as follows: Class A Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 8,303,223 $ 231,732,963 Shares redeemed (14,966,652) (416,864,322) ------------- ------------- Net decrease (6,663,429) $ (185,131,359) ============= ============= Class A Shares for the Year Dollar Ended October 31, 1999 Shares Amount Shares sold 11,565,531 $ 240,814,815 Shares issued to share- holders in reinvestment of dividends 459,562 9,577,280 ------------- ------------- Total issued 12,025,093 250,392,095 Shares redeemed (27,558,400) (572,349,890) ------------- ------------- Net decrease (15,533,307) $ (321,957,795) ============= ============= Class B Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 8,093,155 $ 204,494,655 Automatic conversion of shares (3,754,743) (94,085,703) Shares redeemed (18,883,341) (473,345,029) ------------- ------------- Net decrease (14,544,929) $ (362,936,077) ============= ============= Class B Shares for the Year Dollar Ended October 31, 1999 Shares Amount Shares sold 15,919,015 $ 305,351,815 Shares issued to share- holders in reinvestment of dividends 480,513 9,245,064 ------------- -------------- Total issued 16,399,528 314,596,879 Automatic conversion of shares (6,389,720) (122,861,457) Shares redeemed (73,087,724) (1,396,489,700) ------------- ------------- Net decrease (63,077,916) $(1,204,754,278) ============= =============== Class C Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 386,278 $ 9,655,945 Shares redeemed (1,494,230) (37,162,786) ------------- ------------- Net decrease (1,107,952) $ (27,506,841) ============= ============= Class C Shares for the Year Dollar Ended October 31, 1999 Shares Amount Shares sold 844,502 $ 16,133,830 Shares issued to shareholders in reinvestment of dividends 39,676 757,812 ------------- -------------- Total issued 884,178 16,891,642 Shares redeemed (7,365,382) (139,843,279) ------------- -------------- Net decrease (6,481,204) $ (122,951,637) ============= ============== Class D Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 3,660,286 $ 101,508,624 Automatic conversion of shares 3,439,133 94,085,703 ------------- --------------- Total issued 7,099,419 195,594,327 Shares redeemed (11,249,787) (308,306,548) ------------- --------------- Net decrease (4,150,368) $ (112,712,221) ============= =============== Class D Shares for the Year Dollar Ended October 31, 1999 Shares Amount Shares sold 5,370,336 $ 111,940,566 Shares issued to shareholders in reinvestment of dividends 348,930 7,254,254 Automatic conversion of shares 5,892,240 122,861,457 ------------- --------------- Total issued 11,611,506 242,056,277 Shares redeemed (27,209,168) (565,119,862) ------------- --------------- Net decrease (15,597,662) $ (323,063,585) ============= =============== 5. Short-Term Borrowings: On December 3, 1999, the Fund, along with certain other funds managed by MLIM and its affiliates, entered into a $1,000,000,000 credit agreement with Bank of America, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the facility. Amounts borrowed under the facility bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank of America, N.A. The Fund did not borrow under the facility during the year ended October 31, 2000. Merrill Lynch Growth Fund October 31, 2000 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders, Merrill Lynch Growth Fund: We have audited the accompanying statement of assets and liabilities, including the schedule of investments of Merrill Lynch Growth Fund as of October 31, 2000, 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 auditing standards generally accepted in the United States of America. 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 October 31, 2000 by correspondence with the custodian and broker. 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 Growth Fund as of October 31, 2000, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey December 15, 2000 Merrill Lynch Growth Fund October 31, 2000 PORTFOLIO INFORMATION (unaudited) As of October 31, 2000 Percent of Ten Largest Equity Holdings Net Assets General Electric Company 5.8% Solectron Corporation 4.5 Corning Incorporated 4.5 Associates First Capital Corporation (Class A) 4.4 Pfizer Inc. 4.3 Cisco Systems, Inc. 4.0 Microsoft Corporation 3.9 EMC Corporation 3.9 Enron Corp. 3.8 Wal-Mart Stores, Inc. 3.6 Percent of Geographic Allocation Net Assets United States 96.5% United Kingdom 2.0 Merrill Lynch Growth Fund October 31, 2000 OFFICERS AND TRUSTEES Terry K. Glenn, President and Trustee James H. Bodurtha, Trustee Herbert I. London, Trustee Joseph L. May, Trustee Andre F. Perold, Trustee Arthur Zeikel, Trustee Robert C. Doll, Senior Vice President Stephen I. Silverman, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Lori A. Martin, Secretary Custodian State Street Bank and Trust Company One Heritage Drive, P2N North Quincy, MA 02171 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 EX-17.F 10 efc1-0730_exhibit17f.txt Exhibit 17(f) Merrill Lynch Investment Managers Semi-Annual Report April 30, 2001 Merrill Lynch Growth Fund www.mlim.ml.com This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Growth Fund Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper#10481-4/01 MERRILL LYNCH GROWTH FUND DEAR SHAREHOLDER Merrill Lynch Growth Fund modestly underperformed the unmanaged Standard & Poor's (S&P)/ Barra Growth Index for the six-month period ended April 30, 2001. The Fund's Class A and Class B Shares declined 23.79% and 24.20%, compared to an Index return of -23.08%. For the 12 months ended April 30, 2001, the Fund's Class A and