<R>
As filed with the Securities and
Exchange Commission on July 18, 2003
</R>
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Securities Act File No. 2-60836
Investment Company Act File No. 811-2809
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
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|X|
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Pre-Effective Amendment No.
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<R>
Post-Effective Amendment No. 33
</R>
and/or
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|X|
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REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
|
|X|
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<R>
Amendment
No. 32
</R>
(Check appropriate box or boxes)
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|X|
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Merrill Lynch Small Cap Value Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road, Plainsboro, New
Jersey 08536
(Address of Principal Executive Offices)
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Registrants telephone
number, including Area Code (609) 282-2800
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Terry K. Glenn
Merrill Lynch Small Cap Value Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Counsel for the Fund:
Thomas R. Smith, Jr., Esq.
SIDLEY AUSTIN BROWN & WOOD
LLP
787 Seventh Avenue
New York, New York 10019-6018
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<R>
Andrew J. Donohue, Esq.
</R>
FUND ASSET MANAGEMENT, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
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It is proposed that this filing will become effective
(check appropriate box)
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|X|
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immediately upon filing pursuant to
paragraph (b)
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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph
(a)(1)
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph
(a)(2)
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on (date) pursuant to paragraph (a)(2)
of Rule 485
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If appropriate, check the following box:
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This post-effective amendment designates
a new effective date for a previously filed post-effective amendment.
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Title of Securities Being Registered:
Common
Stock, par value $.10 per share.
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Master Small Cap Value Trust has also executed
this Registration Statement
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[LOGO]
Merrill Lynch
Investment Managers
|
Merrill Lynch Small Cap Value Fund, Inc.
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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.
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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.
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<R>
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PAGE
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[ICON]
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KEY FACTS
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Merrill Lynch Small Cap Value Fund at a Glance
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3
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Risk/Return Bar Chart
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5
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Fees and Expenses
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7
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[ICON]
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DETAILS ABOUT THE FUND
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How the Fund Invests
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9
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Investment Risks
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12
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[ICON]
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YOUR ACCOUNT
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Merrill Lynch Select Pricing
SM
System
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19
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How to Buy, Sell, Transfer and Exchange Shares
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25
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Participation in Merrill Lynch Fee-Based Programs
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29
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[ICON]
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MANAGEMENT OF THE FUND
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Fund Asset Management
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32
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Master/Feeder Structure
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32
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Financial Highlights
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34
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[ICON]
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FOR MORE INFORMATION
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Shareholder Reports
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Back Cover
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Statement of Additional Information
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Back Cover
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</R>
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MERRILL LYNCH SMALL CAP VALUE FUND, INC.
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|
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.
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Common Stock
shares of ownership of a
corporation.
|
<R>
Small Companies
Small companies
are those whose market capitalization is similar to the market capitalization
of companies in the Russell 2000
®
or
the S&P SmallCap 600
®
at the time
of the Funds investment. Companies whose capitalization no longer
meets this definition after purchase continue to be considered small market
capitalization companies for purposes of the 80% policy. As of June 30,
2003, the Russell 2000
®
included companies
with capitalizations up to $1.2 billion and the S&P SmallCap 600
®
included companies with capitalizations up to $2.95 billion. The market
capitalizations of companies in each index change with market conditions
and the composition of the index.</R>
|
MERRILL LYNCH SMALL CAP VALUE FUND AT A GLANCE
|
What is the Funds investment objective?
|
The investment objective of the Fund is to seek long term
growth of capital by investing in a diversified portfolio of securities,
primarily
common stock
, of relatively
small companies
that management of the Fund believes have special investment value and
emerging
growth companies
regardless of size.
|
What are the Funds main investment
strategies?
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<R>Under normal circumstances, the Fund invests at
least 80% of its assets in securities of small companies. The Fund invests
primarily in common stock of small companies and emerging growth companies
that Fund management believes have special investment value. This means
Fund management will look for companies that have long-term potential to
grow in size or to become more profitable or that the stock market may value
more highly in the future. Fund management seeks to invest in small companies
that are trading at the low end of their historical price-book value or
enterprise value-sales ratios
, and that have particular qualities
that affect the outlook for that company including an attractive market
niche. Fund management also seeks to invest in emerging growth companies
that occupy dominant positions in developing industries, have strong management
and demonstrate successful product development and marketing capabilities.
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The Fund is a feeder fund that invests all of
its assets in a master portfolio, the Master Small Cap Value
Trust (the Trust), that has the same investment objective and
strategies as the Fund. All investments will be made at the Trust level.
This structure is sometimes called a master/feeder structure.
The Funds investment results will correspond directly to the investment
results of the Trust. For simplicity, this Prospectus uses the term Fund
to include the Trust.</R>
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What are the main risks of investing in the
Fund?
|
<R>The Fund cannot guarantee that it will achieve its
objective.
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As with any mutual fund, the value of the Funds investments
and therefore the value of the Funds shares may fluctuate.
These changes may occur because a particular stock market in which the Fund
invests is rising or falling. Also, Fund management may select securities
that underperform the stock market, relevant indices or other funds with
similar investment objectives and investment strategies. If the value of
the Funds investments goes down, you may lose money.</R>
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|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
3
|
Emerging growth companies
companies of
any market capitalization without a long or consistent history of earnings but that Fund
management believes have the potential to grow earnings significantly over an extended
period of time.
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Enterprise value-sales ratio
the ratio of
a companys market value (calculated with reference to the aggregate market value of its
outstanding shares plus the amount of debt outstanding minus cash) to its total sales.
Generally, a low enterprise value-sales ratio is one indication that the company may be
undervalued.
|
The Fund will invest primarily in small and
emerging growth companies. Small and emerging growth companies may have limited product
lines or markets, may depend on a smaller number of key personnel and may be less
financially secure than larger, more established companies. If a product fails, or if
management changes, or if there are other adverse developments, the Funds investment in
a small or emerging growth company may lose substantial value.
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Small and emerging growth companies securities
generally trade in lower volumes and are subject to greater, less predictable price
changes than the securities of more established companies. Investing in small or
emerging growth companies requires a long term view.
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Investors should consider their own investment
goals, time horizon, and risk tolerance before investing in the Fund. An investment in
the Fund may not be appropriate for all investors and is not intended to be a complete
investment program. The Fund may be an appropriate investment for you if you:
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Are
investing with long term goals in mind.
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<R>Want a professionally managed and diversified
portfolio that will increase your exposure to small and emerging growth
companies.</R>
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Are
willing to accept greater potential for short-term fluctuations, including declines, in
the value of your investment in exchange for potentially higher long-term growth of
capital associated with small cap stock investing.
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Are
not looking for a significant amount of current income.
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4
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
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|
<R>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
Funds performance for Class B shares for each of the past ten calendar
years. The performance before September 2000 was prior to the Funds
change from a stand alone fund to a master/ feeder structure.
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
Funds average annual total return with the Russell 2000
®
Stock Index (Russell 2000), a broad measure of market performance. How the
Fund performed in the past (before and after taxes) is not necessarily an
indication of how the Fund will perform in the future.
|
During the ten-year period shown in the bar chart, the highest
return for a quarter was 28.09% (quarter ended December 31, 2001) and the
lowest return for a quarter was -26.00% (quarter ended September 30, 1998).
The year-to-date return as of June 30, 2003 was 14.34%.</R>
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MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
5
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<R>After-tax returns are shown only for Class B shares
and will vary for other classes. The after-tax returns are calculated using
the historical highest marginal Federal individual income tax rates in effect
during the periods measured and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on an investors tax situation
and may differ from those shown. The after-tax returns shown are not relevant
to investors who hold their Fund shares through tax-deferred arrangements,
such as 401(k) plans or individual retirement accounts or through tax advantaged
education savings accounts.
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Average Annual Total Returns (for the
periods ended December 31, 2002)
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One Year
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Five Years
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Ten
Years/Life
of Fund
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Merrill Lynch Small Cap Value
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Fund Class A#
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Return Before Taxes*
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-27.33%
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6.49%
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12.12%
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Merrill Lynch Small Cap Value
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Fund Class B
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Return Before Taxes*
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-26.87%
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6.53%
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11.51%
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Return After Taxes on Distributions*
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-27.36%
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3.90%
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8.24%
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Return After Taxes on Distributions and
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Sale of Fund Shares*
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-16.25%
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4.47%
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8.19%
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Merrill Lynch Small Cap Value
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Fund Class C
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Return Before Taxes*
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-24.63%
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6.80%
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11.98%
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Merrill Lynch Small Cap Value
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Fund Class I#
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Return Before Taxes*
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-27.15%
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6.75%
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12.05%
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Russell 2000 Stock Index**
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-20.48%
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-1.36%
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7.15%/6.69%
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The
inception date for Class R shares was February 4, 2003; therefore, information with
respect to Class R shares is not included.
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#
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Prior to April 14, 2003, Class A shares were
designated Class D and Class I shares were designated Class A.</R>
|
*
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Includes all applicable fees and sales charge.<R>
|
**
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This
unmanaged broad-based index is comprised of approximately 2,000 smaller-capitalization
common stocks from various industrial sectors. Performance of the index does not reflect
the deduction of fees, expenses or taxes. Past performance is not predictive of future
performance.
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Class
inception date is October 21, 1994.
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Ten years and since October 21, 1994.</R>
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6
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
Fund investors pay various fees and expenses,
either directly or indirectly. Listed below are some of the main types of expenses that
the Fund may charge:
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Expenses paid directly by the
shareholder:
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Shareholder Fees
these include sales
charges that you may pay when you buy or sell shares of the Fund.
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Expenses paid indirectly by the
shareholder:
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Annual Fund Operating Expenses
expenses
that cover the costs of operating the Fund.
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Management Fee
a fee paid to the
Investment Adviser for managing the Trust.
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Distribution Fees
fees used to support
the Funds marketing and distribution efforts, such as compensating financial advisers
and other financial intermediaries, advertising and promotion.
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Service (Account Maintenance) Fees
fees
used to compensate securities dealers and other financial intermediaries for account
maintenance activities.
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Administrative Fees
Fees paid to the
Administrator for providing administrative services to the Fund.
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<R>The Fund offers five 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 Advisor can help you with this decision.</R>
|
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.
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<R>
Shareholder Fees (fees paid directly
from your investment)(a):
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Class A*
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Class B(b)
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Class C
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Class I*
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Class R
|
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Maximum Sales Charge (Load) imposed
on
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purchases (as a percentage of offering
price)
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5.25%
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(c)
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None
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None
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5.25%
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(c)
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None
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Maximum Deferred Sales Charge (Load)
(as
a percentage of original purchase price or
redemption proceeds, whichever is lower)
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None
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(d)
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4.00%
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(c)
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1.00%
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(c)
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None
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(d)
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None
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Maximum Sales Charge (Load) imposed
on
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Dividend Reinvestments
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None
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None
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None
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None
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None
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Redemption Fee
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None
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None
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None
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None
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None
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Exchange Fee
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None
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None
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None
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None
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None
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Annual Fund Operating Expenses
(expenses that are deducted
from your investment)
(e):
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Management Fee
(f)
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0.48%
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0.48%
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0.48%
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0.48%
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0.48%
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Distribution and/or Service (12b-1)
Fees(g)
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0.25%
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1.00%
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1.00%
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None
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0.50%
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Other Expenses(h) (including
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administrative fees(i))
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0.60%
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0.62%
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0.64%
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0.59%
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0.68%
|
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Total Annual Fund Operating Expenses
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1.33%
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2.10%
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2.12%
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1.07%
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1.66%
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|
|
*
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|
Prior
to April 14, 2003, Class A shares were designated Class D and Class I shares were
designated Class A.
|
(a)
|
|
In
addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a
client buys or redeems shares. See Your Account How to Buy, Sell, Transfer
and Exchange Shares.
|
(b)
|
|
Class B shares automatically convert to Class
A shares approximately eight years after you buy them and will no longer
be subject to distribution fees.</R>
|
(c)
|
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Some
investors may qualify for reductions in or waivers of the sales charge (load).
|
(d)
|
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You
may pay a deferred sales charge if you purchase $1 million or more and you redeem within
one year.
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(e)
|
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The fees and expenses shown in the table and
the examples that follow include both the expenses of the Fund and the Funds
share of expenses of the Trust.<R>
|
(g)
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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, Class C or Class R shares over time, it may cost you
more in distribution and account maintenance (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
|
(h)
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Financial
Data Services, Inc., an affiliate of the Investment Adviser, provides transfer agency
services to the Fund. The Fund pays a fee for these services. The Investment Adviser or
its affiliates also provide certain accounting services to the Fund and the Trust. The
Fund and the Trust reimburse the Investment Adviser or its affiliates for such services.
|
(i)
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Includes administrative fees, which are payable
to the Administrator by the Fund at the annual rate of 0.25% of the Funds
average daily net assets.</R>
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
7
|
These examples are intended to help you compare
the cost of investing in the Fund with the cost of investing in other mutual funds.
|
<R>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 Funds operating expenses remain the same. These
assumptions are 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 these
examples. 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
|
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Class A**
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$653
|
$924
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$1,216
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$2,042
|
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Class B
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$613
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$958
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$1,329
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$2,240
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***
|
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Class C
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$315
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$664
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$1,139
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$2,452
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Class I**
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$628
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$847
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$1,084
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$1,762
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Class R
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$169
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$523
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$ 902
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$1,965
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|
EXPENSES IF YOU
DID NOT
REDEEM YOUR SHARES:*
|
|
1 Year
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3 Years
|
5 Years
|
10 Years
|
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Class A**
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$653
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$924
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$1,216
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$2,042
|
|
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Class B
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$213
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$658
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$1,129
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$2,240
|
***
|
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Class C
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$215
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$664
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$1,139
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$2,452
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Class I**
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$628
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$847
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$1,084
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$1,762
|
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Class R
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$169
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$523
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$ 902
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$1,965
|
|
|
*
|
|
Includes
expenses of both the Fund and the Funds share of expenses of the Trust.
|
**
|
|
Prior
to April 14, 2003, Class A shares were designated Class D and Class I shares were
designated Class A.
|
***
|
|
Assumes conversion to Class A shares approximately
eight years after purchase. See note (b) to the Fees and Expenses Table.</R>
|
8
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
Details About the Fund
[ICON]
|
ABOUT THE PORTFOLIO
MANAGER
|
<R>R. Elise Baum is the Senior Portfolio Manager of
the Fund. Ms. Baum is primarily responsible for the day-to-day management
of the Fund. Ms. Baum has been a Managing Director of Merrill Lynch Investment
Managers since 2000 and was First Vice President of Merrill Lynch Investment
Managers from 1999 to 2000 and a Director from 1997 to 1999. Ms. Baum has
been the Funds portfolio manager since 2002.</R>
|
ABOUT THE INVESTMENT
ADVISER AND
ADMINISTRATOR
|
Fund Asset Management serves as the Investment
Adviser and the Administrator.
|
<R>The Funds investment objective is long term
growth of capital.
|
Outlined below are the main strategies the Fund
uses in seeking to achieve its investment objective.
|
The Fund tries to choose investments for capital appreciation
that is, investments that will increase in value. The Fund will invest
in a diversified portfolio primarily consisting of common stock of small
and emerging growth companies. Under normal circumstances, the Fund will
invest at least 80% of its assets in securities of small companies. This
policy is a non-fundamental policy of the Fund and may not be changed without
60 days notice to shareholders. The equity securities in which the Fund
may invest include:</R>
|
|
|
|
Securities
convertible into common stock
|
|
|
|
<R>Index securities that are based on a group
of common stocks.</R>
|
|
|
|
Derivative
instruments, such as options and futures, the values of which are based on a common
stock or group of common stocks
|
The Fund will primarily focus on investments in
common stock.
|
The Funds management chooses investments using
a fundamental, value-oriented investment style. This means that the Fund seeks to invest
in companies that Fund management believes to be undervalued. Fund management may
consider a companys stock to be undervalued when the stocks current price is less than
what the Fund believes a share of the company is worth. A companys worth can be
assessed by several factors, such as financial resources, value of tangible assets,
sales and earnings growth, rate of return on capital, product development, quality of
management, and overall business prospects. A companys stock may become undervalued
when most investors fail to perceive the companys strengths in one or more of these
areas. Fund management may also determine a company is undervalued if its stock price is
down because of temporary factors from which Fund management believes the company will
recover. Additionally, management of the Fund may acquire the securities of companies
that are in a particular industry or related industries or market segments together as a
basket or group in a single transaction. The Fund may subsequently sell such
basket as a unit or it may sell only selected securities and continue to hold
other securities acquired in the basket.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
9
|
[ICON]
Details
About the Fund
|
The Fund may sell a security if, for example,
the stock price increases to the high end of the range of its historical price-book
value ratio or if the Fund determines that the issuer no longer meets the criteria Fund
management has established for the purchase of such securities or if Fund management
thinks there is a more attractive investment opportunity in the same category.
|
Fund management seeks to invest in small
companies that:
|
|
|
|
are
trading at the low end of their historical price-book value or enterprise value-sales
ratios
|
|
|
|
have
particular qualities that affect the outlook for that company, such as strong research
capabilities, new or unusual products or occupation of an attractive market niche
|
|
|
|
have
the potential to increase earnings over an extended period of time
|
Fund management seeks to invest in emerging
growth companies that:
|
|
|
|
occupy
dominant positions in new, developing industries or have a significant market share in a
large, fragmented industry or are relatively undervalued in the marketplace when
compared to their favorable market potential
|
|
|
|
have
rapid growth rates or above-average returns on equity
|
|
|
|
demonstrate
successful product development and marketing capabilities
|
<R>Fund management also considers other factors, such
as the level of competition in an industry or the extent of government regulation.
The Fund may also purchase the stock of a company that has suffered a recent
earnings decline if Fund management believes that the decline is temporary
or cyclical and will not significantly affect the companys long term
growth.
|
The Fund will invest primarily in U.S. companies that do
most of their business in the United States, but may invest a portion of
its assets in foreign companies. It is anticipated that in the immediate
future, the Fund will invest not more than 30% of its total assets in the
securities of foreign issuers.</R>
|
10
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
<R>
Short Sale
a transaction
in which the Fund sells a security it does not own in anticipation of a
decline in the market price of that security.
|
Small and emerging growth companies may include
unseasoned issuers or companies that have limited product lines or markets, may depend
on a smaller number of key personnel and may be less financially secure than larger,
more established companies. In addition, small and emerging growth companies securities
generally trade in lower volumes and are subject to greater, less predictable price
changes than the securities of more established companies.
|
The Fund has no stated minimum holding period
for investments, and will buy or sell securities whenever the Funds management sees an
appropriate opportunity.
|
In addition to the main strategies discussed
above, the Fund may use certain other investment strategies.
|
The Fund may, as a temporary defensive measure,
and without limitation, hold assets in other types of securities, including
non-convertible preferred stock and debt securities, U.S. Government and money market
securities, including repurchase agreements or cash, in such proportions as the
Investment Adviser may determine. Normally, a portion of the Funds assets would be held
in these securities in anticipation of investment in equities or to meet redemptions.
Short term investments and temporary defensive positions can be easily sold and have
limited risk of loss but may limit the Funds ability to achieve its investment
objective.
|
The Fund may also lend its portfolio securities
and may invest uninvested cash balances in affiliated money market funds.
|
The Fund may use derivatives to hedge its investment portfolio
against market and currency risks. Derivatives are financial instruments
whose value is derived from another security, a commodity (such as oil or
gold), a currency or an index (such as the Standard & Poors 500
Index). The derivatives that the Fund may use include futures, forwards,
options, and indexed securities.</R>
|
The Fund may make
short sales
of securities,
either as a hedge against potential declines in value of a portfolio security
or to realize appreciation when a security that the Fund does not own declines
in value. When the Fund makes a short sale, it borrows the security sold
short and delivers it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion
of the sale. The Fund may have to pay a fee to borrow particular securities
and is often obligated to turn over any payments received on such borrowed
securities to the lender of the securities.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
11
|
[ICON]
Details
About the Fund
|
The Funds obligation to replace the borrowed
security will be secured by collateral deposited with the broker-dealer, usually cash,
U.S. Government securities or other liquid securities similar to those borrowed. With
respect to uncovered short positions, the Fund will also be required to deposit similar
collateral with its custodian to the extent, if any, necessary so that the value of both
collateral deposits in the aggregate is at all times equal to at least 100% of the
current market value of the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security, regarding payment over any payments
received by the Fund on such security, the Fund may not receive any payments (including
interest) on its collateral deposited with such broker-dealer.
|
The Fund will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short exceeds 10% of
the value of its total assets.
|
The Fund may also make short sales against
the box without being subject to such limitations. In this type of short sale, at
the time of the sale, the Fund owns or has the immediate and unconditional right to
acquire the identical security at no additional cost.
|
<R>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 objective or that the Funds
performance will be positive for any period of time.
|
Set forth below are the main risks of investing
in the Fund:
|
Market Risk and Selection Risk
Market
risk is the risk that a stock market in one or more countries in which the
Fund invests will go down in value, including the possibility that a market
will go down sharply and unpredictably. Selection risk is the risk that
the securities that Fund management selects will underperform the stock
markets, the relevant indices or other funds with similar investment objectives
and investment strategies.</R>
|
Small Cap and Emerging Growth Securities Risk
Small cap or emerging growth companies may include unseasoned issuers or
companies that have limited product lines or markets. They may be less financially
|
12
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
secure than larger, more established companies.
They may depend on a small number of key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Funds investment in a small cap
or emerging growth company may lose substantial value.
|
The securities of small cap and emerging growth
companies generally trade in lower volumes and are subject to greater and less
predictable price changes than the securities of larger, more established companies.
These securities may also be purchased by the Fund in initial public offerings.
Securities purchased in initial public offerings can produce gains that positively
affect Fund performance during any given period, but such securities may not be
available during other periods or even if they are available, may not be available in
sufficient quantity to have a meaningful impact on Fund performance. They may also, of
course, produce losses. Investing in smaller and emerging growth companies requires a
long term view.
|
<R>
Value Investing Style Risk
The Fund follows an investment style that favors value investments. Historically,
value investments have performed best during periods of economic recovery.