Class B Shares declined 28.61% and 29.34%, which compared to the 29.16% decline posted by the Index. (Fund performance does not reflect sales charges, and would be lower if sales charges were included. Complete performance information, including average annual total returns, can be found on pages 4 and 5 of this report to shareholders.) Analyzing Investment Performance The Fund's recent performance would be disappointing if not for the outperformance achieved during the prior year. In our view, if we can outperform an appropriate passive benchmark such as the S&P Barra Growth Index over the longer term, we have added value as an active investment manager. As discussed in our last report to shareholders, when we compare the Fund's investment results to those of the unmanaged S&P/Barra Growth Index, we do so in five different ways: 1. If a stock we own performs well--whether it is or is not included in the S&P/Barra Growth Index--it is a positive for the Fund's performance. If the stock is in the Index, it provides outperformance to the Fund only insofar as we have overweighted it. 2. If a stock that we do not own performs poorly--and it is included in the S&P/Barra Growth Index--then it is a positive for the Fund's performance. The outperformance will be lessened if we merely underweight the stock relative to the Index instead of not owning it at all. 3. If a stock that we own performs poorly--whether it is or is not included in the S&P/Barra Growth Index--it is a negative for the Fund's performance. If the stock is included in the Index, the under- performance will be magnified if we overweight the stock relative to the Index and lessened if we underweight the stock relative to the Index. 4. If a stock that we do not own performs well--and it is included in the S&P/Barra Growth Index--then it is a negative for the Fund's performance. This underperformance will be lessened if we underweight the stock relative to the Index. 5. If a stock that we do not own performs well--even if it is not included in the S&P/Barra Growth Index--then it is a negative for the Fund's performance, so long as this stock was an appropriate candidate for inclusion in the Fund. Benefiting the Fund's recent performance were our positions in Citigroup Inc., Pharmacia Corporation and Lowe's Companies, Inc. At the same time, having a slightly increased cash position provided some cushion against the decline in stock prices. Also positive was our avoidance of investments in Sun Microsystems, Inc., Oracle Corporation and Broadcom. Our decision to underweight Cisco Systems, Inc. in the portfolio also improved performance relative to the S&P/Barra Growth Index. Unfortunately, these positive investment decisions were offset by a few large "errors of commission;" specifically, our large investments in Corning Incorporated, Solectron Corporation, Sanmina Corporation and McLeodUSA Incorporated. All of these stocks experienced negative returns during the past six months, much more than the 23% decline in our benchmark index during the period. When we invested in these companies, we believed that their growth prospects would prove to be both large and enduring. Their shares were somewhat expensive, but not out of line compared to other companies with sustainable growth prospects. In retrospect, they did not fulfill their growth prospects. Last year, companies could not forecast their results because they had more business than they had ever seen before. This year, companies cannot forecast their results because their customers are either no longer in existence or are so uncertain about their own business that they hesitate to place any orders. Most of these companies are in the field of technology, especially communications technology. The business outlook in this area seems to be changing so rapidly that even insiders have difficulty gauging prospects for their companies. Assessing Growth Prospects This environment poses a real challenge for growth investors today. Even those involved in the businesses have no idea about order volume trends and pricing (the combination of which gives us revenues)--and have no clear projections for them over the next several quarters. Therefore, it is very hard to value a growth business. Ironically, this is the same situation that we found ourselves in back in 1999, under dramatically different business conditions. Then we were unable to determine appropriate valuations for most companies within the large cap growth stock universe because of the extraordinarily strong business prospects. It seemed that either future earnings growth was faster and of longer duration- -or the discount rate used to determine the present value of the future earnings was low enough--that what resulted was unprecedented and unpredictable valuation "territory." In sharp contrast, in the latter part of 2000 and thus far in 2001, companies saw their businesses deteriorate and their near-term business forecasts diminish materially. As a result, there was a consensus that the unprecedented strong growth prospects anticipated not very long ago was almost certainly unrealistically optimistic. Moreover, the appropriate rate at which one must discount this now smaller and more slowly growing stream of future earnings appears to be much higher. Although interest rates have been declining as the Federal Reserve Board has been seeking to avert a serious economic slowdown, we contend that the appropriate discount rate actually has risen. The rate used to discount a company's earnings is partly a reflection of overall interest