Therefore, the value investing style may over time go in and out of favor.
At times when the value investing style is out of favor, the Fund may underperform
other equity funds that use different investment styles.
|
The Fund may also be subject to certain other risks associated
with its investments and investment strategies, including:
</R>
|
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 convertibles 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 sell 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 sell them or may be able
to sell them only at a price below current value. The risk that a security will become
illiquid is greater for small cap securities.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
13
|
[ICON]
Details
About the Fund
|
Restricted Securities
Restricted
securities have contractual or legal restrictions on their resale. They 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 the Investment Adviser receives
material adverse nonpublic information about the issuer, the Fund will not be able to
sell the securities.
|
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.
|
<R>
Derivatives
The Fund may
use derivative instruments, including options on portfolio positions or
currencies, financial and currency futures, options on such futures and
forward foreign currency transactions. 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:</R>
|
|
|
|
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.
|
14
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
|
|
|
Liquidity
risk
the risk that certain securities may be difficult or impossible to sell at
the time that the seller would like or at the price that the seller believes the
security is currently worth.
|
<R>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 risks associated with other Fund holdings. 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
and may be increased. There can be no assurance that the Funds 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.
|
Foreign Market Risk
Since the Fund
may invest in foreign securities, it offers the potential for more diversification
than a fund that invests only in the United States. This is because securities
traded on foreign markets have often (though not always) performed differently
from securities traded 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.</R>
|
|
|
|
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.
|
|
|
|
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.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
15
|
[ICON]
Details
About the Fund
|
|
|
|
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 Funds ability
to purchase or sell foreign securities or transfer its assets or income back into the
United States, or otherwise adversely affect the Funds 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 some foreign countries may be less extensive than
those available to investors in the United States.
|
|
|
|
Because
there are generally fewer investors on foreign exchanges and a smaller number of
securities 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.
|
|
|
|
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 Funds 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.
|
Emerging Markets Risk
The risks of
foreign investments are usually much greater for emerging markets. Investments in
emerging markets may be considered speculative. Emerging markets include those in
countries defined as emerging or developing by the World Bank, the International Finance
Corporation or the United Nations. Emerging markets are riskier because they develop
unevenly and may never fully develop. They are more likely to experience hyperinflation
and currency devaluations, which adversely affect returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower trading
volumes and less liquidity than developed
|
16
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
markets. Since these markets are so small, they
may be more likely to suffer sharp and frequent price changes or long term price
depression because of adverse publicity, investor perceptions, or the actions of a few
large investors.
|
In addition, traditional measures of investment
value used in the United States, such as price to earnings ratios, may not apply to
certain small markets.
|
Many emerging markets have histories of
political instability and abrupt changes in policies. As a result their governments are
more likely to take actions that are hostile or detrimental to private enterprise or
foreign investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of war, and
ethnic, religious and racial conflicts. In addition, governments in many emerging market
countries participate to a significant degree in their economics and securities markets,
which may impair investment and economic growth.
|
<R>
Securities Lending
The Fund
may lend securities with a value up to 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, 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/or the value of the
collateral falls, including the value of investments made with cash collateral.
These events could trigger adverse tax consequences to the Fund.
|
Borrowing and Leverage Risk
The Fund may
borrow for temporary emergency purposes including to meet redemptions. Borrowing may
exaggerate changes in the net asset value of Fund shares and in the return on the Funds
portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Funds return. Certain securities that the Fund buys may create
leverage including, for example, futures contracts and options.
|
Short Sales
Because making short sales
in securities that it does not own exposes the Fund to risks associated
with those securities, such short sales involve speculative exposure risk.
As a result, if the Fund makes short sales in securities that increase in
value, it will likely underperform similar mutual funds that do not make
short sales in securities they do not own. The Fund will incur a loss as
a result of a short sale if the price of the security increases between
the date of the short sale and the date on which the Fund replaces the borrowed
security. The Fund will realize a gain if the security</R>
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
17
|
[ICON]
Details
About the Fund
|
<R>declines in price between those dates. There can
be no assurance that the Fund will be able to close out a short sale position
at any particular time or at an acceptable price. Although the Funds
gain is limited to the amount at which it sold a security short, its potential
loss is limited only by the maximum attainable price of the security, less
the price at which the security was sold. The Fund may also pay transaction
costs and borrowing fees in connection with short sales.
|
When Issued and Delayed Delivery Securities and Forward
Commitments
When issued and delayed delivery securities and
forward commitments involve the risk that the security the Fund buys will
lose value prior to its delivery. There also is the risk that the security
will not be issued or that the other party will not meet its obligation.
If this occurs, the Fund both loses the investment opportunity for the assets
it has set aside to pay for the security and any gain in the securitys
price.</R>
|
STATEMENT OF ADDITIONAL INFORMATION
|
If you would like further information about the
Fund, including how it invests, please see the Statement of Additional Information.
|
18
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
MERRILL LYNCH SELECT PRICING
SM
SYSTEM
|
<R>The Fund offers five 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 Advisor 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 Class I shares, you
generally pay a sales charge at the time of purchase. If you buy Class A
shares, you also pay an ongoing account maintenance fee of 0.25%. You may
be eligible for a sales charge reduction or waiver.</R>
|
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.
|
<R>If you select Class B, Class C or Class R shares,
you will invest the full amount of your purchase price, but you will be
subject to a distribution fee of 0.75% for Class B and Class C shares and
0.25% for Class R shares and an account maintenance fee of 0.25% for all
three classes. Because these fees are paid out of the Funds 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 Class
C shares.</R>
|
The Funds shares are distributed by FAM
Distributors, Inc., an affiliate of the Investment Adviser.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
19
|
The table below summarizes key features of the
Merrill Lynch Select Pricing
SM
System.
|
<R>
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
Class B
|
|
Class C
|
|
Class I
|
|
Class R
|
|
Availability
|
|
Generally available through Merrill
Lynch. Limited availability
through selected
securities dealers
and other
financial intermediaries.
|
|
Generally available through Merrill
Lynch. Limited availability
through selected
securities dealers
and other
financial intermediaries.
|
|
Generally available through Merrill
Lynch. Limited availability
through selected
securities dealers
and other
financial intermediaries.
|
|
Limited to
certain investors
including:
Current Class I
shareholders
Certain Retirement
Plans
Participants in
certain Merrill
Lynch-sponsored
programs
Certain affiliates
of Merrill Lynch,
selected securities
dealers and
other financial
intermediaries.
|
|
Available only to certain retirement plans.
|
|
Initial Sales Charge?
|
|
Yes. Payable at time of purchase. Lower sales charges
available for larger investments.
|
|
No. Entire purchase price is invested in shares of the
Fund.
|
|
No. Entire purchase price is invested in shares of the
Fund.
|
|
Yes. Payable at time of purchase. Lower sales charges
available for larger investments.
|
|
No. Entire purchase price is invested in the shares of
the Fund.
|
|
Deferred Sales Charge?
|
|
No. (May be charged for purchases over $1 million
that are redeemed within one year.)
|
|
Yes. Payable if you redeem within six years of purchase.
|
|
Yes. Payable if you redeem within one year of purchase.
|
|
No. (May be charged for purchases over $1 million
that are redeemed within
one year.)
|
|
No.
|
|
Account Maintenance and Distribution Fees?
|
|
0.25% Account Maintenance Fee. No Distribution Fee.
|
|
0.25% Account Maintenance Fee. 0.75%
Distribution Fee.
|
|
0.25% Account Maintenance Fee. 0.75%
Distribution Fee.
|
|
No.
|
|
0.25% Account Maintenance Fee. 0.25% Distribution Fee.
|
|
Conversion to Class A shares?
|
|
N/A
|
|
Yes, automatically after approximately eight years.
|
|
No.
|
|
No.
|
|
No.
|
|
</R>
20
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
<R>
Right of Accumulation
permits
you to pay the sales charge that would apply to the cost or value (whichever
is higher) of all qualifying 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 qualifying shares
of Merrill Lynch Select Pricing
SM
System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
|
Class A and Class I Shares Initial
Sales Charge Options
|
If you select Class A or Class I shares, you will pay a sales
charge at the time of purchase as shown in the following table. Securities
dealers compensation is shown in the last column.</R>
|
Your Investment
|
|
As a % of
Offering
Price
|
As a % of
Your
Investment*
|
Dealer
Compensation
as a % of
Offering Price
|
|
Less than $25,000
|
|
5.25%
|
5.54%
|
5.00%
|
|
$25,000 but less
than $50,000
|
|
4.75%
|
4.99%
|
4.50%
|
|
$50,000 but less
than $100,000
|
|
4.00%
|
4.17%
|
3.75%
|
|
$100,000 but less
than $250,000
|
|
3.00%
|
3.09%
|
2.75%
|
|
$250,000 but less
than $1,000,000
|
|
2.00%
|
2.04%
|
1.80%
|
|
$1,000,000 and over**
|
|
0.00%
|
0.00%
|
0.00%
|
|
*
|
|
Rounded
to the nearest one-hundredth percent.
|
**
|
|
<R>If you invest $1,000,000 or more in
Class A or Class I 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 I shares by certain
employer-sponsored retirement or savings plans.</R>
|
<R>No initial sales charge applies to Class A or
Class I shares that you buy through reinvestment of dividends.
|
A reduced or waived sales charge on a purchase of Class
A or Class I shares may apply for:
</R>
|
|
|
|
Purchases
under a
Right of Accumulation
or
Letter of Intent
|
|
|
|
Merrill Lynch Blueprint
SM
Program participants
|
|
|
|
Certain
Merrill Lynch investment or central asset accounts
|
|
|
|
Certain
employer-sponsored retirement or savings plans
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
21
|
|
|
|
Purchases
using proceeds from the sale of certain Merrill Lynch closed-end funds under certain
circumstances
|
|
|
|
Certain
investors, including directors or trustees of Merrill Lynch mutual funds and Merrill
Lynch employees
|
|
|
|
Certain
fee-based programs of Merrill Lynch and other financial intermediaries that have
agreements with the Distributor or its affiliates
|
<R>Only certain investors are eligible to buy Class
I shares. Your Merrill Lynch Financial Advisor can help you determine whether
you are eligible to buy Class I 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 I shares,
you should buy Class I shares since Class A shares are subject to a 0.25% account
maintenance fee, while Class I shares are not.
|
If you redeem Class A or Class I 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 Advisor, selected securities dealer,
other financial intermediary or contact the Funds Transfer Agent at
1-800-MER-FUND.</R>
|
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 six 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 Funds 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 the costs of marketing, advertising and compensating the
Merrill Lynch Financial Advisor, selected securities dealer or other financial
intermediary who assists you in purchasing Fund shares.
|
22
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
If you redeem Class B shares within six 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
|
4.00
|
%
|
|
|
|
2 3
|
3.00
|
%
|
|
|
|
3 4
|
3.00
|
%
|
|
|
|
4 5
|
2.00
|
%
|
|
|
|
5 6
|
1.00
|
%
|
|
|
|
6 and after
|
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 by dividend reinvestment
are not subject to a deferred sales charge. For shares acquired before June 1, 2001, the
four-year deferred sales charge schedule in effect at that time will apply. Not all
Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your
shares for shares of another Merrill Lynch fund, the higher charge will apply.
|
The deferred sales charge relating to Class B
shares may be reduced or waived in certain circumstances, such as:
|
|
|
|
Certain post-retirement withdrawals from an IRA
or other retirement plan if you are over 59
1
/
2
years old
|
|
|
|
Redemption by certain eligible 401(a) and 401(k)
plans, certain related accounts, certain group plans participating in the
Merrill Lynch Blueprint
SM
Program and certain
retirement plan rollovers
|
|
|
|
Redemption
in connection with participation in certain fee-based programs of Merrill Lynch or other
financial intermediaries that have agreements with the Distributor or its affiliates or
in connection with involuntary termination of an account in which Fund shares are held
|
|
|
|
Withdrawals
resulting from shareholder death or disability as long as the waiver request is made
within one year after death or disability or, if later, reasonably promptly following
completion of probate
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
23
|
|
|
|
Withdrawals
through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class
B account value at the time the plan is established
|
<R>Your Class B shares convert automatically into Class
A 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 A shares are subject to lower annual expenses than Class
B shares. The conversion of Class B to Class A shares is not a taxable event
for Federal income tax purposes.</R>
|
Different conversion schedules may 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 Funds 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 funds 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.
|
<R>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, withdrawals through the Merrill Lynch Systematic Withdrawal
Plan, and redemptions of Class C shares by certain retirement plans.</R>
|
Class C shares do not offer a conversion
privilege.
|
Class R Shares are available only to certain retirement plans.
If you buy Class R shares, you will not pay either an initial sales charge
or a contingent deferred sales charge. However, Class R shares are subject
to a distribution fee of 0.25% and an account maintenance fee of 0.25%.
Because these fees </R>
|
24
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
<R>are paid out of the Funds 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. Class R shares do
not offer a conversion privilege.</R>
|
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
|
<R>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, sell, transfer and exchange 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 Advisor may help you with this decision.</R>
|
Because of the high cost 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 SMALL CAP VALUE FUND, INC.
|
25
|
If You Want to
|
|
Your Choices
|
|
Information Important for You to Know
|
|
Buy Shares
|
|
First, select the share class appropriate for you
|
|
<R>Refer to the Merrill Lynch Select Pricing table
on page 20. Be sure to read this prospectus carefully.</R>
|
|
|
|
|
|
Next, determine the amount of your investment
|
|
The minimum initial investment for the Fund is $1,000
for all accounts except:
$250 for certain Merrill Lynch fee-based programs
$100 for retirement plans
(The minimums for initial investments may be waived under certain circumstances.)
|
|
|
|
|
|
Have your Merrill Lynch Financial Advisor, selected securities
dealer or other financial intermediary submit your purchase order
|
|
The price of your shares is based on the next calculation
of net asset value after your order is placed. Any purchase orders placed
prior to the close of business on the New York Stock Exchange (generally
4:00 p.m. Eastern time) will be priced at the net asset value determined
that day. 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. The fees charged by other securities
dealers or other financial intermediaries may be higher or lower.
|
|
|
|
|
|
Or contact the Transfer Agent
|
|
To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the completed
purchase application to the Transfer Agent at the address on the inside
back cover of this Prospectus.
|
|
Add to Your
Investment
|
|
Purchase additional shares
|
|
The minimum investment for additional purchases is generally
$50 except that retirement plans have a minimum additional purchase of
$1 and certain programs, such as automatic investment plans, may have
higher minimums.
(The minimums for additional purchases may be waived under
certain circumstances.)
|
|
|
|
|
|
Acquire additional shares through the automatic dividend
reinvestment plan
|
|
All dividends are automatically reinvested without a sales
charge.
|
|
|
|
|
|
Participate in the automatic investment plan
|
|
You may invest a specific amount in the Fund on a periodic
basis through certain Merrill Lynch investment accounts or central asset
accounts.
|
|
26
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
If You Want to
|
|
Your Choices
|
|
Information Important for You to Know
|
|
Transfer Shares to Another Selected Securities Dealer
or Other Financial Intermediary
|
|
Transfer to a participating selected securities dealer
or other financial intermediary
|
|
You may transfer your Fund shares only to another selected
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. You may only purchase additional
shares of funds previously owned before the transfer. All future trading
of these assets must be coordinated by the receiving firm.
|
|
|
|
|
|
Transfer to a non-participating securities dealer or other
financial intermediary
|
|
You must either:
Transfer your shares to an account with the Transfer
Agent; or
Sell your shares, paying any applicable deferred
sales charge.
|
|
Sell Your Shares
|
|
Have your Merrill Lynch Financial Advisor, selected securities
dealer or other financial intermediary submit your sales order
|
|
The price of your shares is based on the next calculation
of net asset value after your order is placed. For your redemption request
to be priced at the net asset value on the day of your request, you must
submit your request to your securities dealer or other financial intermediary
prior to that days close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time). Certain financial intermediaries 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.
Selected 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 fees charged
by other securities dealers or financial intermediaries may be higher
or lower. 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 and loan 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.
|
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
27
|
If You Want to
|
|
Your Choices
|
|
Information Important for You to Know
|
|
Sell Shares Systematically
|
|
Participate in the Funds Systematic Withdrawal Plan
|
|
You can choose to receive systematic payments from your
Fund account either by check or through direct deposit to your bank account
on a monthly or quarterly basis. If you hold your Fund shares in a Merrill
Lynch CMA
©
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 Class 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 Advisor or other financial
intermediary for details.
|
|
Exchange Your Shares
|
|
Select the fund into which you want to exchange. Be sure
to read that funds prospectus
|
|
<R>You can exchange your Class A, Class B, Class
C, and Class I shares of the Fund for shares of many other Merrill Lynch
mutual funds. You must have held the shares used in the exchange for at
least 15 calendar days before you can exchange to another fund.
Class A, Class B, Class C, and Class I shares are generally
exchangeable for shares of the same class of another fund. If you own
Class I shares and wish to exchange into a fund in which you have no Class
I shares (and you are not eligible to buy Class I shares), you will exchange
into Class A shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange Class I or
Class A 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 generally
apply. The time you hold Class B or Class C shares in both funds will
count when determining your holding period for calculating a deferred
sales charge at redemption. If you exchange Class I or Class A shares
for money market fund shares, you will receive Class A shares of Summit
Cash Reserves Fund. Class B or Class C shares of the Fund will be exchanged
for Class B shares of Summit Cash Reserves Fund.
To exercise the exchange privilege contact your Merrill
Lynch Financial Advisor, selected securities dealer or other financial
intermediary or call the Transfer Agent at 1-800-MER-FUND.</R>
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.
|
|
<R>The Fund reserves the right to reject any purchase
order, including exchanges. Short-term or excessive trading into and out
of the Fund, particularly in larger amounts, may harm performance by disrupting
portfolio management strategies and by increasing expenses. Accordingly,
the Fund may reject purchase orders, including exchanges, from market timers
or investors that Fund management has determined are short-term or excessive
or that will be disruptive to the Fund. For these purposes, Fund management
may consider an investors trading history in the Fund or other Merrill
Lynch funds, and accounts under common ownership or control.</R>
|
28
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
Net Asset Value
the market value of the
Funds 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. If events that are
expected to materially affect the value of securities traded in other markets
occur between the close of those markets and the close of business on the
New York Stock Exchange, those securities may be valued at their fair value.
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 Funds net asset value may change
on days when you will not be able to purchase or redeem Fund shares.
|
The Fund may accept orders from certain
authorized financial intermediaries or their designees. The Fund will be deemed to
receive an order when accepted by the intermediary or designee and the order will
receive the net asset value next computed by the Fund after such acceptance. If the
payment for a purchase order is not made by a designated later time, the order will be
canceled and the financial intermediary could be held liable for any losses.
|
<R>Generally, Class I shares will have the highest
net asset value because that class has the lowest expenses, Class A shares
will have a higher net asset value than Class B, Class C or Class R shares
and Class R shares will have a higher net asset value than Class B or Class
C shares. Also, dividends paid on Class A, Class I and Class R shares generally
will be higher than dividends paid on Class B and Class C shares because
Class A, Class I and Class R shares have lower expenses.</R>
|
PARTICIPATION IN MERRILL LYNCH FEE-BASED
PROGRAMS
|
<R>If you participate in certain fee-based programs
offered by Merrill Lynch or other financial intermediaries, you may be able
to buy Class I 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.</R>
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
29
|
Dividends
Ordinary income and capital
gains paid to shareholders. Dividends may be reinvested in additional Fund shares as
they are paid.
|
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.
|
<R>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 A shares may be modified. Any redemption or exchange will be at
net asset value.</R>
|
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 Advisor, selected securities dealer or other
financial intermediary.
|
<R>The Fund will distribute net investment income
and net realized capital gains, if any, at least annually. The Fund may
also pay a special distribution at the end of the calendar year to comply
with Federal tax requirements.
Dividends
may be reinvested
automatically in shares of the Fund at net asset value without a sales charge
or may be taken in cash. If you would like to receive dividends in cash,
contact your Merrill Lynch Financial Advisor, selected securities dealer,
other financial intermediary or the Transfer Agent. Although this can not
be predicted with any 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.</R>
|
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
|
30
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
Unless your investment is in a tax deferred
account, you may want to avoid buying shares shortly before the Fund pays a dividend.
The reason? If you buy shares when a fund has realized but not yet distributed income or
capital gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want to
consult your tax adviser.
|
<R>shares and any gain on the transaction may be subject
to tax. Recently enacted legislation reduces the tax rate on certain dividend
income, including dividends received from some foreign corporations, and
long-term capital gain. To the extent that the Funds distributions
are derived from qualifying dividend income and long-term capital gain,
such distributions will be eligible for taxation at a reduced rate.
|
If you are neither a lawful permanent resident nor a citizen
of the United States or if you are a foreign entity, the Funds ordinary
income dividends (which include distributions of the excess of net short
term capital gains over net long term capital losses) will generally be
subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.</R>
|
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, your dividends and redemption proceeds
will be subject to a withholding tax 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.
|
The Fund is now offering electronic delivery of communications
to its shareholders. In order to receive this service, you must register
your account and provide us with e-mail information. To sign up for this
service, simply access this website http://www.icsdelivery.com/live/ and
follow the instructions. When you visit the site, you will obtain a personal
identification number (PIN). You will need this PIN should you wish to update
your e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for certain
retirement accounts at this time.</R>
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
31
|
Management of the Fund
[ICON]
|
<R>Fund Asset Management, the Trusts Investment
Adviser, manages the Trusts investments under the overall supervision
of the Board of Trustees of the Trust. The Investment Adviser has the responsibility
for making all investment decisions for the Trust. The Trust pays the Investment
Adviser an investment advisory fee at the annual rate of 0.50% of the average
daily net assets of the Trust for the first $1 billion; 0.475% of the average
daily net assets from $1 billion to $1.5 billion; and 0.45% of the average
daily net assets above $1.5 billion. For the fiscal year ended March 31,
2003, the Investment Adviser received a fee equal to 0.48% of the Funds
average daily net assets. The Fund pays the Administrator an administrative
fee at the annual rate of 0.25% of the average daily net assets of the Fund.
|
Fund Asset Management was organized as an investment adviser
in 1977 and offers investment advisory services to more than 50 registered
investment companies. Fund Asset Management and its affiliates had approximately
$498 billion in investment company and other portfolio assets under management
as of June 2003.</R>
|
The Fund is a feeder fund that
invests all of its assets in the Trust. (Except where indicated, this Prospectus uses
the term Fund to mean this feeder fund and the Trust taken together).
Investors in the Fund will acquire an indirect interest in the Trust.
|
The Trust may accept investments from other
feeder funds, and all the feeders of the Trust bear the portfolios expenses in
proportion to their assets. This structure may enable the Fund to reduce costs through
economies of scale. A larger investment portfolio may also reduce certain transaction
costs to the extent that contributions to and redemptions from the Trust from different
feeders may offset each other and produce a lower net cash flow.
|
However, each feeder fund can set its own
transaction minimums, fund-specific expenses, and other conditions. This means that one
feeder fund could offer access to the Trust on more attractive terms, or could
experience better performance, than another feeder fund.
|
32
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
Whenever the Trust holds a vote of its feeder
funds, the Fund will pass the vote through to its own shareholders. Smaller feeder funds
may be harmed by the actions of larger feeder funds. For example, a larger feeder fund
could have more voting power than the Fund over the operations of the master portfolio.
|
The Fund may withdraw from the Trust at any time
and may invest all of its assets in another pooled investment vehicle or retain an
investment adviser to manage the Funds assets directly.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
33
|
[ICON]
Management
of the Fund
|
The Financial Highlights table is intended to
help you understand the Funds financial performance for the past five years. These
years include operations prior to the change to a master/feeder structure.
Certain information reflects the financial results for a single Fund share. The total
returns in the table represent the rate an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends). The information has
been audited by Deloitte & Touche
LLP
, whose report, along with the Funds financial
statements, is included in the Funds Annual Report, which is available upon request.
|
<R>
|
Class A*
For the Year Ended March 31,
|
Class B
For the Year Ended March 31,
|
Increase (Decrease) in
Net Asset Value:
|
2003
|
2002
|
2001
|
2000
|
1999
|
2003
|
2002
|
2001
|
2000
|
1999
|
|
Per Share Operating
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value,
beginning of year
|
$24.45
|
|
$19.73
|
|
$22.80
|
|
$16.19
|
|
$21.97
|
|
$22.74
|
|
$18.44
|
|
$21.59
|
|
$15.37
|
|
$21.03
|
|
|
Investment loss net
|
(.09
|
)
|
(.07
|
)
|
|
|
(.07
|
)
|
(.06
|
)
|
(.23
|
)
|
(.22
|
)
|
(.15
|
)
|
(.21
|
)
|
(.20
|
)
|
|
Realized and
unrealized gain (loss)
on investments and
from the Trust net
|
(6.73
|
)
|
6.08
|
|
1.23
|
|
8.82
|
|
(4.65
|
)
|
(6.25
|
)
|
5.67
|
|
1.15
|
|
8.35
|
|
(4.43
|
)
|
|
Total from investment
operations
|
(6.82
|
)
|
6.01
|
|
1.23
|
|
8.75
|
|
(4.71
|
)
|
(6.48
|
)
|
5.45
|
|
1.00
|
|
8.14
|
|
(4.63
|
)
|
|
Less distributions from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized gain on
investments net
|
(.48
|
)
|
(1.29
|
)
|
(4.30
|
)
|
(2.14
|
)
|
(1.07
|
)
|
(.44
|
)
|
(1.15
|
)
|
(4.15
|
)
|
(1.92
|
)
|
(1.03
|
)
|
|
Net asset value, end
of year
|
$17.15
|
|
$24.45
|
|
$19.73
|
|
$22.80
|
|
$16.19
|
|
$15.82
|
|
$22.74
|
|
$18.44
|
|
$21.59
|
|
$15.37
|
|
|
Total Investment
Return:**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset
value per share
|
(28.09
|
%)
|
31.17
|
%
|
6.11
|
%
|
56.98
|
%
|
(22.37
|
%)
|
(28.70
|
%)
|
30.22
|
%
|
5.26
|
%
|
55.72
|
%
|
(22.96
|
%)
|
|
Ratios to Average
Net Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
1.33
|
%
|
1.25
|
%
|
1.30
|
%
|
1.33
|
%
|
1.33
|
%
|
2.10
|
%
|
2.01
|
%
|
2.06
|
%
|
2.11
|
%
|
2.10
|
%
|
|
Investment loss net
|
(.48
|
%)
|
(.30
|
%)
|
(.02
|
%)
|
(.37
|
%)
|
(.35
|
%)
|
(1.26
|
%)
|
(1.04
|
%)
|
(.75
|
%)
|
(1.14
|
%)
|
(1.12
|
%)
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year
(in thousands)
|
$347,736
|
|
$467,733
|
|
$198,094
|
|
$151,650
|
|
$82,279
|
|
$640,017
|
|
$1,003,961
|
|
$563,316
|
|
$511,780
|
|
$378,610
|
|
|
Portfolio turnover
|
68.27
|
%##
|
54.14
|
%##
|
42.30
|
%#
|
89.18
|
%
|
57.82
|
%
|
68.27
|
%##
|
54.14
|
%##
|
42.30
|
%#
|
89.18
|
%
|
57.82
|
%
|
|
*
|
|
Prior
to April 14, 2003, Class A shares were designated Class D.
|
**
|
|
Total investment returns exclude the effects
of sales charges.</R>
|
|
|
Based
on average shares outstanding.
|
|
|
Includes
the Funds share of the Trusts allocated expenses.
|
|
|
On September 1, 2000, the Fund converted from
a stand-alone investment company to a feeder fund that seeks
to achieve its investment objective by investing all of its assets in Master
Small Cap Value Trust, a mutual fund that has the same investment objective
as the Fund. All investments will be made at the Trust level. This structure
is sometimes called a master/feeder structure.<R>
|
|
|
Amount is less than $.01 per share.</R>
|
#
|
|
Portfolio
turnover for the Trust for the period September 1, 2000 (commencement of operations of
the Trust) to March 31, 2001.
|
##
|
|
Portfolio
turnover for the Trust.
|
34
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
FINANCIAL HIGHLIGHTS (concluded)
|
<R>
Increase
(Decrease)
in Net Asset
Value:
|
Class C
For the Year Ended March 31,
|
Class I*
For the Year Ended March 31,
|
Class R
For the Period
February 4,
2003
(commencement)
of operations)
to
|
2003
|
2002
|
2001
|
2000
|
1999
|
2003
|
2002
|
2001
|
2000
|
1999
|
March 31, 2003
|
|
Per Share
Operating
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value,
beginning of
year
|
$22.30
|
|
$18.13
|
|
$21.32
|
|
$15.21
|
|
$20.83
|
|
$24.58
|
|
$19.81
|
|
$22.87
|
|
$16.27
|
|
$22.03
|
|
$16.12
|
|
|
Investment
income (loss)
net
|
(.23
|
)
|
(.23
|
)
|
(.15
|
)
|
(.21
|
)
|
(.20
|
)
|
(.05
|
)
|
(.01
|
)
|
.06
|
|
(.02
|
)
|
(.02
|
)
|
|
###
|
|
Realized and
unrealized gain
(loss) on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and from the
Trust net
|
(6.13
|
)
|
5.58
|
|
1.14
|
|
8.25
|
|
(4.38
|
)
|
(6.77
|
)
|
5.84
|
|
1.23
|
|
8.84
|
|
(4.66
|
)
|
(.25
|
)
|
|
Total from
investment
operations
|
(6.36
|
)
|
5.35
|
|
.99
|
|
8.04
|
|
(4.58
|
)
|
(6.82
|
)
|
5.83
|
|
1.29
|
|
8.82
|
|
(4.68
|
)
|
(.25
|
)
|
|
Less
distributions
from realized
gain on
investments
net
|
(.44
|
)
|
(1.18
|
)
|
(4.18
|
)
|
(1.93
|
)
|
(1.04
|
)
|
(.49
|
)
|
(1.06
|
)
|
(4.35
|
)
|
(2.22
|
)
|
(1.08
|
)
|
|
|
|
Net asset
value, end of year
|
$15.50
|
|
$22.30
|
|
$18.13
|
|
$21.32
|
|
$15.21
|
|
$17.27
|
|
$24.58
|
|
$19.81
|
|
$22.87
|
|
$16.27
|
|
$15.87
|
|
|
Total Investment
Return:**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net
asset value
per share
|
(28.69
|
%)
|
30.23
|
%
|
5.29
|
%
|
56.98
|
%
|
(22.99
|
%)
|
(27.93
|
%)
|
31.56
|
%
|
6.39
|
%
|
57.29
|
%
|
(22.17
|
%)
|
(1.55
|
%)
|
|
Ratios to
Average Net
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
2.12
|
%
|
2.02
|
%
|
2.08
|
%
|
2.12
|
%
|
2.12
|
%
|
1.07
|
%
|
.99
|
%
|
1.04
|
%
|
1.08
|
%
|
1.08
|
%
|
1.66
|
%***
|
|
Investment
loss net
|
(1.27
|
%)
|
(1.11
|
%)
|
(.75
|
%)
|
(1.16
|
%)
|
(1.14
|
%)
|
(.24
|
%)
|
(.03
|
%)
|
.27
|
%
|
(.12
|
%)
|
(.10
|
%)
|
(.65
|
%)***
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end
of year (in
thousands)
|
$334,720
|
|
$504,537
|
|
$140,610
|
|
$67,390
|
|
$38,249
|
|
$607,484
|
|
$1,259,688
|
|
$648,806
|
|
$491,855
|
|
$276,957
|
|
|
****
|
|
Portfolio
turnover
|
68.27
|
%##
|
54.14
|
%##
|
42.30
|
%#
|
89.18
|
%
|
57.82
|
%
|
68.27
|
%##
|
54.14
|
%##
|
42.30
|
%#
|
89.18
|
%
|
57.82
|
%
|
68.27
|
%
|
|
*
|
|
Prior
to April 14, 2003, Class I shares were designated Class A.
|
**
|
|
Total
investment returns exclude the effects of sales charges.
|
****
|
|
Amount is less than $1,000.</R>
|
|
|
Based
on average shares outstanding.
|
|
|
Includes the Funds share of the Trusts
allocated expenses.
|
|
|
On September 1, 2000, the Fund converted from
a stand-alone investment company to a feeder fund that seeks
to achieve its investment objective by investing all of its assets in Master
Small Cap Value Trust, a mutual fund that has the same investment objective
as the Fund. All investments will be made at the Trust level. This structure
is sometimes called a master/feeder structure.<R>
|
|
|
Aggregate total investment return.</R>
|
#
|
|
Portfolio
turnover for the Trust for the period September 1, 2000 (commencement of operations of
the Trust) to March 31, 2001.
|
##
|
|
Portfolio turnover for the Trust.<R>
|
###
|
|
Amount is less than $(.01) per share.</R>
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
35
|
(This page intentionally left blank)
|
|
MERRILL LYNCH SMALL CAP VALUE FUND,
INC.
|
|
(This page intentionally left blank)
|
|
MERRILL LYNCH SMALL CAP VALUE FUND,
INC.
|
|
(This page intentionally left blank)
|
|
MERRILL LYNCH SMALL CAP VALUE FUND,
INC.
|
|
[1]
|
POTENTIAL
INVESTORS
Open an account (two options).
|
[2]
|
MERRILL LYNCH
FINANCIAL ADVISOR
OR
SECURITIES DEALER
Advises shareholders on their Fund investments.
|
|
TRANSFER AGENT
Financial Data Services, Inc.
ADMINISTRATIVE OFFICES
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
MAILING ADDRESS
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and
reporting services.
|
|
|
|
COUNSEL
Sidley Austin Brown & Wood
LLP
787 Seventh Avenue
New York, New York 10019-6018
Provides legal advice to the Fund.
|
DISTRIBUTOR
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
|
|
|
|
|
INDEPENDENT AUDITORS
Deloitte & Touche
LLP
<R>750 College Road
East Princeton, New Jersey 08540
Audits the financial
statements of the Fund.
</R>
|
THE FUND
The Board of
Directors/Trustees
oversees the
Fund and the Trust.
|
CUSTODIAN
The Bank of New York
100 Church Street
New York, New York 10007
Holds the Funds assets for
safekeeping.
|
|
|
|
ACCOUNTING SERVICES
PROVIDER
State Street Bank
and Trust Company
500 College Road East
Princeton, New Jersey 08540
Provides certain accounting
services to the Fund.
|
MASTER SMALL CAP
VALUE TRUST
The Fund invests all its assets
in the Trust.
|
INVESTMENT ADVISER
Fund Asset Management, L.P.
ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Plainsboro, New Jersey 08536
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Funds day-to-day activities.
|
|
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
|
|
[ICON]
For
More Information
|
<R>Additional information about the Funds investments
is available in the Funds Annual and Semi-Annual Reports. In the Funds
Annual Report you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds performance during
its last fiscal year. You may obtain these reports at no cost by calling
1-800-MER-FUND.</R>
|
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 Advisor or other financial intermediary, 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 Advisor, other financial intermediary or call the
Transfer Agent at 1-800-MER-FUND.
|
Statement of Additional Information
|
<R>The Statement of Additional Information contains
further information about the Fund. The portions of the Statement of Additional
Information relating to the Fund are incorporated by reference into (legally
considered part of) this Prospectus. The portions of the Statement of Additional
Information that do not relate to the Fund are not incorporated by reference,
are not part of this Prospectus, and should not be relied on by investors
in the Fund. 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.
|
Information about the Fund (including the Statement of Additional
Information) can be reviewed and copied at the SECs 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
SECs 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 writing the Public Reference Section
of the SEC, Washington, D.C. 20549-0102.</R>
|
You should rely only on the information
contained in this Prospectus. No one is authorized to provide you with information that
is different from information contained in this Prospectus.
|
Investment Company Act file #811-2809
<R> Code #10055-07-03</R>
©
Fund Asset Management, L.P.
|
[LOGO]
Merrill Lynch
Investment Managers
|
Merrill Lynch Small Cap Value Fund, Inc.
|
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.
|
STATEMENT OF ADDITIONAL
INFORMATION
|
M
ERRILL
L
YNCH
S
MALL
C
AP
V
ALUE
FUND, I
NC
.
|
P.O. Box 9011, Princeton, New
Jersey 08543-9011 Phone No. (609) 282-2800
|
This Statement of Additional Information of
Merrill Lynch Small Cap Value Fund, Inc. (the Fund) is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated July 18, 2003,
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 to the Fund at the above address. The Funds Prospectus is incorporated by
reference into this Statement of Additional Information, and Part I of this Statement of
Additional Information and the portions of Part II of this Statement of Additional
Information that relate to the Fund have been incorporated by reference into the Funds
Prospectus. The portions of Part II of this Statement of Additional Information that do
not relate to the Fund do not form a part of the Funds Statement of Additional
Information, have not been incorporated by reference into the Funds Prospectus and
should not be relied upon by investors in the Fund. The Funds audited financial
statements are incorporated by reference into this Statement of Additional Information
by reference to the Funds 2003 Annual Report. You may request a copy of the Annual
Report at no charge by calling 1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern
time on any business day.
|
Fund Asset Management Investment
Adviser
|
FAM Distributors, Inc. Distributor
|
The date of this Statement of
Additional Information is July 18, 2003
|
Part I
|
|
|
|
|
|
Investment Objectives and Policies
|
|
I-1
|
Investment Restrictions
|
|
I-2
|
Information on Officers and Directors
|
|
I-4
|
Management and Advisory Arrangements
|
|
I-7
|
Information on Sales Charges and Distribution Related
Expenses
|
|
I-9
|
Computation of Offering Price
|
|
I-11
|
Portfolio Transactions and Brokerage
|
|
I-12
|
Fund Performance
|
|
I-12
|
Additional Information
|
|
I-13
|
Financial Statements
|
|
I-14
|
|
|
|
Part II
|
|
|
|
|
|
Investment Risks and Considerations
|
|
II-1
|
Management and other Service Arrangements
|
|
II-27
|
Purchase of Shares
|
|
II-30
|
Redemption of Shares
|
|
II-38
|
Shareholder Services
|
|
II-39
|
Pricing of Shares
|
|
II-44
|
Portfolio Transactions and Brokerage
|
|
II-45
|
Dividends and Taxes
|
|
II-48
|
Performance Data
|
|
II-51
|
Proxy Voting Policies and Procedures
|
|
II-53
|
General Information
|
|
II-56
|
Appendix A
|
|
A-1
|
Part I: Special Information about Merrill
Lynch Small Cap Value Fund, Inc.
|
Part I of this Statement of Additional
Information sets forth information about Merrill Lynch Small Cap Value Fund, Inc. (the
Fund). It includes information about the Funds Board of Directors, the
advisory services provided to and the management fees paid by the Fund, performance data
for the Fund, and information about other fees paid by and services provided to the
Fund. This Part I should be read in conjunction with the Funds Prospectus and those
portions of Part II of this Statement of Additional Information that pertain to the Fund.
|
The Fund is a feeder fund that
invests all of its assets in Master Small Cap Value Trust (the Trust), which
has the same investment objective and strategies as the Fund. All investments are made
at the Trust level. This structure is sometimes called a master/feeder
structure. The Funds investment results will correspond directly to the investment
results of the Trust. For simplicity, however, this Statement of Additional Information,
like the Prospectus, uses the term Fund to include the Trust. It also uses
the term Directors to include the Trusts Trustees.
|
I. Investment Objectives
and Policies
|
The investment objective of the Fund is to seek
long-term growth of capital by investing in a diversified portfolio of securities,
primarily common stock, of relatively small companies that management of the Fund
believes have special investment value and emerging growth companies regardless of size.
Current income is not a factor in the selection of securities. The investment objective
of the Fund is a fundamental policy of the Fund and may not be changed without the
approval of a majority of the Funds outstanding voting securities as defined in the
Investment Company Act of 1940, as amended (the Investment Company Act). The
Fund is intended to provide an opportunity for investors who are not ordinarily in a
position to perform the specialized type of research or analysis involved in investing
in small and emerging growth companies and to invest sufficient assets in such companies
to provide wide diversification. There can be no assurance that the Fund will achieve
its investment objective. The Fund is classified as diversified under the Investment
Company Act.
|
Under normal circumstances, the Fund will invest
at least 80% of its net assets in securities of small companies. For this purpose, net
assets include any borrowings for investment purposes.
|
In attempting to achieve its investment
objective, the Fund may employ various investment strategies. Fund management seeks to
identify those companies that can show significant and sustained increases in earnings
over an extended period of time. This strategy focuses on the long-range view of a
companys prospects, primarily through fundamental analysis of its management, financial
structure, product development, marketing ability and other relevant factors. Fund
management anticipates applying such a strategy of fundamental analysis to small and
emerging growth companies. Fund Management also may seek to identify companies that can
show favorable investment potential through analysis of the economy and the financial
markets. This strategy focuses on the long-range view of a companys market valuation,
primarily through analysis of economic trends, valuation models, market statistics and
other quantitative factors applicable to specific companies, industries or economic
sectors.
|
While it is the policy of the Fund generally not
to engage in trading for short-term gains, Fund management will effect portfolio
transactions without regard to holding period 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, economic or financial conditions.
|
Additionally, Fund management may, from time to
time, identify a number of companies that it believes share favorable investment
potential. These companies are often in a particular industry or related industries or
market segments. At times, the Fund may acquire the securities of such companies
together as a basket or group in a single transaction. The Fund may
subsequently sell such basket as a unit or it may sell only selected
securities and continue to hold other securities acquired in the basket. The
Fund may also acquire or dispose of baskets of securities as a means of
rapidly increasing or decreasing exposure to the markets in response to the Funds cash
flow (primarily, the effects of net purchases or net redemptions of the Funds shares).
These baskets may be comprised of securities selected solely because their
aggregate volatility appears to substantially correlate to the volatility of the markets
(or a portion of the markets) in which the Fund invests, although the Fund may continue
to hold particular securities included in such a basket based on their
favorable investment potential.
|
Fund management believes that while the
companies in which it invests present above-average risks, properly selected companies
of this type also have the potential to increase their earnings or market valuation at a
rate substantially in excess of the general growth of the economy. Full development of
these companies and trends frequently takes time and, for this reason, the Fund should
be considered as a long term investment and not as a vehicle for seeking short term
profits. Because of its focus on small cap and emerging growth equity securities, the
Fund should be considered as a vehicle for diversification and not as a complete
investment program.
|
Temporary Investments.
The Fund reserves the right,
as a temporary defensive measure, to invest, without limitation, in other
types of securities, including non-convertible preferred stocks and debt
securities, U.S. Government and money market securities, including repurchase
agreements or cash (Temporary Investments). Under certain adverse
investment conditions, the Fund may restrict the markets in which its assets
will be invested and may increase the proportion of assets invested in Temporary
Investments. Investments made for defensive purposes will be maintained
only during periods in which Fund Asset Management, L.P. (FAM
or the Investment Adviser) determines that economic or financial
conditions are adverse for holding or being fully invested in equity securities.
A portion of the Funds assets normally would be held in Temporary
Investments in anticipation of investment in equity securities or to provide
for possible redemptions.
|
II. Investment Restrictions
|
The Fund has adopted restrictions and policies
relating to the investment of the Funds assets and its activities. Certain of the
restrictions are fundamental policies of the Fund and may not be changed without the
approval of the holders of a majority of the Funds outstanding voting securities (which
for this purpose and under the Investment Company Act, 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). The Fund has also
adopted certain non-fundamental restrictions, which may be changed by the Board of
Directors without shareholder approval. None of the following fundamental and
non-fundamental investment restrictions shall prevent the Fund from investing all of its
assets in shares of another registered investment company with the same investment
objective and policies (in a master/feeder structure).
|
Set forth below are the Funds fundamental and
non-fundamental restrictions. The Trust has adopted investment restrictions
substantially identical to those set forth below, which are fundamental and
non-fundamental, as applicable, policies of the Trust and may not be changed with
respect to the Trust without the approval of the holders of a majority of interests of
the Trust. Unless otherwise provided, all references below to the assets of the Fund are
in terms of current market value.
|
Under its fundamental investment restrictions,
the Fund may not:
|
(1) Make any investment inconsistent with the
Funds classification as a diversified company under the Investment Company Act.
|
(2) Invest more than 25% of its assets, taken at
market value at the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities).
|
(3) Make investments for the purpose of
exercising control or management.
|
(4) Purchase or sell real estate, except that,
to the extent permitted by applicable law, the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
|
(5) Make loans to other persons, except that the
acquisition of bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, 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 Funds 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 Funds 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.
|
Under its non-fundamental investment restrictions, the Fund may not:
(a) Purchase securities of other investment
companies, except to the extent such purchases are permitted by applicable law.