rates that help us determine a company's cost of capital. The cost of equity capital has, in our view, gone up appreciably because investors are no longer confident about future growth. (The cost of debt, the other form of capital, is easily measured.) While the deflation in the valuations of many well-known growth stocks is logical in hindsight, we and many other growth investors did not perceive the magnitude of the business slowdown. Investment Activities Given the uncertainties of the current environment, we believe it best to not seek to change our investment strategy. Looking ahead, the central question we face is: are those companies that almost everyone (ourselves included) perceived to be rapidly growing ready to resume their growth, or are they going to be in a "no growth" mode for any significant period of time? Forecasting future growth prospects is an especially difficult exercise. Warren Buffett, almost certainly the most outstanding investor of our time, has significant positions in The Coca-Cola Compay and The Gillette Company, two companies whose prospects seem to have been severely diminished recently. Companies such as Coca-Cola and Gillette operate in reasonably stable business environments, yet are turning in substandard business performances. Therefore, if the growth prospects of Coca-Cola and Gillette were misappraised, imagine how hard it is to judge which companies in embryonic businesses such as optical networking, electronic manufacturing or cellular telephony will continue to grow long into the future. In fact, judging which companies will grow fast and at what rates for how long may be too hard to consistently do successfully. Compounding this task with the requirement to assess what one ought to pay for these companies might make the entire task rife with potential for errors in understanding, estimation and valuation. This challenge is illustrated by our investment in Corning Incorporated. Obviously, the "right" thing to do would have been to sell our investment at a much higher price than the current one. Notwithstanding the apparent deterioration in Corning's business (which has led to significant layoffs) and the corresponding sharp decline in its stock price, we still believe that Corning is a very credible participant in a business sector that will have strong and sustained growth. Therefore, we maintain our investment in the company. While we made the mistake of not selling our investment in Corning at a higher price, the question facing us now is whether to increase our position at the current much-lower share price. However, at this time, it is too difficult for us to assess the appropriate price at which to buy Corning shares. Until we can do so, we do not think it wise to increase our investment. Although we believe that Corning (and other similar industry leaders represented in the portfolio) should provide very good returns if its growth rate is merely reasonable (much less than the stupendous rates that were generally expected just a few months ago), our previous misassessment of Corning's value makes us cautious about increasing our investment in the face of progressively deteriorating industry and company fundamentals. The sharp and sudden business slowdown that just occurred was unforeseen by us, as well as by many other investors, and we need to see some evidence of more stable conditions before committing more assets to former high-growth businesses. In Conclusion We thank you for your investment in Merrill Lynch Growth Fund, and we look forward to reviewing our outlook and strategy with you again in our annual report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Trustee (Stephen I. Silverman) Stephen I. Silverman Senior Vice President and Portfolio Manager June 12, 2001 Merrill Lynch Growth Fund April 30, 2001 PROXY RESULTS During the six-month period ended April 30, 2001, Merrill Lynch Growth Fund's shareholders voted on the following proposals. The proposals were approved at a shareholders' meeting on December 21, 2000. The description of each proposal and number of shares voted are as follows:
Shares Voted Shares Withheld For From Voting 1. To elect the Fund's Board of Trustees: Terry K. Glenn 86,628,672 708,854 James H. Bodurtha 86,629,437 708,089 Herbert I. London 86,630,052 707,474 Joseph L. May 86,590,966 746,560 Andre F. Perold 86,617,845 719,681 Roberta Cooper Ramo 86,620,351 717,175
Shares Voted Shares Voted Shares Voted For Against Abstain 2. To ratify the selection of Deloitte & Touche LLP as the Fund's independent auditors for the current fiscal year. 86,467,650 305,996 563,880 3. To approve to convert the Fund to a "master/feeder" structure. 84,741,423 1,413,768 1,182,335
Merrill Lynch Growth Fund April 30, 2001 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after approximately 8 years. (There is no initial sales charge for automatic share conversions.) * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. The Fund's Investment Adviser voluntarily waived a portion of its management fee. Without such a waiver, the Fund's performance would have been lower. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 3/31/01 -40.13% -43.27% Five Years Ended 3/31/01 - 1.09 - 2.15 Ten Years Ended 3/31/01 + 6.53 + 5.96 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares were offered at a higher sales charge. Thus, actual returns would have been lower than shown for the ten-year period.) **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* One Year Ended 3/31/01 -40.76% -42.88% Five Years Ended 3/31/01 - 2.10 - 2.10 Ten Years Ended 3/31/01 + 5.44 + 5.44 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without CDSC With CDSC** Class C Shares* One Year Ended 3/31/01 -40.76% -41.29% Five Years Ended 3/31/01 - 2.12 - 2.12 Inception (10/21/94) through 3/31/01 + 2.97 + 2.97 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* One Year Ended 3/31/01 -40.29% -43.43% Five Years Ended 3/31/01 - 1.34 - 2.40 Inception (10/21/94) through 3/31/01 + 3.79 + 2.92 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. Merrill Lynch Growth Fund April 30, 2001 PERFORMANCE DATA (concluded)
Recent Performance Results Ten-Year/ 6-Month 12-Month Since Inception As of April 30, 2001 Total Return Total Return Total Return ML Growth Fund Class A Shares* -23.79% -28.61% +114.64% ML Growth Fund Class B Shares* -24.20 -29.34 + 93.80 ML Growth Fund Class C Shares* -24.20 -29.32 + 34.88 ML Growth Fund Class D Shares* -23.93 -28.79 + 41.94 Standard & Poor's/Barra Growth Index** -23.08 -29.16 +291.44/+193.70 Standard & Poor's 500 Index*** -12.07 -12.97 +315.57/+201.40
*Investment results shown do not reflect sales charges; results would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's ten-year/inception periods are ten years for Class A & Class B Shares and from 10/21/94 for Class C & Class D Shares. **This unmanaged broad-based Index is a subset of the S&P 500 Index, containing those companies with higher price-to-book ratios. Ten year/since inception total returns are for ten years and from 10/31/94, respectively. ***An unmanaged broad-based index comprised of common stocks. Ten- year/since inception total returns are for ten years and from 10/21/94, respectively. OFFICERS AND TRUSTEES Terry K. Glenn, President and Trustee James H. Bodurtha, Trustee Herbert I. London, Trustee Joseph L. May, Trustee Andre F. Perold, Trustee Roberta Cooper Ramo, Trustee Robert C. Doll, Jr., Senior Vice President Stephen I. Silverman, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Lori A. Martin, Secretary Custodian State Street Bank and Trust Company One Heritage Drive, P2N North Quincy, MA 02171 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 Arthur Zeikel, Trustee of Merrill Lynch Growth Fund, has recently retired. The Fund's Board of Trustees wishes Mr. Zeikel well in his retirement. Merrill Lynch Growth Fund April 30, 2001
SCHEDULE OF INVESTMENTS Shares Percent of Industries Held Long-Term Investments Value Net Assets Consumer Discretionary Media 1,486,900 ++AOL Time Warner Inc. $75,088,450 4.3% Multiline Retail 1,221,900 Wal-Mart Stores, Inc. 63,221,106 3.6 Specialty Retail 576,500 Lowe's Companies, Inc. 36,319,500 2.1 Total Consumer Discretionary (Cost--$151,983,931) 174,629,056 10.0
Consumer Staples Beverages 679,000 The Coca-Cola Company 31,363,010 1.8 700,000 PepsiCo, Inc. 30,667,000 1.8 Total Consumer Staples (Cost--$74,552,345) 62,030,010 3.6 Energy Oil & Gas 3,848,434 ++TransMontaigne Inc. (a) 17,240,984 1.0 Total Energy (Cost--$27,022,169) 17,240,984 1.0 Financials Diversified Financials 1,891,736 Citigroup Inc. 92,978,824 5.3 Insurance 693,000 American International Group, Inc. 56,687,400 3.3 Total Financials (Cost--$136,588,294) 149,666,224 8.6 Health Care Biotechnology 460,000 ++Amgen Inc. 28,119,800 1.6 Health Care 1,033,300 Medtronic, Inc. 46,085,180 2.6 Equipment & Supplies Pharmaceuticals 435,000 Abbott Laboratories 20,175,300 1.2 817,950 American Home Products Corporation 47,236,612 2.7 554,000 Eli Lilly and Company 47,090,000 2.7 795,300 Merck & Co., Inc. 60,418,941 3.5 923,380 Pfizer Inc. 39,982,354 2.3 1,086,210 Pharmacia Corporation 56,765,335 3.3 500,000 Schering-Plough Corporation 19,270,000 1.1 Total Health Care (Cost--$353,361,085) 365,143,522 21.0 Industrials Electrical Equipment 974,100 ++Active Power, Inc. 21,673,725 1.3 600,000 ++Beacon Power Corporation 2,400,000 0.1 100,000 ++Capstone Turbine Corporation 2,929,000 0.2 742,300 ++Proton Energy Systems, Inc. 5,314,868 0.3 Industrial 2,740,100 General Electric Company 132,977,053 7.6 Conglomerates Total Industrials (Cost--$146,596,996) 165,294,646 9.5 Merrill Lynch Growth Fund April 30, 2001 SCHEDULE OF INVESTMENTS (continued) Shares Percent of Industries Held Long-Term Investments Value Net Assets Information Technology Communications 1,915,308 ++Cisco Systems, Inc. $32,521,930 1.9% Equipment 1,527,450 Corning Incorporated 33,558,077 1.9 650,000 ++Finisar Corporation 9,717,500 0.6 159,700 ++Metawave Communications Corporation 590,890 0.0 1,026,500 Motorola, Inc. 15,962,075 0.9 Computers & 834,900 ++EMC Corporation 33,062,040 1.9 Peripherals 387,200 International Business Machines Corporation 44,582,208 2.6 Electronic 251,000 ++FuelCell Energy, Inc. 17,273,820 1.0 Equipment & 1,310,000 ++Sanmina Corporation 38,186,500 2.2 Instruments 1,988,889 ++Solectron Corporation 50,617,225 2.9 Internet 450,000 ++Quest Software, Inc. 16,551,000 1.0 Software & Services Semiconductor 1,962,060 Intel Corporation 60,647,275 3.5 Equipment & 1,150,000 ++Lattice Semiconductor Corporation 28,290,000 1.6 Products 519,000 ++Xilinx, Inc. 24,631,740 1.4 Software 1,480,000 ++Microsoft Corporation 100,255,200 5.7 270,000 ++VERITAS Software Corporation 16,097,400 0.9 Total Information Technology(Cost--$702,849,034) 522,544,880 30.0 Telecommunications Services Diversified 4,705,600 ++McLeodUSA Incorporated (Class A) 41,644,560 2.4 Telecommunication Services Wireless 12,056,786 Vodafone Group PLC 36,614,928 2.1 Telecommunication Services Total Telecommunications Services 78,259,488 4.5 (Cost--$86,452,354) Utilities Electric Utilities 112,800 ++Aquila, Inc. 