Applicable law currently allows the Fund to purchase the securities of other investment
companies if immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company is owned by the Fund, (ii) 5% of the Funds total assets, taken at
market value, would be invested in any one such company, (iii) 10% of the Funds total
assets, taken at market value, would be invested in such securities, and (iv) the Fund,
together with other investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10% of the total outstanding
stock of any one closed-end investment company. Investments by the Fund in wholly-owned
investment entities created under the laws of certain countries will not be deemed an
investment in other investment companies. 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 Funds 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 under the Prospectus and Statement of
Additional Information and by applicable law.
|
(c) Invest in securities that cannot be readily
resold because of legal or contractual restrictions or that cannot otherwise be
marketed, redeemed or put to the issuer or to a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or securities
that the Board of Directors of the Fund has otherwise determined to be liquid pursuant
to applicable law. Securities purchased in accordance with Rule 144A under the
Securities Act and determined to be liquid by the Board of Directors are not subject to
the limitations set forth in this investment restriction.
|
(d) Notwithstanding fundamental investment
restriction (7) above, borrow amounts in excess of 5% of its total assets, taken at
market value, and then only from banks as a temporary measure for extraordinary or
emergency purposes.
|
(e) Change its policy of investing, under normal
circumstances, at least 80% of its assets in securities of small companies, as defined
in the Prospectus, unless the Fund provides shareholders with at least 60 days prior
written notice of such change.
|
In addition, as a non-fundamental policy which
may be changed by the Board of Directors and to the extent required by the Commission or
its staff, the Fund will, for purposes of investment restriction (1), treat securities
issued or guaranteed by the government of any one foreign country as the obligations of
a single issuer.
|
As another non-fundamental policy, the Fund will not invest
in securities that are subject to material legal restrictions on repatriation
of assets or cannot be readily resold because of legal or contractual restrictions
or which are not otherwise readily marketable, including repurchase agreements
and purchase and sale contracts maturing in more than seven days, if, regarding
all such securities, more than 15% of its net assets, taken at market value,
would be invested in such securities.
|
If a percentage restriction on the investment or
use of assets set forth above is adhered to at the time a transaction is effected, later
changes in percentages resulting from changing values will not be considered a violation.
|
For purposes of investment restriction (2)
above, industry means any one or more of the industry sub-classifications used by one or
more widely recognized market indices or ratings group indices, and/or as defined by
Fund management.
|
III. Information on Directors
and Officers
|
The Directors of the Fund consist of six
individuals, five of whom are not interested persons of the Fund as defined
in the Investment Company Act (the non-interested Directors). The same
individuals serve as the Trustees of the Trust. 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.
|
Each non-interested Director is a member of the
Funds Audit and Nominating Committee (the Committee). The principal
responsibilities of the Committee are the appointment, compensation and oversight of the
Funds independent accountants, including the resolution of disagreements regarding
financial reporting between Fund management and such independent accountants. The
Committees responsibilities include, without limitation, to (i) review with the
independent accountants the arrangements for and scope of annual and special audits and
any other services provided by the independent accountants to the Fund; (ii) discuss
with the independent accountants certain matters relating to the Funds financial
statements, including any adjustment to such financial statements recommended by such
independent accountants or any other results of any audit; (iii) ensure that the
independent accountants submit on a periodic basis a formal written statement with
respect to their independence, discuss with the independent accountants any
relationships or services disclosed in the statement that may impact the objectivity and
independence of the Funds independent accountants and recommend that the Board take
appropriate action in response thereto to satisfy itself of the independent accountants
independence; and (iv) consider the comments of the independent accountants with respect
to the quality and adequacy of the Funds accounting and financial reporting policies
and practices and internal controls and Fund managements responses thereto. The Board
of the Fund has adopted a written charter for the Committee. The Committee also reviews
and nominates candidates to serve as non-interested Directors. The Committee generally
will not consider nominees recommended by shareholders. The Committee has retained
independent legal counsel to assist it in connection with these duties. The Committee
met four times during the fiscal year ended March 31, 2003.
|
Certain biographical and other information
relating to the non-interested Directors of the Fund is set forth below, including their
ages, their principal occupations for at least the last five years, the length of time
served, the total number of portfolios overseen in the complex of funds advised by the
Investment Adviser and its affiliate, Merrill Lynch Investment Managers, L.P.
(MLIM) (MLIM/FAM-advised funds), and other public directorships:
|
Name, Address* and
Age of Director
|
|
Position(s)
Held with
the Fund
|
|
Term of
Office** and
Length of
Time Served
|
|
Principal Occupation During
Past Five Years
|
|
Number of
MLIM/FAM-
Advised
Funds and Portfolios
Overseen
|
|
Public
Directorships
|
Donald W. Burton (59)
|
|
Director
|
|
Director since 2002
|
|
General Partner of The Burton Partnership,
Limited Partnership since 1979; Managing General Partner of The South Atlantic
Venture Funds since 1983; Member of the Investment Advisory Committee of
the Florida State Board of Administration since 2001.
|
|
21 registered investment companies
consisting
of 35 portfolios
|
|
ITC DeltaCom, Inc.
(telecommunications);
ITC Holding
Company,
Inc.
(telecommunications);
Knology,
Inc.
(telecommunications);
MainBancorp,
N.A.
(bank holding
company);
PriCare,
Inc. (health care);
Symbion,
Inc. (health
care)
|
|
|
|
|
|
|
|
|
|
|
|
M. Colyer Crum (70)
|
|
Director
|
|
Director since 1981
|
|
Currently James R. Williston Professor of Investment Management
Emeritus, Harvard Business School; James R. Williston Professor of Investment
Management, Harvard Business School from 1971 to 1996; Director of Cambridge
Bancorp.
|
|
22 registered investment companies
consisting
of 36 portfolios
|
|
Cambridge Bancorp
|
|
|
|
|
|
|
|
|
|
|
|
Laurie Simon Hodrick (40)
|
|
Director
|
|
Director since 1999
|
|
Professor of Finance and Economics, Graduate School of
Business, Columbia University since 1998; Associate Professor of Finance
and Economics, Graduate School of Business, Columbia University from 1996
to 1998.
|
|
21 registered investment companies
consisting
of 35 portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
David H. Walsh (61)
|
|
Director
|
|
Director since 2003
|
|
Consultant with Putnam Investments since 1998 and employed
in various capacities therewith from 1971 to 1992; Director, the National
Audubon Society since 1980; Director, the American Museum of Fly Fishing
since 1998.
|
|
21 registered investment companies
consisting
of 35 portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Fred G. Weiss (61)
|
|
Director
|
|
Director since 1998
|
|
Managing Director of FGW Associates since 1997; Vice President,
Planning, Investment and development of Warner Lambert Co. from 1979 to
1997; Director of Watson Pharmaceutical, Inc. (a pharmaceutical company)
since 2000; Director of Michael J. Fox Foundation for Parkinsons
Research; Director of BTG International PLC (a global technology commercialization
company) since 2001.
|
|
21 registered investment companies
consisting
of 35 portfolios
|
|
Watson Pharmaceutical,
Inc. (pharmaceutical
company)
|
*
|
|
The
address of each non-interested Director is P.O. Box 9095, Princeton, New Jersey
08543-9095.
|
**
|
|
Each
Director serves until his or her successor is elected and qualified, or until his or her
death or resignation, or removal as provided in the Funds by-laws or charter or by
statute, or until December 31 of the year in which her or she turns 72.
|
Certain biographical and other information
relating to the Director who is an interested person of the Fund as defined
in the Investment Company Act (the interested Director) and to the other
officers of the Fund is set forth below, including their ages, their principal
occupations for at least the last five years, the length of time served, the total
number of portfolios overseen in MLIM/FAM-advised funds and public directorships held:
|
Name, Address*
and Age
|
|
Position(s)
Held with
the Fund
|
|
Term of
Office** and
Length of
Time Served
|
|
Principal Occupation
During
Past Five Years
|
|
Number of
MLIM/FAM-
Advised
Funds and
Portfolios
Overseen
|
|
Public
Directorships
|
|
|
|
|
|
|
|
|
|
|
|
Terry K. Glenn*** (62)
|
|
Director and President
|
|
Director**** and President since 1999
|
|
President and Chairman of the MLIM/FAM-advised
funds since 1999; Chairman (Americas Region) of MLIM from 2000 to 2002;
Executive Vice President of MLIM and FAM (which terms as used herein include
their corporate predecessors) from 1983 to 2000; Executive Vice President
and Director of Princeton Services ( Princeton Services) from
1993 to 2002; President of FAM Distributors, Inc. (FAMD or the
Distributor) from 1986 to 2002 and Director thereof from 1991
to 2002; President of Princeton Administrators, LP (Princeton Administrators)
from 1988 to 2002; Director of Financial Data Services, Inc. (FDS)
from 1985 to 2002.
|
|
114 registered investment companies consisting
of 159 portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Donald C. Burke (43)
|
|
Vice President and Treasurer
|
|
Vice President since 1993 and Treasurer since
1999
|
|
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 FAMD since 1999; Vice President of MLIM and FAM
from 1990 to 1997;Director of Taxation of MLIM since1990.
|
|
113 registered investment companies consisting
of 158 portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
R. Elise Baum (42)
|
|
Vice President and Portfolio Manager
|
|
Vice President since 2001
|
|
Managing Director of the Investment Adviser since
2000; First Vice President of MLIM from 1999 to 2000; Director of MLIM from
1997 to 1999; Vice President of MLIM from 1995 to 1997.
|
|
4 registered investment companies consisting
of
3 portfolios
|
|
None
|
*
|
|
The
address of each officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
|
**
|
|
Elected
by and serves at the pleasure of the Board of Directors of the Fund.
|
***
|
|
Mr.
Glenn is an interested person, as defined in the Investment Company Act, of
the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and
Princeton Administrators, L.P.
|
****
|
|
As
a Director, Mr. Glenn serves until his successor is elected and qualified or until the
earlier of his death or resignation, or removal as provided in the Funds by-laws or
charter or by statute, or until December 31 of the year in which he turns 72.
|
Information relating to each Directors share
ownership of the Fund and in all registered funds in the Merrill Lynch family of funds
overseen by the respective Director (Supervised Merrill Lynch Funds) as of
December 31, 2002 is set forth in the table below:
|
Name
|
Aggregate Dollar Range
of Equity in the Fund
|
Aggregate Dollar Range of
Securities in All Supervised
Merrill Lynch Funds
|
Interested Director:
|
|
|
|
Terry K. Glenn
|
Over $100,000
|
Over $100,000
|
Non-Interested Directors:
|
|
|
|
Donald W. Burton
|
None
|
Over $100,000
|
|
M. Colyer Crum
|
$10,001-$50,000
|
Over $100,000
|
|
Laurie Simon Hodrick
|
$1-$10,000
|
Over $100,000
|
|
David H. Walsh*
|
None
|
None
|
|
Fred G. Weiss
|
Over $100,000
|
Over $100,000
|
*
|
|
Mr.
Walsh became a Director of the Fund and certain other MLIM/FAM-advised funds effective
July 7, 2003.
|
Directors of the Fund may purchase Class I
shares of the Fund at net asset value.
|
As of July 3, 2003, the Directors and officers
of the Fund, as a group, owned an aggregate of less than 1% of the outstanding shares of
the Fund. As of December 31, 2002, none of the non-interested Directors of the Fund or
their immediate family members owned, beneficially or of record, any securities in
Merrill Lynch & Co., Inc. (ML & Co.).
|
Compensation of
Directors/Trustees
|
The Fund and the Trust pay each non-interested
Director/Trustee for service on the Board and the Committee a combined fee of $10,000
per year plus $750 per in-person Board meeting attended and $750 per in-person Committee
meeting attended. The Fund and the Trust pay the Chairman of the Committee an additional
fee of $1,000 per year. The Fund and the Trust reimburse each non-interested
Director/Trustee for his of her out-of-pocket expenses relating to attendance at Board
and Committee meetings.
|
The following table sets forth the compensation
earned by the non-interested Directors/Trustees for the fiscal year ended March 31, 2003
and the aggregate compensation paid to them by all MLIM/FAM-advised funds for the
calendar year ended December 31, 2002.
|
Director
|
Compensation
from
Fund/Trust
|
Pension or
Retirement Benefits
Accrued as Part of
Fund/Trust
Expense
|
Aggregate
Compensation
From Fund/Trust
and Other
MLIM/FAM
Advised Funds**
|
Donald W. Burton
|
$16,750
|
None
|
$189,042
|
M. Colyer Crum
|
$17,750
|
None
|
$226,583
|
Laurie Simon Hodrick
|
$16,750
|
None
|
$208,917
|
J. Thomas Touchton*
|
$12,750
|
None
|
$139,375
|
David H. Walsh***
|
$ 0
|
None
|
$ 0
|
Fred G. Weiss
|
$16,750
|
None
|
$208,917
|
|
|
Chairman
of the Committee.
|
*
|
|
J.
Thomas Touchton retired effective January 1, 2003.
|
**
|
|
For
the number of MLIM/FAM-advised funds from which each Director/Trustee receives
compensation, see the table beginning on page I-5.
|
***
|
|
Mr.
Walsh became a Director of the Fund and certain other MLIM/FAM-advised funds effective
July 7, 2003.
|
IV. Management and Advisory
Arrangements
|
Prior to the conversion to a master/feeder structure
(effective September 1, 2000), all management and administrative services
were provided directly at the Fund level and were paid for pursuant to the
Funds investment advisory agreement at a fee rate of 0.75% of the
average daily net assets of the Fund for the first $1 billion; 0.725%
|
of the average daily net assets from $1 billion to $1.5
billion; and 0.70% of the average daily net assets above $1.5 billion.
|
The Investment Adviser receives for its services
to the Trust monthly compensation at an annual rate of 0.50% of the Trusts average
daily net assets for the first $1 billion; 0.475% of the Trusts average daily net
assets from $1 billion to $1.5 billion; and 0.45% of the Trusts average daily net
assets above $1.5 billion. For purposes of this calculation, average daily net assets is
determined at the end of each month on the basis of the average net assets of the Trust
for each day during the month. For the fiscal year ended March 31, 2003, the fee payable
to the Investment Adviser from the Trust was equal to 0.48%.
|
The table below sets forth information about the
total fees paid by the Fund and/or the Trust to FAM for the periods indicated.
|
|
Fiscal year
ended March 31,
|
|
Investment
Advisory Fee
|
|
2003
|
|
$ 11,853,554
|
|
|
2002
|
|
$ 11,136,073
|
|
|
2001
|
|
$ 8,068,858
|
*
|
*
|
|
Prior
to master/feeder conversion, total fee payable to the Investment Adviser from the Fund
was equal to 0.75% of the Funds average daily net assets. For the period September 1,
2000 to March 31, 2001, the total fee payable to the Investment Adviser from the Trust
was equal to 0.49% of the Trusts average daily net assets. Beginning September 1, 2000,
the Fund pays an administrative fee of 0.25% of the Trusts average daily net assets.
|
The Fund has entered into an administration
agreement with FAM (the Administrator) as Administrator (the
Administration Agreement). The Administrator receives for its services to
the Fund monthly compensation at the annual rate of 0.25% of the average daily net
assets of the Fund.
|
The table below sets forth information about the
total fees paid by the Fund to the Administrator for the periods indicated:
|
|
Fiscal year
ended March 31,
|
|
Administrative
Fee
|
|
2003
|
|
$ 6,208,731
|
|
|
2002
|
|
$ 5,825,726
|
|
|
September 1, 2000
to March 31, 2001
|
|
$ 2,106,893
|
|
In connection with its consideration of the
Investment Advisory Agreement, the Board reviewed information derived from a number of
sources and covering a range of issues. The Board considered the services provided to
the Fund by the Investment Adviser under the Investment Advisory Agreement, as well as
other services provided by the Investment Adviser and its affiliates under other
agreements, and the personnel who provide these services. In addition to investment
advisory services, the Investment Adviser and its affiliates provide administrative
services, shareholder services, oversight of fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services necessary
for the operation of the Fund. The Board also considered the Investment Advisers costs
of providing services, and the direct and indirect benefits to the Investment Adviser
from its relationship with the Fund. The benefits considered by the Board included not
only the Investment Advisers compensation for investment advisory services and the
Investment Advisers profitability under the Investment Advisory Agreement, but also
compensation paid to the Investment Adviser or its affiliates for other, non-advisory,
services provided to the Fund. The Board also considered the Investment Advisers access
to research services from brokers to which the Investment Adviser may have allocated
Fund brokerage in a soft dollar arrangement. In addition, the Board
considered the fee paid to FAM by the Fund under the Administration Agreement. In
connection with its consideration of the Investment Advisory Agreement, the Board also
compared the Funds advisory fee rate, expense ratios and historical performance to
those of comparable funds. Based in part on this comparison, and taking into account the
various services provided to the Fund by the Investment Adviser and its affiliates, as
well as the requirements of managing a portfolio of small and emerging growth companies,
the Board concluded that the advisory fee rate was reasonable. The Board considered
whether there should be changes in the advisory fee rate or structure in order to enable
the Fund to participate in any economies of scale that the Investment Adviser may
experience as a result of growth in the Funds assets.
|
Based on the information reviewed and the
discussions, the Board, including a majority of the non-interested Directors, concluded
that the investment advisory fee rate was reasonable in relation to the services
provided. The non-interested Directors were represented by independent counsel who
assisted them in their deliberations.
|
The table below sets forth information about the
total amounts paid by the Fund to the transfer agent for the periods indicated.
|
|
Fiscal year
ended March 31,
|
|
Transfer Agency
Fees*
|
|
|
2003
|
|
$ 7,537,797
|
|
|
2002
|
|
$ 4,809,148
|
|
|
2001
|
|
$ 3,150,812
|
|
*
|
|
For
the fiscal year ended March 31, 2001 and the period April 1, 2001 to June 30, 2001, the
Fund paid fees to the transfer agent at lower rates than the ones currently in effect.
If the current rates had been in effect for the periods shown, the fees paid may have
been higher. The new rates became effective July 1, 2001.
|
The table below shows the amounts paid by the
Fund and the Trust to State Street Bank and Trust Company (State Street) and
to the Investment Adviser for accounting services for the periods indicated:
|
|
|
Fund
|
Trust
|
|
Fiscal
year ended March 31,
|
Paid
to
State Street
|
Paid to the
Investment
Adviser
|
Paid
to
State Street*
|
Paid to the
Investment
Adviser
|
|
2003
|
|
$ 0
|
|
$ 0
|
|
$ 502,476
|
|
$ 49,660
|
|
|
2002
|
|
$ 0
|
|
$ 142
|
|
$ 469,646
|
|
$ 51,374
|
|
|
2001
|
|
$ 0
|
**
|
$ 52,537
|
|
$ 98,620
|
**
|
$ 115,204
|
|
*
|
|
For
providing services to the Fund and the Trust.
|
**
|
|
Represents
payments pursuant to the agreement with State Street commencing on January 1, 2001.
|
|
|
The
Trust commenced operations on September 1, 2000.
|
V. Information on Sales
Charges and Distribution Related Expenses
|
Set forth below is information on sales charges
(including any contingent deferred sales charges (CDSCs)) received by the
Fund, including the amounts paid to Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Merrill Lynch) for each of the Funds last three fiscal years.
|
Class A and Class
I Sales Charge Information
|
|
Class A* Shares
|
For the Fiscal
Year Ended
March 31,
|
Gross Sales
Charges
Collected
|
Sales Charges
Retained by
Distributor
|
Sales Charges
Paid to
Merrill Lynch
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
2003
|
$409,722
|
$25,088
|
$384,634
|
$ 6,218
|
2002
|
$ 27,728
|
$ 2,454
|
$ 25,274
|
$60,677
|
2001
|
$ 17,330
|
$ 1,106
|
$ 16,224
|
$ 0
|
|
|
|
Class I* Shares
|
For the Fiscal
Year Ended
March 31,
|
Gross Sales
Charges
Collected
|
Sales Charges
Retained by
Distributor
|
Sales Charges
Paid to
Merrill Lynch
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
2003
|
$ 13,675
|
$ 779
|
$ 12,896
|
$ 65
|
2002
|
$1,338,516
|
$83,998
|
$1,254,518
|
$4,845
|
2001
|
$ 291,526
|
$18,688
|
$ 272,838
|
$5,841
|
*
|
|
Prior
to April 14, 2003, Class I shares were designated Class A and Class A shares were
designated Class D.
|
Class B and Class
C Sales Charge Information
|
Class
B Shares*
|
Fiscal Year Ended March 31,
|
CDSCs Received by
Distributor
|
CDSCs Paid to
Merrill Lynch
|
2003
|
$1,278,815
|
**
|
$1,278,815
|
**
|
2002
|
$ 638,157
|
|
$ 638,157
|
|
2001
|
$ 359,556
|
|
$ 359,556
|
|
*
|
|
Additional Class B CDSCs payable to the Distributor
may have been waived or converted to a contingent obligation in connection
with a shareholders participation in certain fee-based programs.
|
Class
C Shares
|
Fiscal Year Ended March 31,
|
CDSCs Received by
Distributor
|
CDSCs Paid to
Merrill Lynch
|
2003
|
$ 317,039
|
**
|
$ 317,039
|
**
|
2002
|
$ 109,821
|
|
$ 109,821
|
|
2001
|
$ 23,719
|
|
$ 23,719
|
|
**
|
|
Includes
CDSCs paid to Mercury Small Cap Value Fund, Inc., which was acquired by the Fund,
effective March 21, 2003.