3,418,968 0.2 Multi-Utilities 625,000 ++Calpine Corporation 35,618,750 2.0 1,208,000 Enron Corp. 75,765,760 4.4 600,300 ++NRG Energy, Inc. 21,460,725 1.2 Total Utilities (Cost--$91,667,779) 136,264,203 7.8 Total Long-Term Investments (Cost--$1,771,073,987) 1,671,073,013 96.0 Merrill Lynch Growth Fund April 30, 2001 SCHEDULE OF INVESTMENTS (concluded) Face Percent of Industries Amount Short-Term Investments Value Net Assets Commercial $ 81,763,000 The CIT Group Holdings, Inc., 4.65% $81,763,000 4.7% Paper* due 5/01/2001 Total Short-Term Investments (Cost--$81,763,000) 81,763,000 4.7 Total Investments (Cost--$1,852,836,987) 1,752,836,013 100.7 Nominal Value Covered by Options Issue Call Options 270,000 VERITAS Software Corporation, expiring Written November 2001 at US$ 79.89 (2,527,200) (0.1) Total Call Options Written (Premiums Received--$2,430,000) (2,527,200) (0.1) Total Investments, Net of Options Written (Cost--$1,850,406,987) 1,750,308,813 100.6 Liabilities in Excess of Other Assets (9,868,642) (0.6) ------------- ------- Net Assets $1,740,440,171 100.0% ============== =======
*Commercial Paper is traded on a discount basis; the interest rate shown reflects the discount rate paid at the time of purchase by the Fund. ++Non-income producing security. (a)Investment 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 Oil & Gas Trans-Montaigne Inc. -- -- ++ ++Non-income producing security. See Notes to Financial Statements. PORTFOLIO INFORMATION As of April 30, 2001 Percent of Ten Largest Equity Holdings Net Assets General Electric Company 7.6% Microsoft Corporation 5.7 Citigroup Inc. 5.3 Enron Corp. 4.4 AOL Time Warner Inc. 4.3 Wal-Mart Stores, Inc. 3.6 Intel Corporation 3.5 Merck & Co., Inc. 3.5 Pharmacia Corporation 3.3 American International Group, Inc. 3.3 Percent of Geographic Allocation Net Assets United States 93.9% United Kingdom 2.1 Merrill Lynch Growth Fund April 30, 2001
FINANCIAL INFORMATION Statement of Assets and Liabilities as of April 30, 2001 Assets: Investments, at value (identified cost--$1,852,836,987) $1,752,836,013 Cash 249,191 Foreign cash 572,111 Receivables: Beneficial interest sold $ 3,471,863 Dividends 332,977 Securities sold 258,586 4,063,426 --------------- Prepaid registration fees and other assets 130,854 -------------- Total assets 1,757,851,595 -------------- Liabilities: Options written, at value (premiums received--$2,430,000) 2,527,200 Payables: Beneficial interest redeemed 9,256,552 Securities purchased 2,707,200 Investment adviser 882,042 Distributor 709,084 13,554,878 --------------- Accrued expenses and other liabilities 1,329,346 --------------- Total liabilities 17,411,424 --------------- Net Assets: Net assets $1,740,440,171 =============== Net Assets Class A Shares of beneficial interest, $.10 par value, Consist of: unlimited number of shares authorized $2,516,196 Class B Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 4,241,684 Class C Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 377,608 Class D Shares of beneficial interest, $.10 par value, unlimited number of shares authorized 2,761,548 Paid-in capital in excess of par 1,848,952,142 Accumulated investment loss--net (7,361,550) Accumulated realized capital losses on investments and foreign currency transactions--net (10,933,871) Unrealized depreciation on investments and foreign currency transactions--net (100,113,586) --------------- Net assets $1,740,440,171 ================ Net Asset Value: Class A--Based on net assets of $467,010,665 and 25,161,959 shares of beneficial interest outstanding $ 18.56 ================ Class B--Based on net assets of $703,369,472 and 42,416,837 shares of beneficial interest outstanding $ 16.58 ================ Class C--Based on net assets of $62,104,571 and 3,776,076 shares of beneficial interest outstanding $ 16.45 ================ Class D--Based on net assets of $507,955,463 and 27,615,480 shares of beneficial interest outstanding $ 18.39 ================ See Notes to Financial Statements. Merrill Lynch Growth Fund April 30, 2001 FINANCIAL INFORMATION (continued) Statement of Operations for the Six Months Ended April 30, 2001 Investment Dividends (net of $13,131 foreign withholding tax) $ 4,313,918 Income: Interest and discount earned 3,074,997 Other 55,529 ------------- Total income 7,444,444 ------------- Expenses: Investment advisory fees $ 6,462,168 Account maintenance and distribution fees--Class B 4,037,418 Transfer agent fees--Class B 1,224,192 Transfer agent fees--Class D 778,136 Transfer agent fees--Class A 731,915 Account maintenance fees--Class D 713,859 Account maintenance and distribution fees--Class C 358,025 Accounting services 201,197 Transfer agent fees--Class C 117,019 Printing and shareholder reports 114,097 Professional fees 65,379 Custodian fees 47,397 Trustees' fees and expenses 45,628 Registration fees 42,179 Pricing fees 19,134 Other 35,452 --------------- Total expenses before reimbursement 14,993,195 Reimbursement of expenses (187,201) --------------- Total expenses after reimbursement 14,805,994 ------------ Investment loss--net (7,361,550) ------------- Realized & Realized gain (loss) on: Unrealized Gain Investments--net (10,936,153) (Loss) on Foreign currency transactions--net 2,314 (10,933,839) Investments & ------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net: Investments--net (583,623,530) Foreign currency transactions--net (2,027) (583,625,557) --------------- -------------- Net Decrease in Net Assets Resulting from Operations $(601,920,946) ---------------- See Notes to Financial Statements.