|
As of March 31, 2003, direct cash distribution
revenues for the period since the commencement of operations of Class B shares exceeded
direct cash distribution expenses by $33,736,713 (5.27% of Class B average net assets at
that date). As of March 31, 2003, direct cash distribution revenues for the period since
the commencement of operations of Class C shares exceeded direct cash distribution
expenses by $7,069,260 (2.11% of Class C net assets at that date). As of March 31, 2003,
direct cash distribution revenues for the period since the commencement of operations of
Class R shares exceeded direct cash distribution expenses by $0 (0% of Class R average
net assets at that date).
|
For the fiscal year ended March 31, 2003, the
Fund paid the Distributor $982,169 pursuant to the Class A Distribution Plan (based on
average daily net assets subject to such Class A Distribution Plan of approximately
$389.7 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with Class A
shares. For the same period ended March 31, 2003, the Fund paid the Distributor
$7,794,194 pursuant to the Class B Distribution Plan (based on average daily net assets
subject to such Class B Distribution Plan of approximately $773.1 million), all of which
was paid to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. For the same period ended
March 31, 2003, the Fund paid the Distributor $4,208,570 pursuant to the Class C
Distribution Plan (based on average daily net assets subject to such Class C
Distribution Plan of approximately $417.4 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 period February 4, 2003 (commencement of
operations) to March 31, 2003, the Fund paid the Distributor $0 pursuant to the Class R
Distribution Plan (based on average daily net assets subject to such Class R
Distribution Plan of approximately $90), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services in
connection with Class R shares.
|
Limitations on the
Payment of Deferred Sales Charges
|
The following table sets forth comparative
information as of March 31, 2003 with respect to the Class B, Class C and Class R 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 Distributors
voluntary maximum.
|
|
Data Calculated as of March 31, 2003
(in thousands)
|
|
|
|
Eligible
Gross
Sales(1)
|
|
Allowable
Aggregate
Sales
Charges(2)
|
|
Allowable
Interest on
Unpaid
Balance(3)
|
|
Maximum
Amount
Payable
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current Net
Asset
Level(5)
|
Class B Shares for the
period October 21, 1988
(commencement of operations)
to March 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as Adopted
|
$1,305,668
|
|
$83,657
|
|
$19,172
|
|
$102,829
|
|
$41,349
|
|
$61,480
|
|
$4,781
|
Under Distributors Voluntary
Waiver
|
$1,305,668
|
|
$83,657
|
|
$4,476
|
|
$88,133
|
|
$41,349
|
|
$46,784
|
|
$4,781
|
Class C Shares for the
period October 21, 1994
(commencement of operations)
to March 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as Adopted
|
$ 623,852
|
|
$39,559
|
|
$5,844
|
|
$45,403
|
|
$8,268
|
|
$37,136
|
|
$2,528
|
Class R Shares for the
period February 4, 2003
(commencement of operations)
to March 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under NASD Rule as Adopted
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Purchase
price of all eligible Class B, Class C and Class R shares sold during the period
indicated other than shares acquired through dividend reinvestment and the exchange
privilege.
|
(2)
|
|
Includes
amounts attributable to exchanges from Summit Cash Reserves Fund (Summit)
that 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 Key Facts Fees
and Expenses in the Prospectus. Of the distribution fee payments made with respect
to Class B shares prior to July 7, 1993 under the distribution plan in effect at that
time, at a 1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the proceeds, without the
imposition of a sales charge, in Class I shares in conjunction with the shareholders
participation in the Mutual Funds Advisor (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.
|
VI. Computation of Offering
Price
|
An illustration of the computation of the
offering price for Class A, Class B, Class C, Class I and Class R shares of the Fund
based on the value of the Funds net assets and number of shares outstanding on March
31, 2003 is set forth below:
|
|
Class A*
|
Class B
|
Class C
|
Class I*
|
Class R
|
Net Assets
|
$ 347,736,188
|
$ 640,017,069
|
$ 334,719,592
|
$ 607,483,923
|
$ 98.42
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Outstanding
|
20,282,027
|
40,443,808
|
21,596,333
|
35,185,043
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share (net
assets divided by number of shares outstanding)
|
$ 17.15
|
$ 15.82
|
$ 15.50
|
$ 17.27
|
$ 15.87
|
|
|
|
|
|
|
Sales Charge (for Class A and Class
I shares: 5.25% of offering price; 5.54% of net asset value per share)**
|
$ .95
|
***
|
***
|
$ .96
|
$ ****
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering Price
|
$ 18.10
|
$ 15.82
|
$ 15.50
|
$ 18.23
|
$ 15.87
|
|
|
|
|
|
|
*
|
|
Prior
to April 14, 2003, Class D shares were designated Class A and Class A shares were
designated Class I.
|
**
|
|
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.
|
****
|
|
Class
R shares are not subject to any sales charge.
|
VII. Portfolio Transactions
and Brokerage
|
See Part II Portfolio Transactions and
Brokerage of this Statement of Additional Information for more information.
|
Information about the brokerage commissions paid
by the Trust and by the Fund (prior to its change to a master/feeder
structure) including commissions paid to Merrill Lynch, is set forth in the following
table:
|
|
Fiscal Year Ended March 31,
|
Brokerage
Commissions Paid
|
Commissions Paid
To Merrill Lynch
|
|
2003
|
$ 9,507,368
|
$ 762,540
|
|
2002
|
$ 6,461,920
|
$ 533,101
|
|
2001
|
$ 2,413,285
|
$ 264,550
|
For the fiscal year ended March 31, 2003, the
brokerage commissions paid to Merrill Lynch represented 8.02% of the aggregate brokerage
commissions paid and involved 5.12% of the Trusts dollar amount of transactions
involving payment of commissions.
|
For the fiscal years ended March 31, 2003 and
2002, the Funds lending agent received $197,418, and $29,395, respectively, in
securities lending agent fees from the Fund.
|
Set forth in the tables below is total return
information, before and after taxes, for the Class A, Class B, Class C, Class I and
Class R shares of the Fund for the periods indicated, expressed as a percentage based on
a hypothetical $1,000 investment.
|
|
Class A* Shares
|
Class B Shares
|
Class C Shares
|
Class I* Shares
|
Class R Shares
|
|
Average Annual Total Return
(including maximum applicable sales charges)
|
One Year Ended March 31, 2003
|
-31.86%
|
-31.49%
|
-29.39%
|
-31.71%
|
|
Five Year Ended March 31, 2003
|
2.94%
|
2.96%
|
3.23%
|
3.19%
|
|
Ten Year Ended March 31, 2003
|
|
10.70%
|
|
11.24%
|
|
Inception (October 21, 1994)
to
March 31, 2003
|
11.08%
|
|
10.92%
|
|
|
Inception (February 4, 2003)
to
March 31, 2003
|
|
|
|
|
-1.55%
|
|
|
|
Average Annual Total Return
After Taxes on Dividends
(including maximum applicable sales charge)
|
One Year Ended March 31, 2003
|
-32.32
|
-31.94%
|
-29.87%
|
-32.19%
|
|
Five Year Ended March 31, 2003
|
0.35%
|
0.42%
|
0.64%
|
0.53%
|
|
Ten Year Ended March 31, 2003
|
|
7.45%
|
|
7.79%
|
|
Inception (October 21, 1994)
to
March 31, 2003
|
7.70%
|
|
7.58%
|
|
|
Inception (February 4, 2003)
to
March 31, 2003
|
|
|
|
|
-1.55%
|
|
|
|
|
|
|
|
|
Class A* Shares
|
Class B Shares
|
Class C Shares
|
Class I* Shares
|
Class R Shares
|
|
Average Annual Total Return
After Taxes on Dividends and Redemption
(including maximum applicable sales charge)
|
One Year Ended March 31, 2003
|
-19.33%
|
-19.07%
|
-17.77%
|
-19.24%
|
|
Five Year Ended March 31, 2003
|
1.53%
|
1.64%
|
1.83%
|
1.69%
|
|
Ten Year Ended March 31, 2003
|
|
7.54%
|
|
7.82%
|
|
Inception (October 21, 1994) to
March 31, 2003
|
7.78
|
|
7.73%
|
|
|
Inception (February 4, 2003) to
March 31, 2003
|
|
|
|
|
-0.95%
|
*
|
|
Prior
to April 14, 2003, Class A shares were designated Class D and Class I shares were
designated Class A.
|
IX. Additional Information
|
The Fund is a feeder fund that
invests in the Trust. Investors in the Fund have an indirect interest in the Trust. The
Trust may accept investments from other feeder funds, and all of the feeders of the
Trust bear the Trusts expenses in proportion to their assets. This structure may enable
the Fund to reduce costs through economies of scale. A larger investment portfolio also
may reduce certain transaction costs to the extent that contributions to and
redemptions from the Trust from different feeders may offset each other and produce a
lower net cash flow. However, each feeder can set its own transaction minimums,
fund-specific expenses, and other conditions. This means that one feeder could offer
access to the same Trust on more attractive terms, or could experience better
performance, than another feeder.
|
The Fund, a diversified, open-end investment
company, was incorporated under Maryland law on February 23, 1978. The former name of
the Fund is Merrill Lynch Special Value Fund, Inc. The Fund changed its name to Merrill
Lynch Small Cap Value Fund, Inc. on approximately July 1, 2000. The Fund converted from
a stand-alone investment company to a feeder fund on September 1, 2000. As of the date
of this Statement of Additional Information, the Fund has an authorized capital of
500,000,000 shares of Common Stock, par value $0.10 per share, divided into five
classes, designated Class A, Class B, Class C, Class I and Class R Common Stock. Class
A, Class B, Class C, Class I and Class R each consists of 100,000,000 shares. Shares of
Class A, Class B, Class C, Class I and Class R Common Stock represent interests in the
same assets of the Fund and have identical voting, dividend, liquidation and other
rights and the same terms and conditions except that the Class A, Class B, Class C and
Class R 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 shareholders may vote upon material changes to the expenses charged under the
Class A distribution plan). 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. Effective April 14, 2003, Class D shares were redesignated Class A and Class A
shares were redesignated Class I.
|
To the knowledge of the Fund, the following
entities owned beneficially or of record 5% or more of any class of the Funds shares as
of July 3, 2003.
|
Name
|
Address
|
Percentage and Class
|
Merrill Lynch Trust
Co., FSB*
Trustee FBO 401K Plan
|
800 Scudders Mill Road
Plainsboro, NJ 08536
|
10.01% of Class I
|
|
|
|
Merrill Lynch Trust
Co., FSB*
Trustee FBO
Daimler Chrysler Corp Salary
|
800 Scudders Mill Road
Plainsboro, NJ 08536
|
7.91% of Class I
|
Name
|
Address
|
Percentage and Class
|
Merrill Lynch Trust
Co., FSB*
Trustee FBO
WorldCom
|
800 Scudders Mill
Road
Plainsboro, NJ 08536
|
5.76% of Class I
|
|
|
|
Oppenheimer Tr Co
FBO
The Colad Group Inc 401K Plan
|
800 Scudders Mill
Road
Plainsboro, NJ 08536
|
58.36% of Class
R
|
|
|
|
Oppenheimer Trust
Company
Nebraska Distributing Company
401K Profit Sharing Plan
|
800 Scudders Mill
Road
Plainsboro, NJ 08536
|
41.51% of Class
R
|
*
|
|
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 a trustee.
|
The Funds audited financial statements are
incorporated in the Funds Statement of Additional Information by reference to its 2003
Annual Report. You may request a copy of the Annual Report at no charge by calling
1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.
|
Part II of this Statement of
Additional Information contains information about the following funds: Merrill
Lynch Balanced Capital Fund, Inc. (Balanced Capital); Merrill
Lynch Basic Value Fund, Inc. (Basic Value); Merrill Lynch Developing
Capital Markets Fund, Inc. (Developing Capital Markets); Merrill
Lynch Disciplined Equity Fund, Inc. (Disciplined Equity); Merrill
Lynch Dragon Fund, Inc. (Dragon); Merrill Lynch Equity Income
Fund (Equity Income); Merrill Lynch EuroFund (EuroFund);
Merrill Lynch Focus Twenty Fund, Inc. (Focus Twenty); Merrill
Lynch Focus Value Fund, Inc. (Focus Value); Merrill Lynch Fundamental
Growth Fund, Inc. (Fundamental Growth); Merrill Lynch Global
Allocation Fund, Inc. (Global Allocation); Merrill Lynch Global
Balanced Fund (Global Balanced), Merrill Lynch International
Fund (ML International), Merrill Lynch Pan-European Growth Fund
(Pan-European Growth) and Merrill Lynch Small Cap Growth Fund
(Small Cap Growth), each a series of Mercury Funds, Inc.; Merrill
Lynch Global Financial Services Fund, Inc. (Global Financial Services);
Merrill Lynch Global Growth Fund, Inc. (Global Growth); Merrill
Lynch Global SmallCap Fund, Inc. (Global SmallCap); Merrill
Lynch Global Technology Fund, Inc. (Global Technology); Merrill
Lynch Global Value Fund, Inc. (Global Value); Merrill Lynch
Healthcare Fund, Inc. (Healthcare); Merrill Lynch International
Equity Fund (International Equity);Merrill Lynch International
Value Fund of Mercury Funds II; Merrill Lynch Large Cap Growth Fund, Merrill
Lynch Large Cap Value Fund, and Merrill Lynch Large Cap Core Fund, each
a series of Merrill Lynch Large Cap Series Funds, Inc. (collectively, Large
Cap Series Funds); Merrill Lynch Latin America Fund, Inc. (Latin
America); Merrill Lynch Mid Cap Value Fund (Mid Cap Value)
of The Asset Program, Inc.; Merrill Lynch Natural Resources Trust (Natural
Resources); Merrill Lynch Pacific Fund, Inc. (Pacific);
Merrill Lynch Small Cap Value Fund, Inc. (Small Cap Value);
and Merrill Lynch Utilities & Telecommunications Fund, Inc. (Utilities
& Telecommunications).
|
Throughout this Statement of
Additional Information, each of the above listed funds may be referred to
as a Fund or collectively as the Funds.
|
Each Fund is organized either
as a Maryland corporation or a Massachusetts business trust. In each jurisdiction,
nomenclature varies. For ease and clarity of presentation, shares of common
stock and shares of beneficial interest are referred to herein as shares
or Common Stock, holders of shares or Common Stock are referred
to as shareholders, the trustees or directors of each Fund are
referred to as Directors, Merrill Lynch Investment Managers,
L.P. (MLIM) or Fund Asset Management, L.P. (FAM),
as applicable, is the investment adviser or manager of each Fund and each
is referred to as the Manager, and the investment advisory agreement
or management agreement applicable to each Fund is referred to as the Management
Agreement. Each Funds Articles of Incorporation or Declaration
of Trust is referred to as its charter. The Investment Company
Act of 1940, as amended, is referred to herein as the Investment Company
Act. The Securities and Exchange Commission is referred herein as
the Commission.
|
Certain Funds are feeder
funds (each, a Feeder Fund) that invest all of their assets
in a corresponding master portfolio (each, a Master Portfolio)
of a master trust (each, a Master Trust), a mutual fund that
has the same objective as the Feeder Fund. All investments will be made
at the level of the Master Portfolio. This structure is sometimes called
a master/feeder structure. A Feeder Funds investment results
will correspond directly to the investment results of the underlying Master
Portfolio in which it invests. For simplicity, this Statement of Additional
Information uses the term Fund to include both a Feeder Fund
and its Master Portfolio.
|
INVESTMENT RISKS AND CONSIDERATIONS
|
Set forth below are descriptions
of some of the types of investments and investment strategies that one or
more of the Funds may use, and the risks and considerations associated with
those investments and investment strategies. Please see each Funds
Prospectus and the Investment Objectives and Policies section
of this Statement of Additional Information for a complete description of
each Funds investment policies and risks. Information contained in
this section about the risks and considerations associated with a Funds
investments and/or investment strategies applies only to those Funds specifically
identified as making each type of investment or using each investment strategy
(each, a Covered Fund). Information that does not apply to a
Covered Fund does not form a part of that Covered Funds Statement
of Additional Information and should not be relied on by investors in that
Covered Fund. Only information that is clearly identified as applicable
to a Covered Fund is considered to form a part of that Covered Funds
Statement of Additional Information.
|
|
|
Balanced Capital
|
Basic Value
|
Developing Capital Markets
|
Disciplined Equity
|
Dragon
|
Equity Income
|
EuroFund
|
Focus Twenty
|
Focus Value
|
Fundamental Growth
|
|
144A Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Asset-Backed Securities
|
X
|
|
|
|
|
|
|
|
|
|
Asset-Based Securities
|
|
|
|
|
|
|
|
|
|
|
Precious Metal-Related
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Borrowing and Leverage
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
X
|
X
|
Convertible Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Corporate Loans
|
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
X
|
|
X
|
|
X
|
X
|
|
X
|
X
|
X
|
Depositary Receipts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Indexed and Inverse
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Swap Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Options on Securities
and
Securities Indices
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Types of Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Exchange Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Forward Foreign Exchange Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Limitations on Currency Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors in Hedging Foreign
Currency Risks
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors
in Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Credit Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Additional Risk Factors
of OTC
Transactions; Limitations on the Use
of OTC Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Distressed Securities
|
|
|
|
|
|
|
|
|
|
|
Foreign Investment
Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Market Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Economy Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk and
Exchange Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Governmental Supervision
and
Regulation/Accounting Standards
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Certain Risks of Holding
Fund
Assets Outside the United States
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Settlement Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Illiquid or Restricted Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Initial Public Offering
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Other Investment Companies
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Emerging Markets
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Retstrictions on Certain
Investments
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Risk of Investing
in Asia-Pacific
Countries
|
|
|
X
|
|
X
|
|
|
|
|
|
Restrictions on Foreign
Investments
in Asia-Pacific Countries
|
|
|
X
|
|
X
|
|
|
|
|
|
Junk Bonds
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
Mortgage-Backed Securities
|
X
|
|
|
|
|
|
|
|
|
|
Real Estate Related Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Real Estate Investment Trusts (REITs)
|
X
|
X
|
|
|
X
|
X
|
|
|
X
|
|
Repurchase Agreements and Purchase and
Sale Contracts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities Lending
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities of Smaller or Emerging Growth
Companies
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Short Sales
|
|
|
X
|
X
|
|
|
|
X
|
|
|
Sovereign Debt
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
Standby Commitment Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Stripped Securities
|
X
|
|
X
|
|
X
|
|
|
|
|
|
Supranational Entities
|
X
|
|
|
|
|
X
|
|
|
|
|
Utility Industries
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
|
|
|
|
|
|
|
|
|
Gas
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
When Issued Securities, Delayed Delivery
Securities and Forward Commitments
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Allocation
|
Global Balanced
|
Global Financial Services
|
Global Growth Fund
|
Global Small
Cap
|
Global Technology
|
Global Value
|
Healthcare
|
International Equity
|
ML International
|
|
144A Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Asset-Backed Securities
|
X
|
X
|
|
|
X
|
|
|
|
|
|
Asset-Based Securities
|
X
|
|
|
|
|
|
|
|
|
|
Precious Metal-Related
Securities
|
X
|
X
|
|
X
|
X
|
|
X
|
|
X
|
X
|
Borrowing and Leverage
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Convertible Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Corporate Loans
|
X
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
X
|
X
|
X
|
|
X
|
|
X
|
X
|
X
|
X
|
Depositary Receipts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Indexed and Inverse Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Swap
Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Options on Securities and
Securities Indices
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Types of Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Exchange
Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Forward Foreign
Exchange Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Limitations on Currency
Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors in Hedging
Foreign Currency Risks
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors in Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Credit Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Additional Risk Factors
of OTC Transactions;
Limitations on the Use
of OTC Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Distressed Securities
|
X
|
|
|
|
|
|
|
|
|
|
Foreign Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Market Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Economy Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk and
Exchange Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Governmental
Supervision and
Regulation/Accounting
Standards
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Certain Risks of Holding
Fund Assets Outside the
United States
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Settlement Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Illiquid or Restricted
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Initial Public Offering
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Other Investment
Companies
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Emerging
Markets
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Retstrictions on Certain
Investments
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk
of Investing in
Asia-Pacific
Countries
|
|
|
|
|
|
|
|
|
|
|
Restrictions on Foreign
Investments in Asia-Pacific
Countries
|
|
|
|
|
|
|
|
|
|
|
Junk Bonds
|
X
|
|
X
|
|
X
|
|
|
|
|
X
|
Mortgage-Backed Securities
|
X
|
X
|
|
|
X
|
|
|
|
|
|
Real Estate Related
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Real Estate Investment
Trusts (REITs)
|
X
|
X
|
|
|
X
|
|
X
|
|
X
|
X
|
Repurchase Agreements
and Purchase and Sale
Contracts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities Lending
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities of Smaller
or
Emerging Growth Companies
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Short Sales
|
X
|
|
|
|
X
|
X
|
|
|
|
|
Sovereign Debt
|
X
|
X
|
X
|
|
X
|
|
|
X
|
X
|
X
|
Standby Commitment Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Stripped Securities
|
X
|
X
|
|
|
|
|
|
|
|
|
Supranational Entities
|
X
|
X
|
X
|
|
X
|
|
|
|
|
|
Utility Industries
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Electric
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
|
|
|
|
|
|
|
|
|
Gas
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
When Issued Securities,
Delayed Delivery Securities and Forward Commitments
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
|
|
International Value
|
Large Cap Series Funds
|
Latin America
|
Mid Cap Value
|
Natural Resources
|
Pacific
|
Pan-European Growth
|
Small Cap Growth
|
Small Cap Value
|
Utilities & Telecommunications
|
|
144A Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Asset-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
Asset-Based Securities
|
|
|
|
|
X
|
|
|
|
|
|
Precious Metal-Related
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
Borrowing and Leverage
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Convertible Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Corporate Loans
|
X
|
|
|
|
|
|
|
|
|
|
Debt Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
X
|
Depositary Receipts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Indexed and Inverse Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Swap
Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Options on Securities and
Securities Indices
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Purchasing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Call Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Writing Put Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Types of Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Exchange
Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Forward Foreign
Exchange Transactions
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Futures
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Options
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Limitations on Currency Hedging
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors in Hedging
Foreign Currency Risks
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Risk Factors in Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Credit Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Leverage Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Liquidity Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Additional Risk Factors
of OTC Transactions;
Limitations on the Use
of OTC Derivatives
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Distressed Securities
|
|
|
|
|
|
|
|
|
|
|
Foreign Investment Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Market Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Foreign Economy Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Currency Risk and
Exchange Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Governmental
Supervision and
Regulation/Accounting
Standards
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Certain Risks of Holding
Fund Assets Outside the
United States
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Settlement Risk
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Illiquid or Restricted
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Initial Public Offering
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Other Investment
Companies
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Investment in Emerging
Markets
|
X
|
|
X
|
X
|
|
X
|
X
|
|
|
X
|
Retstrictions on Certain
Investments
|
X
|
|
X
|
X
|
|
X
|
X
|
|
|
X
|
Risk
of Investing in
Asia-Pacific
Countries
|
X
|
|
|
|
|
X
|
|
|
|
|
Restrictions on Foreign
Investments in Asia-Pacific
Countries
|
X
|
|
|
|
|
X
|
|
|
|
|
Junk Bonds
|
X
|
|
X
|
|
|
X
|
X
|
X
|
|
X
|
Mortgage-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
Real Estate Related
Securities
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
Real Estate Investment
Trusts (REITs)
|
|
|
X
|
|
|
|
X
|
X
|
X
|
|
Repurchase Agreements
and Purchase and Sale
Contracts
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities Lending
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Securities of Smaller
or Emerging Growth
Companies
|
X
|
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Short Sales
|
|
|
X
|
X
|
|
|
|
|
X
|
|
Sovereign Debt
|
X
|
|
X
|
|
|
X
|
X
|
X
|
|
X
|
Standby Commitment Agreements
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Stripped Securities
|
X
|
|
|
|
|
|
|
|
|
|
Supranational Entities
|
|
|
|
|
X
|
X
|
|
|
|
|
Utility Industries
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
Electric
|
|
|
|
|
|
|
|
|
|
X
|
Telecommunications
|
|
|
|
|
|
|
|
|
|
X
|
Gas
|
|
|
|
|
X
|
|
|
|
|
X
|
Water
|
|
|
|
|
X
|
|
|
|
|
X
|
Warrants
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
When Issued Securities,
Delayed Delivery Securities and Forward Commitments
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
X
|
|
|
Investment in Other Investment
Companies.
Each Fund may invest in other investment companies
whose investment objectives and policies are consistent with those of the
Fund. In accordance with the Investment Company Act, a Fund may invest up
to 10% of its total assets in securities of other investment companies.
In addition, under the Investment Company Act a Fund may not own more than
3% of the total outstanding voting stock of any investment company and not
more than 5% of the value of the Funds total assets may be invested
in securities of any investment company. (These limits do not restrict a
Feeder Fund from investing all of its assets in shares of its Master Portfolio.)
Each Fund has received an exemptive order from the Commission permitting
it to invest in affiliated registered money market funds and in an affiliated
private investment company without regard to such limitations, provided
however, that in all cases the Funds aggregate investment of cash
in shares of such investment companies shall not exceed 25% of the Funds
total assets at any time. If a Fund acquires shares in investment companies,
shareholders would bear both their proportionate share of expenses in the
Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies (including management and advisory fees). Investments
by a Fund in wholly owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment companies.
|
Securities Lending.
Each
Fund may lend securities with a value not exceeding 33
1
/
3
% of its total assets or the limit prescribed by applicable law 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. Each Fund maintains the ability
to obtain the right to vote or consent on proxy proposals involving material
events affecting securities loaned. A Fund receives the income on the loaned
securities. Where a Fund receives securities as collateral, the Fund receives
a fee for its loans from the borrower and does not receive the income on
the collateral. Where a Fund receives cash collateral, it may invest such
collateral and retain the amount earned, net of any amount rebated to the
borrower. As a result, the Funds yield may increase. Loans of securities
are terminable at any time and the borrower, after notice, is required to
return borrowed securities within the standard time period for settlement
of securities transactions. The Fund is obligated to return the collateral
to the borrower at the termination of the loan. A Fund could suffer a loss
in the event the Fund must return the cash collateral and there are losses
on investments made with the cash collateral. In the event the borrower
defaults on any of its obligations with respect to a securities loan, a
Fund could suffer a loss where there are losses on investments made with
the cash collateral or, where the value of the securities collateral falls
below the market value of the borrowed securities. A Fund could also experience
delays and costs in gaining access to the collateral. Each Fund may pay
reasonable finders, lending agent, administrative and custodial fees
in connection with its loans. Each Fund has received an exemptive order
from the Commission permitting it to lend portfolio securities to Merrill
Lynch or its affiliates and to retain an affiliate of the Fund as lending
agent.
|
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), (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) or (iii) a synthetic security manufactured by another
party.
|
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 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 a Fund are 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, a Fund is authorized
to enter into foreign currency hedging transactions in which it may seek
to reduce the effect of such fluctuations.
|
Apart from currency considerations,
the value of convertible securities is influenced by both the yield of nonconvertible
securities of comparable issuers and by the value of the underlying common
stock. The value of a convertible security viewed without regard to its
conversion feature (
i.e.
, strictly on the basis of its yield) is
sometimes referred to as its investment value. To the extent
interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the convertible
security will be influenced by its conversion value, which is
the market value of the underlying common stock that would be obtained if
the convertible security were converted. Conversion value fluctuates directly
with the price of the underlying common stock. If, because of a low price
of the common stock the conversion value is substantially below the investment
value of the convertible security, the price of the convertible security
is governed principally by its investment value.
|
To the extent the conversion
value of a convertible security increases to a point that approximates or
exceeds its investment value, the price of the convertible security will
be influenced principally by its conversion value. A convertible security
will sell at a premium over the conversion value to the extent investors
place value on the right to acquire the underlying common stock while holding
a fixed-income security. The yield and conversion premium of convertible
securities issued in Japan and the Euromarket are frequently determined
at levels that cause the conversion value to affect their market value more
than the securities investment value.
|
Holders of convertible securities
generally have a claim on the assets of the issuer prior to the common stockholders
but may be subordinated to other debt securities of the same issuer. A convertible
security may be subject to redemption at the option of the issuer at a price
established in the charter provision, indenture or other governing instrument
pursuant to which the convertible security was issued. If a convertible
security held by a 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 (convertibility
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, 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 a Funds objective than alternate investments. For example,
the Manager may combine an equity feature with respect to an issuers
stock with a fixed income security of a different issuer in the same industry
to diversify the Funds 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 a 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 that 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.
|
Borrowing and Leverage.
Each Fund may borrow from banks as a temporary measure for extraordinary
or emergency purposes, including to meet redemptions or to settle securities
transactions. Most Funds will not purchase securities at any time when borrowings
exceed 5% of their total assets, except (a) to honor prior commitments or
(b) to exercise subscription rights when outstanding borrowings have been
obtained exclusively for settlements of other securities transactions. Certain
Funds may also borrow in order to make investments The purchase of securities
while borrowings are outstanding will have the effect of leveraging the
Fund. Such leveraging increases the Funds exposure to capital risk,
and borrowed funds are subject to interest costs that will reduce net income.
The use of leverage by a 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 Funds portfolio. Although the principal of such borrowings
will be fixed, the Funds assets may change in value during the time
the borrowings are outstanding. Borrowings will create interest expenses
for 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 Funds return will be greater than
if leverage had not been used. Conversely, if the income or capital appreciation
from the securities purchased with such borrowed funds is not sufficient
to cover the cost of borrowing, the return to the Fund will be less than
if leverage had not been used, and therefore the amount available for distribution
to shareholders as dividends will be reduced. In the latter case, the Manager
in its best judgment nevertheless may determine to maintain the Funds
leveraged position if it expects that the benefits to the Funds shareholders
of maintaining the leveraged position will outweigh the current reduced
return.
|
Certain types of borrowings
by a 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 Manager from managing a Funds portfolio in accordance with the
Funds investment objectives and policies. However, a breach of any
such covenants not cured within the specified cure period may result in
acceleration of outstanding indebtedness and require the Fund to dispose
of portfolio investments at a time when it may be disadvantageous to do
so.
|
Each Fund may at times borrow
from affiliates of the Manager, provided that the terms of such borrowings
are no less favorable than those available from comparable sources of funds
in the marketplace.
|
When Issued Securities,
Delayed Delivery Securities and Forward Commitments
.
A
Fund may purchase or sell securities that it is entitled to receive on a
when issued basis. A Fund may also purchase or sell securities on a delayed
delivery basis or through a forward commitment. These transactions involve
the purchase or sale of securities by a 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. No Fund has established any
limit on the percentage of its assets that may be committed in connection
with these transactions. When a 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 Funds purchase price. The 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.
|
Warrants
.
Warrants
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.
|
Standby Commitment Agreements
.
A Fund may enter into standby commitment agreements. These agreements
commit a Fund, for a stated period of time, to purchase a stated amount
of securities that may be issued and sold to that 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. A 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. A Fund 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. A Fund segregates liquid assets 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 a Funds 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
and Purchase and Sale Contracts
.
A Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into
only with financial institutions which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Under such agreements, the other party agrees, upon entering
into the contract with a 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 results in a fixed rate
of return insulated from market fluctuations during such period, although
such return may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligation; whereas, in the case of purchase
and sale contracts, the prices take into account accrued interest. Such
agreements usually cover short periods, such as under one week. Repurchase
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agreements may be construed to be collateralized loans by
the purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, as a 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; the Fund does not have the right to seek
additional collateral in the case of purchase and sale contracts. 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 sellers obligation to
pay the repurchase price. Therefore, the Fund may suffer time delays and
incur costs or possible losses in connection with disposition of the collateral.
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A purchase and sale contract
differs from a repurchase agreement in that the contract arrangements stipulate
that securities are owned by the Fund. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of
the contractual fixed rate, the rate of return to the Fund would be dependent
upon intervening fluctuations of the market values 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. A Fund may not invest in repurchase agreements or purchase and
sale contracts maturing in more than seven days if such investments, together
with the Funds other illiquid investments, would exceed 15% of the
Funds net assets.
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Illiquid or Restricted
Securities
.
Each Fund may invest up to 15% of its net assets
in securities that lack an established secondary trading market or otherwise
are considered illiquid. Liquidity of a security relates to the ability
to dispose easily of the security and the price to be obtained upon disposition
of the security, which may be less than would be obtained for a comparable
more liquid security. Illiquid securities may trade at a discount from comparable,
more liquid investments. Investment of a Funds 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 a Funds 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.
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A Fund may invest in securities
that are not registered (restricted securities) under the Securities
Act of 1933, as amended (the Securities Act). Restricted securities
may be sold in private placement transactions between 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 a 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 Funds
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, a Fund may obtain access to material
nonpublic information, which may restrict the Funds ability to conduct
portfolio transactions in such securities.
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144A Securities
.
A Fund may purchase restricted securities that can be offered and
sold to qualified institutional buyers under Rule 144A under
the Securities Act. The Directors have 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 Funds Directors. The Directors have
adopted guidelines and delegated to the Manager the daily function of determining
and monitoring liquidity of restricted securities. The Directors, 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 Directors will carefully monitor a Funds investments
in these securities. This investment practice could have the effect of increasing
the level of illiquidity in a Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
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Initial Public Offering
Risk
.
The volume of initial public offerings and the levels
at which the newly issued stocks trade in the secondary market are affected
by the performance of the stock market overall. If initial public offerings
are brought to the market, availability may be limited and the Fund may
not be able to buy any shares at the offering price, or if it is able to
buy shares, it may not be able to buy as many shares at the offering price
as it would like. In addition, the prices of securities involved in initial
public offerings are often subject to greater and more unpredictable price
changes than more established stocks.
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Securities of Smaller
or Emerging Growth Companies
.
Investment in smaller or emerging
growth companies involves greater risk than is customarily associated with
investments in more established companies. The securities of smaller or
emerging growth companies may be subject to more abrupt or erratic market
movements than larger, more established companies or the market average
in general. These companies may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group.
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While smaller or emerging growth
company issuers may offer greater opportunities for capital appreciation
than large cap issuers, investments in smaller or emerging growth companies
may involve greater risks and thus may be considered speculative. Fund management
believes that properly selected companies of this type have the potential
to increase their earnings or market valuation at a rate substantially in
excess of the general growth of the economy. Full development of these companies
and trends frequently takes time.
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Small cap and emerging growth
securities will often be traded only in the over-the-counter market or on
a regional securities exchange and may not be traded every day or in the
volume typical of trading on a national securities exchange. As a result,
the disposition by a Fund of portfolio securities to meet redemptions or
otherwise may require the Fund to make many small sales over a lengthy period
of time, or to sell these securities at a discount from market prices or
during periods when, in Fund managements judgment, such disposition
is not desirable.
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While the process of selection
and continuous supervision by Fund management does not, of course, guarantee
successful investment results, it does provide access to an asset class
not available to the average individual due to the time and cost involved.
Careful initial selection is particularly important in this area as many
new enterprises have promise but lack certain of the fundamental factors
necessary to prosper. Investing in small and emerging growth companies requires
specialized research and analysis. In addition, many investors cannot invest
sufficient assets in such companies to provide wide diversification.
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Small companies are generally
little known to most individual investors although some may be dominant
in their respective industries. Fund management believes that relatively
small companies will continue to have the opportunity to develop into significant
business enterprises. A 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 Fund management believes that eventual recognition of their
special value characteristics by the investment community can provide above-average
long-term growth to the portfolio.
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Equity securities of specific
small cap issuers may present different opportunities for long-term capital
appreciation during varying portions of economic or securities markets cycles,
as well as during varying stages of their business development. The market
valuation of small cap issuers tends to fluctuate during economic or market
cycles, presenting attractive investment opportunities at various points
during these cycles.
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Smaller companies, due to the
size and kinds of markets that they serve, may be less susceptible than
large companies to intervention from the Federal government by means of
price controls, regulations or litigation.
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Debt Securities
.
Debt securities, such as bonds, involve credit risk. This is the risk
that the issuer will not make timely payments of principal and interest.
The degree of credit risk depends on the issuers financial condition
and on the terms of the bonds. This risk is reduced to the extent a Fund
limits its debt investments to U.S. Government securities. All debt securities,
however, are subject to interest rate risk. This is the risk that the value
of the security may fall when interest rates rise. In general, the market
price of debt securities with longer maturities will go up or down more
in response to changes in interest rates than the market price of shorter
term securities.
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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 a Fund. The major risks in
junk bond investments include the following:
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Junk bonds may be issued by less creditworthy
companies. These securities are vulnerable to adverse changes in the issuers
industry and to general economic conditions. Issuers of junk bonds may be
unable to meet their interest or principal payment obligations because of
an economic downturn, specific issuer developments or the unavailability
of additional financing.
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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 issuers ability to pay its debt
obligations also may be lessened by specific issuer developments, or the
unavailability of additional financing.
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Junk bonds are frequently ranked junior to claims
by other creditors. If the issuer cannot meet its obligations, the senior
obligations are generally paid off before the junior obligations.
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Junk bonds frequently have redemption features
that permit an issuer to repurchase the security from a Fund before it matures.
If an issuer redeems the junk bonds, a Fund may have to invest the proceeds
in bonds with lower yields and may lose income.
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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.
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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 a Funds
portfolio securities than in the case of securities trading in a more liquid
market.
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A Fund may incur expenses to the extent necessary
to seek recovery upon default or to negotiate new terms with a defaulting
issuer.
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Corporate Loans
.
A Fund can invest in corporate loans. Commercial banks and other financial
institutions make corporate loans to companies that need capital to grow
or restructure. Borrowers generally pay interest on corporate loans at rates
that change in response to changes in market interest rates such as the
London Interbank Offered Rate (LIBOR) or the prime rate of U.S.
banks. As a result, the value of corporate loan investments is generally
less responsive to shifts in market interest rates. Because the trading
market for corporate loans is less developed than the secondary market for
bonds and notes, a Fund may experience difficulties from time to time in
selling its corporate loans. Borrowers frequently provide collateral to
secure repayment of these obligations. Leading financial institutions often
act as agent for a broader group of lenders, generally referred to as a
syndicate. The syndicates agent arranges the corporate
loans, holds collateral and accepts payments of principal and interest.
If the agent developed financial problems, a Fund may not recover its investment,
or there might be a delay in the Funds recovery. By investing in a
corporate loan, a Fund becomes a member of the syndicate.
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Distressed Securities
.
A Fund may invest in securities, including corporate loans purchased
in the secondary market, which are the subject of bankruptcy proceedings
or otherwise in default as to the repayment of principal and/or interest
at the time of acquisition by the Fund or are rated in the lower rating
categories (Ca or lower by Moodys Investors Service, Inc. (Moodys)
and CC or lower by Standard & Poors (S&P)) or
which, if unrated, are in the judgment of the Manager of equivalent quality
(Distressed Securities). Investment in Distressed Securities
is speculative and involves significant risks.
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A Fund will generally make
such investments only when the Manager believes it is reasonably likely
that the issuer of the Distressed Securities will make an exchange offer
or will be the subject of a plan of reorganization pursuant to which the
Fund will receive new securities. However, there can be no assurance that
such an exchange offer will be
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made or that such a plan of reorganization will be adopted.
In addition, a significant period of time may pass between the time at which
a Fund makes its investment in Distressed Securities and the time that any
such exchange offer or plan of reorganization is completed. During this
period, it is unlikely that a Fund will receive any interest payments on
the Distressed Securities, the Fund will be subject to significant uncertainty
as to whether or not the exchange offer or plan of reorganization will be
completed and the Fund may be required to bear certain extraordinary expenses
to protect and recover its investment. Even if an exchange offer is made
or plan of reorganization is adopted with respect to Distressed Securities
held by a Fund, there can be no assurance that the securities or other assets
received by a Fund in connection with such exchange offer or plan of reorganization
will not have a lower value or income potential than may have been anticipated
when the investment was made. Moreover, any securities received by a Fund
upon completion of an exchange offer or plan of reorganization may be restricted
as to resale. As a result of a Funds participation in negotiations
with respect to any exchange offer or plan of reorganization with respect
to an issuer of Distressed Securities, the Fund may be restricted from disposing
of such securities.
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Mortgage-Backed Securities
.
Investing in mortgage-backed securities involves certain unique risks
in addition to those generally associated with investing in the real estate
industry in general. These unique risks include the failure of a party to
meet its commitments under the related operative documents, adverse interest
rate changes and the effects of prepayments on mortgage cash flows. Mortgage-backed
securities are pass-through securities, meaning that principal
and interest payments made by the borrower on the underlying mortgages are
passed through to a Fund. The value of mortgage-backed securities, like
that of traditional fixed-income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage-backed
securities differ from traditional fixed-income securities because of their
potential for prepayment without penalty. The price paid by a Fund for its
mortgage backed securities, the yield the Fund expects to receive from such
securities and the average life of the securities are based on a number
of factors, including the anticipated rate of prepayment of the underlying
mortgages. In a period of declining interest rates, borrowers may prepay
the underlying mortgages more quickly than anticipated, thereby reducing
the yield to maturity and the average life of the mortgage-backed securities.
Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances,
it will likely receive a rate of interest that is lower than the rate on
the security that was prepaid.
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To the extent that a Fund purchases
mortgage-backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If a
Fund buys such securities at a discount, both scheduled payments of principal
and unscheduled prepayments will increase current and total returns and
will accelerate the recognition of income which, when distributed to shareholders,
will be taxable as ordinary income. In a period of rising interest rates,
prepayments of the underlying mortgages may occur at a slower than expected
rate, creating maturity extension risk. This particular risk may effectively
change a security that was considered short or intermediate-term at the
time of purchase into a long-term security. Since long-term securities generally
fluctuate more widely in response to changes in interest rates than shorter-term
securities, maturity extension risk could increase the inherent volatility
of the Fund. Under certain interest rate and prepayment scenarios, a Fund
may fail to recoup fully its investment in mortgage-backed securities notwithstanding
any direct or indirect governmental or agency guarantee.
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Asset-Backed Securities
.
Asset-backed securities are pass-through securities, meaning
that principal and interest payments made by the borrower on the underlying
assets (such as credit card receivables) are passed through to a Fund. The
value of asset-backed securities, like that of traditional fixed-income
securities, typically increases when interest rates fall and decreases when
interest rates rise. However, asset-backed securities differ from traditional
fixed-income securities because of their potential for prepayment. The price
paid by a Fund for its asset-backed securities, the yield the Fund expects
to receive from such securities and the average life of the securities are
based on a number of factors, including the anticipated rate of prepayment
of the underlying assets. In a period of declining interest rates, borrowers
may prepay the underlying assets more quickly than anticipated, thereby
reducing the yield to maturity and the average life of the asset-backed
securities. Moreover, when a Fund reinvests the proceeds of a prepayment
in these circumstances, it will likely receive a rate of interest that is
lower than the rate on the security that was prepaid. To the extent that
a Fund purchases asset-backed securities at a premium, prepayments may result
in a loss to the extent of the premium paid. If a Fund buys such securities
at a discount, both scheduled payments and unscheduled prepayments will
increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
assets may occur at a slower than expected rate, creating
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maturity extension risk. This particular risk may effectively
change a security that was considered short or intermediate-term at the
time of purchase into a longer term security. Since longer term securities
generally fluctuate more widely in response to changes in interest rates
than shorter term securities, maturity extension risk could increase the
inherent volatility of the Fund.
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Asset-Based Securities
.
Certain Funds may invest in debt, preferred or convertible securities,
the principal amount, redemption terms or conversion terms of which are
related to the market price of some natural resource asset such as gold
bullion. For the purposes of a Funds investment policies, these securities
are referred to as asset-based securities. A Fund will purchase
only asset-based securities that are rated, or are issued by issuers that
have outstanding debt obligations rated, investment grade (that is AAA,
AA, A or BBB by S&P or Aaa, Aa, A or Baa by Moodys or commercial
paper rated A-1 by S&P or Prime-1 by Moodys) or of issuers that
the Manager has determined to be of similar creditworthiness. Obligations
ranked in the fourth highest rating category, while considered investment
grade, may have certain speculative characteristics and may be more
likely to be downgraded than securities rated in the three highest rating
categories. If the asset-based security is backed by a bank letter of credit
or other similar facility, the Manager may take such backing into account
in determining the creditworthiness of the issuer. While the market prices
for an asset-based security and the related natural resource asset generally
are expected to move in the same direction, there may not be perfect correlation
in the two price movements. Asset-based securities may not be secured by
a security interest in or claim on the underlying natural resource asset.