Merrill Lynch Growth Fund April 30, 2001 FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets For the Six For the Months Ended Year Ended April 30, October 31, Increase (Decrease) in Net Assets: 2001 2000 Operations: Investment loss--net $ (7,361,550) $(27,786,068) Realized gain (loss) on investments and foreign currency transactions--net (10,933,839) 458,622,308 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net (583,625,557) (34,585,394) --------------- --------------- Net increase (decrease) in net assets resulting from operations (601,920,946) 396,250,846 --------------- --------------- Distributions to Realized gain on investments--net: Shareholders: Class A (44,427,658) -- Class B (74,405,662) -- Class C ( 6,658,377) -- Class D (47,581,986) -- --------------- -------------- Net decrease in net assets resulting from distributions to shareholders (173,073,683) -- --------------- --------------- Beneficial Net decrease in net assets derived from beneficial interest Interest transactions (65,311,360) (688,286,498) Transactions: --------------- ---------------- Net Assets: Total decrease in net assets (840,305,989) (292,035,652) Beginning of period 2,580,746,160 2,872,781,812 --------------- ------------------ End of period* $ 1,740,440,171 $2,580,746,160 --------------- ------------------ *Accumulated investment loss--net $ (7,361,550) $ -- =============== ================== See Notes to Financial Statements.
Merrill Lynch Growth Fund April 30, 2001 FINANCIAL INFORMATION (continued)
Financial Highlights Class A For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended April 30, For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 26.25 $ 23.18 $ 22.71 $ 33.13 $ 26.87 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income (loss)--net++ (.02) (.11) (.01) .46 .53 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (5.96) 3.18 .69 (8.47) 7.98 ---------- ---------- ---------- ---------- ---------- Total from investment operations (5.98) 3.07 .68 (8.01) 8.51 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- -- (.48) (.44) In excess of investment income--net -- -- (.21) -- -- Realized gain on investments--net (1.71) -- -- (1.70) (1.81) In excess of realized gain on investments--net -- -- -- (.23) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.71) -- (.21) (2.41) (2.25) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 18.56 $ 26.25 $ 23.18 $ 22.71 $ 33.13 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share (23.79%)+++ 13.24% 3.09% (25.83%) 34.03% Return:** ========== ========== ========== =========== =========== Ratios to Expenses, net of reimbursement .96%* .88% .96% .81% .77% Average ========== ========== ========== =========== ========= Net Assets: Expenses .98%* .91% .99% .85% .81% ========== ========== ========== ========== ========== Investment income (loss)--net (.21%)* (.38%) (.03%) 1.72% 1.84% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in Data: thousands) $467,011 $701,997 $ 774,287 $ 1,111,166 $1,769,296 ========== ========== ========== ========== ============ Portfolio turnover 17.35% 66.49% 101.71% 24.41% 24.75% ========== ========== ========== ========== ============ *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Growth Fund April 30, 2001
FINANCIAL INFORMATION (continued) Financial Highlights (continued) Class B For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended April 30, For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 23.77 $ 21.21 $ 20.88 $ 30.63 $ 25.03 Operating ---------- ---------- ---------- ---------- --------- Performance: Investment income (loss)--net++ (.11) (.35) (.19) .17 .22 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (5.37) 2.91 .61 (7.80) 7.39 ---------- ---------- ---------- ---------- ---------- Total from investment operations (5.48) 2.56 .42 (7.63) 7.61 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- -- (.19) (.20) In excess of investment income--net -- -- (.09) -- -- Realized gain on investments--net (1.71) -- -- (1.70) (1.81) In excess of realized gain on investments--net -- -- -- (.23) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.71) -- (.09) (2.12) (2.01) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.58 $ 23.77 $ 21.21 $ 20.88 $ 30.63 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share (24.20%)+++ 12.07% 2.06% (26.57%) 32.62% Return:** ========== ========== ========== =========== ========== Ratios to Expenses, net of reimbursement 1.99%* 1.90% 1.99% 1.83% 1.79% Average ========== ========== ========== ========== ========== Net Assets: Expenses 2.01%* 1.93% 2.02% 1.87% 1.83% ========== ========== ========== ========== ========== Investment income (loss)--net (1.24%)* (1.40%) (.98%) .70% .82% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in Data: thousands) $ 703,369 $1,052,705 $1,247,547 $2,544,979 $4,687,523 ========== ========== ========== ========== ============ Portfolio turnover 17.35% 66.49% 101.71% 24.41% 24.75% ========== ========== ========== ========== ============ *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Growth Fund April 30, 2001 FINANCIAL INFORMATION (continued)
Financial Highlights (continued) Class C For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended April 30, For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 23.60 $ 21.05 $ 20.72 $ 30.43 $ 24.89 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income(loss)--net++ (.12) (.36) (.18) .17 .22 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (5.32) 2.91 .59 (7.75) 7.34 ---------- ---------- ---------- ---------- ---------- Total from investment operations (5.44) 2.55 .41 (7.58) 7.56 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- -- (.20) (.21) In excess of investment income--net -- -- (.08) -- -- Realized gain on investments--net (1.71) -- -- (1.70) (1.81) In excess of realized gain on investments--net -- -- -- (.23) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.71) -- (.08) (2.13) (2.02) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.45 $ 23.60 $ 21.05 $ 20.72 $ 30.43 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share (24.20%)+++ 12.11% 2.04% (26.60%) 32.63% Return:** ========== ========== ========== ========== ============ Ratios to Average Expenses, net of reimbursement 2.01%* 1.92% 2.02% 1.84% 1.80% Net Assets: ========== ========== ========== ========== ============ Expenses 2.03%* 1.95% 2.05% 1.88% 1.84% ========== ========== ========== ========== ============ Investment income (loss)--net (1.27%)* (1.42%) (.96%) .68% .81% ========== ========== ========== ========== ============ Supplemental Net assets, end of period (in Data: thousands) $ 62,105 $ 93,549 $ 106,797 $ 239,445 $ 427,377 ========== ========== ========== ========== ============ Portfolio turnover 17.35% 66.49% 101.71% 24.41% 24.75% ========== ========== ========== ========== =============
*Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements. Merrill Lynch Growth Fund April 30, 2001 FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded) Class D For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended April 30, For the Year Ended October 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 26.07 $ 23.07 $ 22.63 $ 33.01 $ 26.79 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income(loss)--net++ (.05) (.17) (.06) .39 .46 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (5.92) 3.17 .68 (8.43) 7.95 ---------- ---------- ---------- ---------- ---------- Total from investment operations (5.97) 3.00 .62 (8.04) 8.41 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net -- -- -- (.41) (.38) In excess of investment income--net -- -- (.18) -- -- Realized gain on investments--net (1.71) -- -- (1.70) (1.81) In excess of realized gain on investments--net -- -- -- (.23) -- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.71) -- (.18) (2.34) (2.19) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 18.39 $ 26.07 $ 23.07 $ 22.63 $ 33.01 ========== ========== ========== ========== =========== Total Investment Based on net asset value per share (23.93%)+++ 13.00% 2.82% (26.00%) 33.67% Return:** ========== ========== ========== ========== ============ Ratios to Average Expenses, net of reimbursement 1.21%* 1.13% 1.21% 1.06% 1.02% Net Assets: ========== ========== ========== ========== ============ ========== Expenses 1.23%* 1.16% 1.24% 1.10% 1.06% ========== ========== ========== ========== ============ Investment income (loss)--net (.46%)* (.63%) (.26%) 1.47% 1.59% ========== ========== ========== ========== ============ Supplemental Net assets, end of period (in Data: thousands) $507,955 $ 732,495 $ 744,151 $1,082,627 $1,642,665 ========== ========== ========== ========== ============= Portfolio turnover 17.35% 66.49% 101.71% 24.41% 24.75% ========== ========== ========== ========== =============
*Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Growth Fund (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers four classes of shares under the Merrill Lynch Select PricingSM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. 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 Trustees as the primary market. Securities that are traded both in the over-the- counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange- traded options. In the case of options traded in the over-the- counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Trustees. (b) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Forward foreign exchange contracts--The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Fund's records. However, the effect on net operations is recorded from the date the Fund enters into such contracts. * Foreign currency options and futures--The Fund may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-US dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. * Options--The Fund is authorized to purchase and write covered call options and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current 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 proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums paid or received (or loss or gain to the extent the cost of the closing transaction is less than or greater than the premium paid or received). Written and purchased options are non-income producing investments. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk of existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized on the accrual basis. The Fund will adopt the provisions to amortize all premiums and discounts on debt securities effective November 1, 2001, as now required under the new AICPA Audit and Accounting Guide for Investment Companies. The cumulative effect of this accounting change will have no impact on the total net assets of the Fund. The impact of this accounting change has not been determined, but will result in an adjustment to the cost of securities and a corresponding adjustment to net unrealized appreciation/depreciation, based on debt securities held as of October 31, 2001. (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. Distributions in excess of investment income-net are due primarily to differing tax treatments for post-October losses. (h) Security loans--The Fund receives compensation in the form of fees, or it retains a portion of the interest on the investment of any cash received as collateral. The Fund also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund is required to pay a monthly fee based upon the average daily value of the Fund's net assets at an annual rate of .65%. As a result of a voluntary waiver of expenses, the Fund will pay a monthly fee based upon the average daily value of the Fund's net assets at the following annual rates: .65% of the average daily net assets on the first $1 billion; .625% of the average net assets on the next $500 million; and .60% of the average net assets over $1.5 billion but not exceeding $10 billion and .575% of average net assets in excess of $10 billion. For the six months ended April 30, 2001, MLIM earned fees of $6,462,168, of which $187,201 was waived. Pursuant to 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 .25% .75% Class C .25% .75% Class D .25% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended April 30, 2001, FAMD earned underwriting discounts and direct commissions, and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $ 262 $ 3,903 Class D $2,036 $30,134 For the six months ended April 30, 2001, MLPF&S received contingent deferred sales charges of $273,742 and $3,624 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $38 relating to transactions subject to front-end sales charge waivers in Class D Shares. In addition, MLPF&S received $209,589 in commissions on the execution of portfolio security transactions for the Fund for the six months ended April 30, 2001. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Prior to January 1, 2001, MLIM provided accounting services to the Fund at its cost and the Fund reimbursed MLIM for these services. MLIM continues to provide certain accounting services to the Fund. The Fund reimburses MLIM at its cost for such services. For the six months ended April 30, 2001, the Fund reimbursed MLIM an aggregate of $71,419 for the above-described services. The Fund entered into an agreement with State Street Bank and Trust Company ("State Street"), effective January 1, 2001, pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Certain officers and/or trustees of the Fund are officers and/or directors of MLIM, PSI, FDS, FAMD, and/or ML&Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended April 30, 2001 were $335,716,095 and $611,565,231, respectively. Net realized gains (losses) for the six months ended April 30, 2001 and net unrealized losses as of April 30, 2001 were as follows: Realized Gains Unrealized (Losses) Losses Long-term investments $ (10,936,153) $(100,000,974) Options written -- (97,200) Foreign currency transactions 2,314 (15,412) ------------- ------------- Total $ (10,933,839) $(100,113,586) ============= ============= Transactions in options written for the six months ended April 30, 2001 were as follows: Nominal Value Covered by Premiums Call Options Written Written Options Received Outstanding call options written, beginning of period -- -- Options written 270,000 $ 2,430,000 ------------- ------------- Outstanding call options written, end of period 270,000 $ 2,430,000 ============= ============= As of April 30, 2001, net unrealized depreciation for Federal income tax purposes aggregated $100,098,174, of which $186,932,621 related to appreciated securities and $287,030,795 related to depreciated securities. At April 30, 2001, the aggregate cost of investments, net of options written for Federal income tax purposes was $1,850,406,987. 4. Shares of Beneficial Interest: Net decrease in net assets derived from beneficial interest transactions was $65,311,360 and $688,286,498 for the six months ended April 30, 2001 and for the year ended October 31, 2000, respectively. Transactions in shares of beneficial interest for each class were as follows: Class A Shares for the Six Dollar Months Ended April 30, 2001 Shares Amount Shares sold 3,123,037 $ 63,056,158 Shares issued to share- holders in reinvestment of distributions 1,962,750 43,062,741 ------------- ------------- Total issued 5,085,787 106,118,899 Shares redeemed (6,661,684) (133,894,358) ------------- ------------- Net decrease (1,575,897) $ (27,775,459) ============= ============= Class A Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 8,303,223 $ 231,732,963 Shares redeemed (14,966,652) (416,864,322) ------------- ------------- Net decrease (6,663,429) $(185,131,359) ============= ============= Class B Shares for the Six Dollar Months Ended April 30, 2001 Shares Amount Shares sold 3,741,726 $ 67,578,839 Shares issued to share- holders in reinvestment of distributions 3,367,457 66,271,556 ------------- ------------- Total issued 7,109,183 133,850,395 Automatic conversion of shares (892,929) (15,860,965) Shares redeemed (8,082,012) (146,185,267) ------------- ------------- Net decrease (1,865,758) $ (28,195,837) ============= ============= Class B Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 8,093,155 $ 204,494,655 Automatic conversion of shares (3,754,743) (94,085,703) Shares redeemed (18,883,341) (473,345,029) ------------- ------------- Net decrease (14,544,929) $(362,936,077) ============= ============= Class C Shares for the Six Dollar Months Ended April 30, 2001 Shares Amount Shares sold 180,148 $ 3,327,292 Shares issued to share- holders in reinvestment of distributions 291,633 5,692,671 ------------- ------------- Total issued 471,781 9,019,963 Shares redeemed (660,203) (11,934,722) ------------- ------------- Net decrease (188,422) $ (2,914,759) ============= ============= Class C Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 386,278 $ 9,655,945 Shares redeemed (1,494,230) (37,162,786) ------------- ------------- Net decrease (1,107,952) $ (27,506,841) ============= ============= Class D Shares for the Six Dollar Months Ended April 30, 2001 Shares Amount Shares sold 1,557,349 $ 31,291,977 Shares issued to share- holders in reinvestment of distributions 1,930,881 42,015,965 Automatic conversion of shares 807,278 15,860,965 ------------- ------------- Total issued 4,295,508 89,168,907 Shares redeemed (4,780,366) (95,594,212) ------------- ------------- Net decrease (484,858) $ (6,425,305) ============= ============= Class D Shares for the Year Dollar Ended October 31, 2000 Shares Amount Shares sold 3,660,286 $ 101,508,624 Automatic conversion of shares 3,439,133 94,085,703 ------------- ------------- Total issued 7,099,419 195,594,327 Shares redeemed (11,249,787) (308,306,548) ------------- ------------- Net decrease (4,150,368) $(112,712,221) ============= ============= 5. Short-Term Borrowings: On December 1, 2000, the Fund, along with certain other funds managed by MLIM and its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the facility. Amounts borrowed under the facility bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow under the facility during the six months ended April 30, 2001. 6. Loaned Securities: At April 30, 2001, the Fund held collateral having an aggregate value of approximately $21,774,000 for portfolio securities loaned having a market value of approximately $20,134,000. EX-17.G 11 efc1-0730_exhibit17g.txt EXHIBIT 17(g) [Proxy Card Front] MERRILL LYNCH GROWTH FUND P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 PROXY This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and Lori A. Martin as proxies, each with the power to appoint his or her substitute, as applicable, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch Growth Fund (the "Fund") held of record by the undersigned on August 17, 2001 at a Special Meeting of Shareholders of the Fund to be held on October 15, 2001, or any adjournment thereof. This proxy, when properly executed, will be voted in the manner herein directed by the undersigned shareholder. If no direction is made, this proxy will be voted "for" item 1. By signing and dating the reverse side of this card, you authorize the proxies to vote the proposal as marked, or if not marked, to vote "FOR" the proposal, and to use their discretion to vote for any other matter as may properly come before the meeting or any adjournment thereof. If you do not intend to personally attend the meeting, please complete and return the card at once in the enclosed envelope. You may also vote your shares by touch-tone phone by calling 1-800-690-6903 or through the internet at http://www.proxyvote.com. (Continued and to be signed on the reverse side) [Proxy Card Reverse] Please mark boxes /X/ or [X] in blue or black ink. 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between Merrill Lynch Fundamental Growth Fund, Inc. and the Fund. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated: ___________________________________ X_________________________________________ Signature X_________________________________________ Signature, if held jointly Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope. -----END PRIVACY-ENHANCED MESSAGE-----