The asset-based securities in which a Fund may invest may bear interest
or pay preferred dividends at below market (or even relatively nominal)
rates. As an example, assume gold is selling at a market price of $300 per
ounce and an issuer sells a $1,000 face amount gold-related note with a
seven-year maturity, payable at maturity at the greater of either $1,000
in cash or the then market price of three ounces of gold. If at maturity,
the market price of gold is $400 per ounce, the amount payable on the note
would be $1,200. Certain asset-based securities may be payable at maturity
in cash at the stated principal amount or, at the option of the holder,
directly in a stated amount of the asset to which it is related. In such
instance, because no Fund presently intends to invest directly in natural
resource assets, a Fund would sell the asset-based security in the secondary
market, to the extent one exists, prior to maturity if the value of the
stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
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Precious Metal-Related Securities
.
A Fund may invest in the equity securities of companies that explore
for, extract, process or deal in precious metals,
i.e.
, gold, silver
and platinum, and in asset-based securities indexed to the value of such
metals. Such securities may be purchased when they are believed to be attractively
priced in relation to the value of a companys precious metal-related
assets or when the values of precious metals are expected to benefit from
inflationary pressure or other economic, political or financial uncertainty
or instability. Based on historical experience, during periods of economic
or financial instability the securities of companies involved in precious
metals may be subject to extreme price fluctuations, reflecting the high
volatility of precious metal prices during such periods. In addition, the
instability of precious metal prices may result in volatile earnings of
precious metal-related companies, which may, in turn, affect adversely the
financial condition of such companies.
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The major producers of gold
include the Republic of South Africa, Russia, Canada, the United States,
Brazil and Australia. Sales of gold by Russia are largely unpredictable
and often relate to political and economic considerations rather than to
market forces. Economic, financial, social and political factors within
South Africa may significantly affect South African gold production.
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Foreign Market Risk. Funds
that may invest in foreign securities offer the potential for more diversification
than a Fund that invests only in the United States 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, a 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 be difficult for the
Fund to buy and sell securities on those exchanges. In addition, prices
of foreign securities may fluctuate more than prices of securities traded
in the United States.
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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
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balance of payments position. Certain such economies may
rely heavily on particular industries or foreign capital and are more vulnerable
to diplomatic developments, the imposition of economic sanctions against
a particular country or countries, changes in international trading patterns,
trade barriers, and other protectionist or retaliatory measures. Investments
in foreign markets may also be adversely affected by governmental actions
such as the imposition of capital controls, nationalization of companies
or industries, expropriation of assets, or the imposition of punitive taxes.
In addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or
in certain industries. Any of these actions could severely affect security
prices, impair a Funds ability to purchase or sell foreign securities
or transfer the Funds assets or income back into the United States,
or otherwise adversely affect a Funds 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.
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Currency Risk and Exchange
Risk
. Securities in which a Fund invests may be denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates will affect the value of a Funds 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 stronger U.S. dollar will reduce
returns for U.S. investors while a weak U.S. dollar will increase those
returns.
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Governmental Supervision
and Regulation/Accounting Standards
. Many foreign governments supervise
and regulate stock exchanges, brokers and the sale of securities less than
does the United States. Some countries may not have laws to protect investors
comparable to the U.S. securities laws. For example, some foreign countries
may have no laws or rules against insider trading. Insider trading occurs
when a person buys or sells a companys securities based on nonpublic
information about that company. Accounting standards in other countries
are not necessarily the same as in the United States. If the accounting
standards in another country do not require as much detail as U.S. accounting
standards, it may be harder for Fund management to completely and accurately
determine a companys financial condition. Also, brokerage commissions
and other costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount a
Fund can earn on its investments.
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Certain Risks of Holding
Fund Assets Outside the United States
. A 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 Funds ability to recover its assets if a foreign bank
or 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 Fund as compared to investment companies that invest only in the
United States.
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Settlement Risk
. Settlement
and clearance procedures in certain foreign markets differ significantly
from those in the United States. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of
U.S. investments. Communications between the United States and emerging
market countries may be unreliable, increasing the risk of delayed settlements
or losses of security certificates. Settlements in certain foreign countries
at times have not kept pace with the number of securities transactions;
these problems may make it difficult for a Fund to carry out transactions.
If a Fund cannot settle or is delayed in settling a purchase of securities,
it may miss attractive investment opportunities and certain of its assets
may be uninvested with no return earned thereon for some period. If a Fund
cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted
to sell the security to another party, the Fund could be liable to that
party for any losses incurred.
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Dividends or interest on, or
proceeds from the sale of, foreign securities may be subject to foreign
withholding taxes.
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Investment in Emerging
Markets
.
Certain Funds may invest in the securities of issuers domiciled
in various countries with emerging capital markets. Specifically, a country
with an emerging capital market is any country that the World Bank, the
International Finance Corporation, the United Nations or its authorities
has determined to have a low or middle income economy. Countries with emerging
markets can be found in regions such as Asia, Latin America, Eastern Europe
and Africa.
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Investments in the securities
of issuers domiciled in countries with emerging capital markets involve
certain additional risks not involved in investments in securities of issuers
in more developed capital markets, such as (i) low or non-existent trading
volume, resulting in a lack of liquidity and increased volatility in prices
for such securities, as compared to securities of comparable issuers in
more developed capital markets, (ii) uncertain national policies and social,
political and economic instability, increasing the potential for expropriation
of assets, confiscatory taxation, high rates of inflation or unfavorable
diplomatic developments, (iii) possible fluctuations in exchange rates,
differing legal systems and the existence or possible imposition of exchange
controls, custodial restrictions or other foreign or U.S. governmental laws
or restrictions applicable to such investments, (iv) national policies that
may limit a Funds investment opportunities such as restrictions on
investment in issuers or industries deemed sensitive to national interests,
and (v) the lack or relatively early development of legal structures governing
private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
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Such capital markets are emerging
in a dynamic political and economic environment brought about by events
over recent years that have reshaped political boundaries and traditional
ideologies. In such a dynamic environment, there can be no assurance that
these capital markets will continue to present viable investment opportunities
for a Fund. In the past, governments of such nations have expropriated substantial
amounts of private property, and most claims of the property owners have
never been fully settled. There is no assurance that such expropriations
will not reoccur. In such an event, it is possible that a Fund could lose
the entire value of its investments in the affected markets.
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Also, there may be less publicly
available information about issuers in emerging markets than would be available
about issuers in more developed capital markets, and such issuers may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. In
certain countries with emerging capital markets, reporting standards vary
widely. As a result, traditional investment measurements used in the United
States, such as price/earnings ratios, may not be applicable. Emerging market
securities may be substantially less liquid and more volatile than those
of mature markets, and companies may be held by a limited number of persons.
This may adversely affect the timing and pricing of the Funds acquisition
or disposal of securities.
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Practices in relation to settlement
of securities transactions in emerging markets involve higher risks than
those in developed markets, in part because a Fund will need to use brokers
and counterparties that are less well capitalized, and custody and registration
of assets in some countries may be unreliable. The possibility of fraud,
negligence, undue influence being exerted by the issuer or refusal to recognize
ownership exists in some emerging markets, and, along with other factors,
could result in ownership registration being completely lost. A Fund would
absorb any loss resulting from such registration problems and may have no
successful claim for compensation.
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Restrictions on Certain
Investments
. A number of publicly traded closed-end investment companies
have been organized to facilitate indirect foreign investment in developing
countries, and certain of such countries, such as Thailand, South Korea,
Chile and Brazil have specifically authorized such funds. There also are
investment opportunities in certain of such countries in pooled vehicles
that resemble open-end investment companies. In accordance with the Investment
Company Act, a Fund may invest up to 10% of its total assets in securities
of other investment companies, not more than 5% of which may be invested
in any one such company. 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. These restrictions on investments in securities
of investment companies may limit opportunities for a Fund to invest indirectly
in certain developing countries. Shares of certain investment companies
may at times be acquired only at market prices representing premiums to
their net asset values. If a Fund acquires shares of other investment companies,
shareholders would bear both their proportionate share of expenses of the
Fund (including management and advisory fees) and, indirectly, the expenses
of such other investment companies.
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Risks of Investing in Asia-Pacific
Countries
. In addition to the risks of foreign investing and the risks
of investing in developing markets, the developing market Asia-Pacific countries
in which a Fund may invest are subject to certain additional or specific
risks. Certain Funds may make substantial investments in Asia-Pacific countries.
There is a high concentration of market capitalization and trading volume
in a small number of issuers representing a limited number of industries,
as well as a high concentration of investors and financial intermediaries.
Many of these markets also may be affected by developments with respect
to more established markets in the region such as in Japan and Hong Kong.
Brokers in developing market Asia-Pacific countries typically are fewer
in number and less well capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment discussed below, result
in potentially fewer investment opportunities for a Fund and may have an
adverse impact on the investment performance of the Fund.
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Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political
and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things:
(i) authoritarian governments or military involvement in political and economic
decision-making, including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic, religious and racial
disaffection. In addition, the governments of many of such countries, such
as Indonesia, have a heavy role in regulating and supervising the economy.
Another risk common to most such countries is that the economy is heavily
export oriented and, accordingly, is dependent upon international trade.
The existence of overburdened infrastructure and obsolete financial systems
also present risks in certain countries, as do environmental problems. Certain
economies also depend to a significant degree upon exports of primary commodities
and, therefore, are vulnerable to changes in commodity prices which, in
turn, may be affected by a variety of factors.
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The legal systems in certain
developing market Asia-Pacific countries also may have an adverse impact
on the Fund. For example, while the potential liability of a shareholder
in a U.S. corporation with respect to acts of the corporation is generally
limited to the amount of the shareholders investment, the notion of
limited liability is less clear in certain emerging market Asia-Pacific
countries. Similarly, the rights of investors in developing market Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations.
It may be difficult or impossible to obtain and/or enforce a judgment in
a developing market Asia-Pacific country.
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Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial
influence over many aspects of the private sector. In certain cases, the
government owns or controls many companies, including the largest in the
country. Accordingly, government actions in the future could have a significant
effect on economic conditions in developing market Asia-Pacific countries,
which could affect private sector companies and a Fund itself, as well as
the value of securities in the Funds portfolio. In addition, economic
statistics of developing market Asia-Pacific countries may be less reliable
than economic statistics of more developed nations.
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In addition to the relative
lack of publicly available information about developing market Asia-Pacific
issuers and the possibility that such issuers may not be subject to the
same accounting, auditing and financial reporting standards as U.S. companies,
inflation accounting rules in some developing market Asia-Pacific countries
require companies that keep accounting records in the local currency, for
both tax and accounting purposes, to restate certain assets and liabilities
on the companys balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits for certain developing market Asia-Pacific companies.
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Satisfactory custodial services
for investment securities may not be available in some developing Asia-Pacific
countries, which may result in the Fund incurring additional costs and delays
in providing transportation and custody services for such securities outside
such countries.
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Certain developing Asia-Pacific
countries, such as the Philippines, India and Turkey, are especially large
debtors to commercial banks and foreign governments.
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Fund management may determine
that, notwithstanding otherwise favorable investment criteria, it may not
be practicable or appropriate to invest in a particular developing Asia-Pacific
country. A Fund may invest in countries in which foreign investors, including
management of the Fund, have had no or limited prior experience.
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Restrictions on Foreign
Investments in Asia-Pacific Countries
. Some developing Asia-Pacific
countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as a Fund. As illustrations, certain countries may require governmental
approval prior to investments by foreign persons or limit the amount of
investment by foreign persons in a particular company or limit the investment
by foreign persons to only a specific class of securities of a company which
may have less advantageous terms (including price) than securities of the
company available for purchase by nationals. There can be no assurance that
a Fund will be able to obtain required governmental approvals in a timely
manner. In addition, changes to restrictions on foreign ownership of securities
subsequent to a Funds purchase of such securities may have an adverse
effect on the value of such shares. Certain countries may restrict investment
opportunities in issuers or industries deemed important to national interests.
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The manner in which foreign
investors may invest in companies in certain developing Asia-Pacific countries,
as well as limitations on such investments, also may have an adverse impact
on the operations of a Fund. For example, a Fund may be required in certain
of such countries to invest initially through a local broker or other entity
and then have the shares purchased re-registered in the name of the Fund.
Re-registration may in some instances not be able to occur on a timely basis,
resulting in a delay during which a Fund may be denied certain of its rights
as an investor, including rights as to dividends or to be made aware of
certain corporate actions. There also may be instances where a Fund places
a purchase order but is subsequently informed, at the time of re-registration,
that the permissible allocation of the investment to foreign investors has
been filled, depriving the Fund of the ability to make its desired investment
at that time.
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Substantial limitations may
exist in certain countries with respect to a Funds ability to repatriate
investment income, capital or the proceeds of sales of securities by foreign
investors. A Fund could be adversely affected by delays in, or a refusal
to grant, any required governmental approval for repatriation of capital,
as well as by the application to the Fund of any restrictions on investments.
For example, in September 1998, Malaysia imposed currency controls that
limited a Funds ability to repatriate proceeds of Malaysian investments.
It is possible that Malaysia, or certain other countries may impose similar
restrictions or other restrictions relating to their currencies or to securities
of issuers in those countries. To the extent that such restrictions have
the effect of making certain investments illiquid, securities may not be
available to meet redemptions. Depending on a variety of financial factors,
the percentage of a Funds portfolio subject to currency controls may
increase. In the event other countries impose similar controls, the portion
of the Funds assets that may be used to meet redemptions may be further
decreased. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
operations of a Fund. For example, funds may be withdrawn from the Peoples
Republic of China only in U.S. or Hong Kong dollars and only at an exchange
rate established by the government once each week.
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In certain countries, banks
or other financial institutions may be among the leading companies or have
actively traded securities. The Investment Company Act restricts a Funds
investments in any equity securities of an issuer which, in its most recent
fiscal year, derived more than 15% of its revenues from securities
related activities, as defined by the rules thereunder. These provisions
may restrict a Funds investments in certain foreign banks and other
financial institutions.
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Depositary Receipts
.
A Fund may invest in the securities of foreign issuers in the form of Depositary
Receipts or other securities convertible into securities of foreign issuers.
Depositary Receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted. American
Depositary Receipts (ADRs) are receipts typically issued by
an American bank or trust company that evidence ownership of underlying
securities issued by a foreign corporation. European Depositary Receipts
(EDRs) are receipts issued in Europe that evidence a similar
ownership arrangement. Global Depositary Receipts (GDRs) are
receipts issued throughout the world that evidence a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the U.S. securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets. GDRs are tradable both in the United States and in Europe and are
designed for use throughout the world. A Fund may invest in unsponsored
Depositary Receipts. The issuers of unsponsored Depositary Receipts are
not obligated to disclose material information in the United States, and,
therefore, there may be less
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information available regarding such issuers and there may
not be a correlation between such information and the market value of the
Depositary Receipts.
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Supranational Entities
.
A Fund may invest in debt securities of supranational entities as defined
above. Examples include the International Bank for Reconstruction and Development
(the World Bank), the European Steel and Coal Community, the Asian Development
Bank and the Inter-American Development Bank. The government members, or
stockholders, usually make initial capital contributions to
the supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings.
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Sovereign Debt
.
Investment in sovereign debt can involve a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be able or
willing to repay the principal and/or interest when due in accordance with
the terms of such debt. A governmental entitys willingness or ability
to repay principal and interest due in a timely manner may be affected by,
among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy
as a whole, the government entitys policy towards the International
Monetary Fund and the political constraints to which a government entity
may be subject. Governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others
abroad to reduce principal and interest arrearages on their debt. The commitment
on the part of these governments, agencies and others to make such disbursements
may be conditioned on the implementation of economic reforms and/or economic
performance and the timely service of such debtors obligations. Failure
to implement such reforms, achieve such levels of economic performance or
repay principal or interest when due may result in the cancellation of such
third parties commitments to lend funds to the governmental entity,
which may further impair such debtors ability or willingness to timely
service its debts. Consequently, governmental entities may default on their
sovereign debt.
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Holders of sovereign debt may
be requested to participate in the rescheduling of such debt and to extend
further loans to government entities. In the event of a default by a governmental
entity, there may be few or no effective legal remedies for collecting on
such debt.
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Short Sales.
Certain Funds may make short sales of securities, either as a hedge against
potential declines in value of a portfolio security or to realize appreciation
when a security that the Fund does not own declines in value. When a Fund
makes a short sale, it borrows the security sold short and delivers it to
the broker-dealer through which it made the short sale, as collateral for
its obligation to deliver the security upon conclusion of the sale. A Fund
may have to pay a fee to borrow particular securities and is often obligated
to turn over any payments received on such borrowed securities to the lender
of the securities.
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A Fund secures its obligation
to replace the borrowed security by depositing collateral with the broker-dealer,
usually in cash, U.S. Government securities or other liquid securities similar
to those borrowed. With respect to the uncovered short positions, a Fund
is required to deposit similar collateral with its custodian, if necessary,
to the extent that the value of both collateral deposits in the aggregate
is at all times equal to at least 100% of the current market value of the
security sold short. Depending on arrangements made with the broker-dealer
from which the Fund borrowed the security, regarding payment over of any
payments received by the Fund on such security, a Fund may not receive any
payments (including interest) on its collateral deposited with such broker-dealer.
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Because making short sales
in securities that it does not own exposes a Fund to the risks associated
with those securities, such short sales involve speculative exposure risk.
As a result, if a Fund makes short sales in securities that increase in
value, it will likely underperform similar mutual funds that do not make
short sales in securities they do not own. A Fund will incur a loss as a
result of a short sale if the price of the security increases between the
date of the short sale and the date on which the Fund replaces the borrowed
security. A Fund will realize a gain if the security declines in price between
those dates. There can be no assurance that a Fund will be able to close
out a short sale position at any particular time or at an acceptable price.
Although a Funds gain is limited to the price at which it sold the
security short, its potential loss is limited only by the maximum attainable
price of the security, less the price at which the security was sold and
may, theoretically, be unlimited.
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A Fund may also make short
sales against the box without being subject to such limitations.
In this type of short sale, at the time of the sale, the Fund owns or has
the immediate and unconditional right to acquire the identical security
at no additional cost.
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Each Fund may use instruments
referred to as derivative securities (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 S&P 500 Index or the prime lending rate).
Derivatives allow a 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. Each Fund may use Derivatives for hedging purposes.
Certain Funds may also use derivatives for speculative purposes. The use
of a Derivative is speculative if the Fund is primarily seeking to achieve
gains, rather than offset the risk of other positions. When the Fund invests
in a Derivative for speculative purposes, the Fund will be fully exposed
to the risks of loss of that Derivative, which may sometimes be greater
than the Derivatives cost. No Fund may 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.
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Hedging
. Hedging is
a strategy in which a Derivative is used to offset the risks associated
with other Fund holdings. 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 a Fund,
in which case any losses on the holdings being hedged may not be reduced
or may be increased. The inability to close options and futures positions
also could have an adverse impact on a Funds ability to hedge effectively
its portfolio. There is also a risk of loss by the Fund of margin deposits
or collateral in the event of bankruptcy of a broker with whom the Fund
has an open position in an option, a futures contract or a related option.
There can be no assurance that a Funds hedging strategies will be
effective. No Fund is required to engage in hedging transactions and each
Fund may choose not to do so.
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A Fund may use Derivative instruments
and trading strategies including the following:
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Indexed and Inverse Securities
.
A Fund may invest in securities the potential return of which is based on
an index or interest rate. As an illustration, a 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. A Fund may also invest in a debt security
that 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, certain Funds may invest in securities the potential return
of which is based inversely on the change in an index or interest rate (that
is, a security the value of which will move in the opposite direction of
changes to an index or interest rate). For example, a 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 a 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 interest rate,
index or indices. Indexed and inverse securities involve credit risk, and
certain indexed and inverse securities may involve leverage risk, liquidity
risk and currency risk. A Fund may invest in indexed and inverse securities
for hedging purposes only or to increase returns. When used for hedging
purposes, indexed and inverse securities involve correlation risk. (Furthermore,
where such a security includes a contingent liability, in the event of such
an adverse movement, a Fund may be required to pay substantial additional
margin to maintain the position.)
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Swap Agreements
. Certain
Funds are authorized to enter into equity swap agreements, which are over-the-counter
(OTC) contracts in which one party agrees to make periodic payments
based on the change in market value of a specified equity security, basket
of equity securities or equity index in return for periodic payments based
on a fixed or variable interest rate or the change in market value of a
different equity security, basket of equity securities or equity index.
Swap agreements may be used to obtain exposure to an equity or market without
owning or taking physical custody of securities in circumstances in which
direct investment is restricted by local law or is otherwise prohibited.
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A Fund will enter into an equity
swap transaction only if, immediately following the time the Fund enters
into the transaction, the aggregate notional principal amount of equity
swap transactions to which the Fund is a party would not exceed 5% of the
Funds net assets.
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Swap agreements entail the
risk that a party will default on its payment obligations to a Fund thereunder.
A Fund will seek to lessen the risk to some extent by entering into a transaction
only if the counterparty meets the current credit requirement for OTC option
counterparties. Swap agreements also bear the risk that a Fund will not
be able to meet its obligations to the counterparty. The Fund, however,
will deposit in a segregated account with its custodian, liquid securities
or cash or cash equivalents or other assets permitted to be so segregated
by the Commission in an amount equal to or greater than the market value
of the liabilities under the swap agreement or the amount it would cost
the Fund initially to make an equivalent direct investment, plus or minus
any amount the Fund is obligated to pay or is to receive under the swap
agreement.
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Options on Securities and Securities Indices
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Purchasing Put Options
.
A Fund may purchase put options on securities held in its portfolio or on
securities or interest rate indices that are correlated with securities
held in its portfolio. When a 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 a Funds risk of loss in the event of a decline in
the market value of the portfolio holdings underlying the put option prior
to the options 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.
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Purchasing Call Options
.
A 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 a 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 a 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 a 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.
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A Fund is also authorized to
purchase put or call options in connection with closing out put or call
options it has previously sold. The profit or loss realized by a Fund from
such a closing transaction will depend on whether the amount received is
more or less than the premium paid for the option plus the related transaction
costs.
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Writing Call Options
.
A 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 a 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. A Fund may write call options to
earn income, through the receipt of option premiums. In the event the party
to which a 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, a Fund limits its ability to sell the
underlying securities, and gives up
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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.
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Writing Put Options
.
A Fund may also write put options on securities or securities indices. When
a 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. A Fund
may write put options to earn income, through the receipt of option premiums.
In the event the party to which a 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, a 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 a 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.
A 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.
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A Fund is also authorized to
sell call or put options in connection with closing out call or put options
it has previously purchased.
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Other than with respect to
closing transactions, a Fund will only write call or put options that are
covered. A call or put option will be considered covered if
a 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 a 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.
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Types of Options
. A
Fund may engage in transactions in options on securities or securities indices
on exchanges and in the over-the-counter 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.
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A 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 a 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.
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The sale of a futures contract
limits a Funds risk of loss through a decline in the market value
of portfolio holdings correlated with the futures contract prior to the
futures contracts expiration date. In the event the market value of
the portfolio holdings correlated with the futures contract increases rather
than decreases, however, a 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.
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The purchase of a futures contract
may protect a 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 a 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.
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A Fund is also authorized to
purchase or sell call and put options on futures contracts including financial
futures and stock indices in connection with its hedging activities. Generally,
these strategies would be used under the same market and market sector conditions
(
i.e.
, conditions relating to specific types of investments) in which
the Fund entered into futures transactions. A Fund may purchase put options
or write call options on futures contracts and stock indices rather than
selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, a Fund can purchase call
options, or write put options on futures contracts and stock indices, as
a substitute for the purchase of such futures to hedge against the increased
cost resulting from an increase in the market value of securities which
the Fund intends to purchase.
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A 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). A 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.
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Foreign Exchange Transactions
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A Fund may engage in spot and
forward foreign exchange transactions and currency swaps, purchase and sell
options on currencies and purchase and sell currency futures and related
options thereon (collectively, Currency Instruments) for purposes
of hedging against the decline in the value of currencies in which its portfolio
holdings are denominated against the U.S. dollar. Such transactions could
be effected with respect to hedges on non-U.S. dollar denominated securities
owned by a Fund, sold by a Fund but not yet delivered, or committed or anticipated
to be purchased by a Fund. As an illustration, a Fund may use such techniques
to hedge the stated value in U.S. dollars of an investment in a yen-denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of yen for dollars
at a specified price by a future date. To the extent the hedge is successful,
a loss in the value of the yen relative to the dollar will tend to be offset
by an increase in the value of the put option. To offset, in whole or in
part, the cost of acquiring such a put option, the Fund may also sell a
call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called
a straddle). By selling such a call option in this illustration,
the Fund gives up the opportunity to profit without limit from increases
in the relative value of the yen to the dollar. Straddles of
the type that may be used by a Fund are considered to constitute hedging
transactions and are consistent with the policies described above. No Fund
will attempt to hedge all of its foreign portfolio positions.
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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. A Fund will enter into foreign exchange transactions
only for purposes of hedging either a specific transaction or a portfolio
position. A 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. A
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.
A 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.
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Currency Futures
. A
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
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transactions except that futures are standardized, exchange-traded
contracts. See Futures above. Currency futures involve substantial
currency risk, and also involve leverage risk.
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Currency Options
. A
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. A 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.
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Limitations on Currency
Hedging
. A Fund will not speculate in Currency Instruments. Accordingly,
a 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. A 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). A 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.
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Risk Factors in Hedging
Foreign Currency Risks
. Hedging transactions involving Currency Instruments
involve substantial risks, including correlation risk. While a Funds
use of Currency Instruments to effect hedging strategies is intended to
reduce the volatility of the net asset value of the Funds shares,
the net asset value of the Funds 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 Funds hedging strategies will be ineffective.
To the extent that a Fund hedges against anticipated currency movements
that do not occur, the Fund may realize losses and decrease its total return
as the result of its hedging transactions. Furthermore, a 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.
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In connection with its trading
in forward foreign currency contracts, a Fund will contract with a foreign
or domestic bank, or foreign or domestic securities dealer, to make or take
future delivery of a specified amount of a particular currency. There are
no limitations on daily price moves in such forward contracts, and banks
and dealers are not required to continue to make markets in such contracts.
There have been periods during which certain banks or dealers have refused
to quote prices for such forward contracts or have quoted prices with an
unusually wide spread between the price at which the bank or dealer is prepared
to buy and that at which it is prepared to sell. Governmental imposition
of credit controls might limit any such forward contract trading. With respect
to its trading of forward contracts, if any, a Fund will be subject to the
risk of bank or dealer failure and the inability of, or refusal by, a bank
or dealer to perform with respect to such contracts. Any such default would
deprive the Fund of any profit potential or force the Fund to cover its
commitments for resale, if any, at the then market price and could result
in a loss to the Fund.
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It may not be possible for
a Fund to hedge against currency exchange rate movements, even if correctly
anticipated, in the event that (i) the currency exchange rate movement is
so generally anticipated that the Fund is not able to enter into a hedging
transaction at an effective price, or (ii) the currency exchange rate movement
relates to a market with respect to which Currency Instruments are not available
and it is not possible to engage in effective foreign currency hedging.
The cost to a Fund of engaging in foreign currency transactions varies with
such factors as the currencies involved, the length of the contract period
and the market conditions then prevailing. Since transactions in foreign
currency exchange usually are conducted on a principal basis, no fees or
commissions are involved.
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Risk Factors in Derivatives
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Derivatives are volatile and
involve significant risks, including:
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Credit Risk
the risk that the counterparty
on a Derivative transaction will be unable to honor its financial obligation
to a Fund.
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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.
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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.
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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.
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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, a Fund will experience
a gain or loss which will not be completely offset by movements in the value
of the hedged instruments.
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A 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.
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Certain transactions in Derivatives
(such as futures transactions or sales of put options) involve substantial
leverage risk and may expose a Fund to potential losses, which exceed the
amount originally invested by the Fund. When a 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 Funds exposure, on a mark-to-market
basis, to the transaction (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that a Fund has assets available
to satisfy its obligations with respect to the transaction, but will not
limit the Funds exposure to loss.
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Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives
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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 a Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for a Fund
to ascertain a market value for such instruments. A 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
dealers quotation may be used.
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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 a 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. A 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 that have substantial capital or
that have provided the Fund with a third-party guaranty or other credit
enhancement.
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Stripped Securities
.
Stripped securities are created when the issuer separates the interest and
principal components of an instrument and sells them as separate securities.
In general, one security is entitled to receive the interest payments on
the underlying assets (the interest only or IO security) and
the other to receive the principal payments (the principal only or PO
security). Some stripped securities may receive a combination of interest
and principal payments. The yields to maturity on IOs and POs are sensitive
to the expected or anticipated rate of principal payments (including prepayments)
on the related underlying assets, and principal payments may have a material
effect on yield to maturity. If the underlying assets experience greater
than anticipated prepayments of principal, a Fund may not fully recoup its
initial investment in IOs. Conversely, if the underlying assets experience
less than anticipated prepayments of principal, the yield on POs could be
adversely affected. Stripped securities may be highly sensitive to changes
in interest rates and rates of prepayment.
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Real Estate Related Securities
.
Although no Fund may invest directly in real estate, certain Funds may invest
in equity securities of issuers that are principally engaged in the real
estate industry. Therefore, an investment in a Fund is subject to certain
risks associated with the ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines
in the value of real estate; risks related to general and local economic
conditions; possible lack of availability of mortgage funds or other limitations
on access to capital; overbuilding; risks associated with leverage; market
illiquidity; extended vacancies of properties; increase in competition,
property taxes, capital expenditures and operating expenses; changes in
zoning laws or other governmental regulation; costs resulting from the clean-up
of, and liability to third parties for damages resulting from, environmental
problems; tenant bankruptcies or other credit problems; casualty or condemnation
losses; uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents, including decreases in market rates
for rents; investment in developments that are not completed or that are
subject to delays in completion; and changes in interest rates. To the extent
that assets underlying a Funds investments are concentrated geographically,
by property type or in certain other respects, the Fund may be subject to
certain of the foregoing risks to a greater extent. Investments by a Fund
in securities of companies providing mortgage servicing will be subject
to the risks associated with refinancings and their impact on servicing
rights.
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In addition, if a Fund receives
rental income or income from the disposition of real property acquired as
a result of a default on securities the Fund owns, the receipt of such income
may adversely affect the Funds ability to retain its tax status as
a regulated investment company because of certain income source requirements
applicable to regulated investment companies under the Code.
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Real Estate Investment
Trusts (REITs)
.
Investing in REITs involves certain
unique risks in addition to those risks associated with investing in the
real estate industry in general. Equity REITs may be affected by changes
in the value of the underlying property owned by the REITs, while mortgage
REITs may be affected by the quality of any credit extended. REITs are dependent
upon management skills, may not be diversified geographically or by property
type, and are subject to heavy cash flow dependency, default by borrowers
and self-liquidation. REITs must also meet certain requirements under the
Code to avoid entity level tax and be eligible to pass-through certain tax
attributes of their income to shareholders. REITs are consequently subject
to the risk of failing to meet these requirements for favorable tax treatment
and failing to maintain their exemptions from registration under the Investment
Company Act. REITs are also subject to changes in the Code, including changes
involving their tax status.
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REITs (especially mortgage
REITs) are also subject to interest rate risks. When interest rates decline,
the value of a REITs investment in fixed rate obligations can be expected
to rise. Conversely, when interest rates rise, the value of a REITs
investment in fixed rate obligations can be expected to decline. In contrast,
as interest rates on adjustable rate mortgage loans are reset periodically,
yields on a REITs investments in such loans will gradually align themselves
to reflect changes in market interest rates, causing the value of such investments
to fluctuate less dramatically in response to interest rate fluctuations
than would investments in fixed rate obligations.
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Investing in REITs involves
risks similar to those associated with investing in small capitalization
companies. REITs may have limited financial resources, may trade less frequently
and in limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically, small capitalization
stocks, such as REITs, have been more volatile in price than the larger
capitalization stocks included in the S&P 500 Index. The management
of a REIT may be subject to conflicts of interest with respect to the operation
of the business of the REIT and may be involved in real estate activities
competitive with the REIT. REITs may own properties through
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joint ventures or in other circumstances in which the REIT
may not have control over its investments. REITs may incur significant amounts
of leverage.
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Risks that are intrinsic to
the utility industries include difficulty in obtaining an adequate return
on invested capital, difficulty in financing large construction programs
during an in inflationary period, restrictions on operations and increased
cost and delays attributable to environmental considerations and regulation,
difficulty in raising capital in adequate amounts on reasonable terms in
periods of high inflation and unsettled capital markets, technological innovations
that may render existing plants, equipment or products obsolete, the potential
impact of natural or man-made disasters, increased costs and reduced availability
of certain types of fuel, occasionally reduced availability and high costs
of natural gas for resale, the effects of energy conservation, the effects
of a national energy policy and lengthy delays and greatly increased costs
and other problems associated with the design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the
use of radioactive materials and the disposal of radioactive wastes. There
are substantial differences between the regulatory practices and policies
of various jurisdictions, and any given regulatory agency may make major
shifts in policy from time to time. There is no assurance that regulatory
authorities will, in the future, grant rate increases or that such increases
will be adequate to permit the payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make it even more
difficult for these utilities to obtain adequate relief. Certain of the
issuers of securities held in the Funds portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time to
time review existing policies and impose additional requirements governing
the licensing, construction and operation of nuclear power plants. Prolonged
changes in climatic conditions can also have a significant impact on both
the revenues of an electric and gas utility as well as the expenses of a
utility, particularly a hydro-based electric utility.
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Utility companies in the United
States and in foreign countries are generally subject to regulation. In
the United States, most utility companies are regulated by state and/or
federal authorities. Such regulation is intended to ensure appropriate standards
of service and adequate capacity to meet public demand. Generally, prices
are also regulated in the United States and in foreign countries with the
intention of protecting the public while ensuring that the rate of return
earned by utility companies is sufficient to allow them to attract capital
in order to grow and continue to provide appropriate services. There can
be no assurance that such pricing policies or rates of return will continue
in the future.
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The nature of regulation of
the utility industries is evolving both in the United States and in foreign
countries. In recent years, changes in regulation in the United States increasingly
have allowed utility companies to provide services and products outside
their traditional geographic areas and lines of business, creating new areas
of competition within the industries. In some instances, utility companies
are operating on an unregulated basis. Because of trends toward deregulation
and the evolution of independent power producers as well as new entrants
to the field of telecommunications, non-regulated providers of utility services
have become a significant part of their respective industries. The Manager
believes that the emergence of competition and deregulation will result
in certain utility companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
business from increased competition and may be less profitable. Reduced
profitability, as well as new uses of funds (such as for expansion, operations
or stock buybacks) could result in cuts in dividend payout rates. The Manager
seeks to take advantage of favorable investment opportunities that may arise
from these structural changes. Of course, there can be no assurance that
favorable developments will occur in the future.
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Foreign utility companies are
also subject to regulation, although such regulations may or may not be
comparable to those in the United States. Foreign utility companies may
be more heavily regulated by their respective governments than utilities
in the United States and, as in the United States, generally are required
to seek government approval for rate increases. In addition, many foreign
utilities use fuels that may cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
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A Funds investment policies
are designed to enable it to capitalize on evolving investment opportunities
throughout the world. For example, the rapid growth of certain foreign economies
will necessitate expansion of capacity in the utility industries in those
countries. Although many foreign utility companies currently are government-owned,
thereby limiting current investment opportunities for a Fund, the Manager
believes that, in order to attract significant capital for growth, foreign
governments are likely to seek global investors through the privatization
of their utility industries. Privatization, which refers to the trend toward
investor ownership of assets rather than government ownership, is expected
to occur in newer, faster-growing economies and in mature economies. Of
course, there is no assurance that such favorable developments will occur
or that investment opportunities in foreign markets for the Fund will increase.
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The revenues of domestic and
foreign utility companies generally reflect the economic growth and development
in the geographic areas in which they do business. The Manager will take
into account anticipated economic growth rates and other economic developments
when selecting securities of utility companies.
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Electric
. The electric
utility industry consists of companies that are engaged principally in the
generation, transmission and sale of electric energy, although many also
provide other energy-related services. In the past, electric utility companies,
in general, have been favorably affected by lower fuel and financing costs
and the full or near completion of major construction programs. In addition,
many of these companies have generated cash flows in excess of current operating
expenses and construction expenditures, permitting some degree of diversification
into unregulated businesses. Some electric utilities have also taken advantage
of the right to sell power outside of their traditional geographic areas.
Electric utility companies have historically been subject to the risks associated
with increases in fuel and other operating costs, high interest costs on
borrowings needed for capital construction programs, costs associated with
compliance with environmental and safety regulations and changes in the
regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage. Regulators,
however, lowered allowed rates of return as interest rates declined and
thereby caused the benefits of the rate declines to be shared wholly or
in part with customers. The construction and operation of nuclear power
facilities are subject to increased scrutiny by, and evolving regulations
of, the Nuclear Regulatory Commission and state agencies having comparable
jurisdiction. Increased scrutiny might result in higher operating costs
and higher capital expenditures, with the risk that the regulators may disallow
inclusion of these costs in rate authorizations or the risk that a company
may not be permitted to operate or complete construction of a facility.
In addition, operators of nuclear power plants may be subject to significant
costs for disposal of nuclear fuel and for decommissioning such plants.
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The rating agencies are taking
a closer look at the business profile of utilities. Ratings for companies
are expected to be impacted to a greater extent in the future by the division
of their asset base. Electric utility companies that focus more on the generation
of electricity may be assigned less favorable ratings as this business is
expected to be competitive and the least regulated. On the other hand, companies
that focus on transmission and distribution which is expected to be the
least competitive and the more regulated part of the business may see higher
ratings given the greater predictability of cash flow.
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Currently, several states are
considering deregulation proposals. The introduction of competition into
the industry as a result of deregulation may result in lower revenue, lower
credit ratings, increased default risk, and lower electric utility security
prices. Such increased competition may also cause long-term contracts, which
electric utilities previously entered into to buy power, to become stranded
assets, which have no economic value. Any loss associated with such
contracts must be absorbed by ratepayers and investors. In addition, in
anticipation of increasing competition, some electric utilities have acquired
electric utilities overseas to diversify, enhance earnings and gain experience
in operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings, which have burdened the acquirers
balance sheet. There is no assurance that current deregulation proposals
will be adopted. However, deregulation in any form could significantly impact
the electric utilities industry.
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Telecommunications
.
The telecommunications industry today includes both traditional telephone
companies, with a history of broad market coverage and highly regulated
businesses, and cable companies, which began as small, lightly regulated
businesses focused on limited markets. Today these two historically different
businesses are converging in an industry which is trending toward larger,
competitive, national and international markets with an emphasis on deregulation.
Companies that distribute telephone services and provide access to the telephone
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networks still comprise the greatest portion of this segment,
but non-regulated activities such as cellular telephone services, paging,
data processing, equipment retailing, computer software and hardware services
are becoming increasingly significant components as well. The presence of
unregulated companies in this industry and the entry of traditional telephone
companies into unregulated or less regulated businesses provide significant
investment opportunities with companies which may increase their earnings
at faster rates than had been allowed in traditional regulated businesses.
Still, increasing competition, technological innovations and other structural
changes could adversely affect the profitability of such utilities and the
growth rate of their dividends. Given mergers, certain marketing tests currently
underway and proposed legislation and enforcement changes, it is likely
that both traditional telephone companies and cable companies will soon
provide a greatly expanded range of utility services, including two-way
video and informational services to both residential, corporate and governmental
customers.
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In February 1996, the Telecommunications
Act of 1996 became law. The Act removed regulatory restrictions on entry
that prevented local and long-distance telephone companies and cable television
companies from competing against one another. The Act also removed most
cable rate controls and allowed broadcasters to own more radio and television
stations. Litigation concerning the constitutionality of certain major provisions
of the Act has slowed the implementation of such provisions.
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Gas
. Gas transmission
companies and gas distribution companies are also undergoing significant
changes. In the United States, interstate transmission companies are regulated
by the Federal Energy Regulatory Commission, which is reducing its regulation
of the industry. Many companies have diversified into oil and gas exploration
and development, making returns more sensitive to energy prices. In the
recent decade, gas utility companies have been adversely affected by disruptions
in the oil industry and have also been affected by increased concentration
and competition. In the opinion of the Manager, however, environmental considerations
could improve the gas industry outlook in the future. For example, natural
gas is the cleanest of the hydrocarbon fuels, and this may result in incremental
shifts in fuel consumption toward natural gas and away from oil and coal,
even for electricity generation.
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Water
. Water supply
utilities are companies that collect, purify, distribute and sell water.
In the United States and around the world the industry is highly fragmented
because most of the supplies are owned by local authorities. Companies in
this industry are generally mature and are experiencing little or no per
capita volume growth. In the opinion of the Manager, there may be opportunities
for certain companies to acquire other water utility companies and for foreign
acquisition of domestic companies. The Manager believes that favorable investment
opportunities may result from consolidation of this segment.
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There can be no assurance that
the positive developments noted above, including those relating to privatization
and changing regulation, will occur or that risk factors other than those
noted above will not develop in the future.
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The economic benefit of an
investment in any Fund depends upon many factors beyond the control of the
Fund, the Manager and its affiliates. Each 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 a Fund will depend
upon, among other things, such investors investment objectives and
such investors ability to accept the risks associated with investing
in securities, including the risk of loss of principal.
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Investment Restrictions (All Funds)
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See Part I, Section II Investment
Restrictions of each Funds Statement of Additional Information
for the specific fundamental and non-fundamental investment restrictions
adopted by each Fund. In addition to those investment restrictions, each
Fund is also subject to the restrictions discussed below.
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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, each Fund
has adopted an investment policy pursuant to which it will not purchase
or sell OTC options (including OTC options on futures contracts) if, as
a result of any such transaction, the sum of the market value of OTC options
currently outstanding that are held by the Fund,
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the market value of the underlying securities covered by
OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Funds existing OTC options on financial futures contracts
exceeds 15% of the net assets of the Fund, taken at market value, together
with all other assets of the Fund that are illiquid or are not otherwise
readily marketable. However, if an OTC option is sold by a 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
options 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 any Fund and may be amended by the Board of Directors of the Fund
without the approval of the Funds shareholders. However, no Fund will
change or modify this policy prior to the change or modification by the
Commission staff of its position.
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Each Funds investments
will be limited in order to allow the Fund to qualify as a regulated
investment company for purposes of the Code. See Dividends and
Taxes Taxes. To qualify, among other requirements, each Fund
will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Funds
total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer. Foreign government
securities (unlike U.S. government securities) are not exempt from the diversification
requirements of the Code and the securities of each foreign government issuer
are considered to be obligations of a single issuer. These tax-related limitations
may be changed by the Directors of a Fund to the extent necessary to comply
with changes to the Federal tax requirements. A Fund that is diversified
under the Investment Company Act must satisfy the foregoing 5% and 10% requirements
with respect to 75% of its total assets.
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See Part I, Section III Information
on Officers and Directors, Biographical Information,
Share Ownership and Compensation of Directors
of each Funds Statement of Additional Information for biographical
and certain other information relating to the Directors and officers of
your Fund, including Directors compensation.
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MANAGEMENT AND OTHER SERVICE ARRANGEMENTS
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Management Services
.
The Manager provides each Fund with investment advisory and management services.
Subject to the supervision of the Directors, the Manager is responsible
for the actual management of a Funds portfolio and reviews the Funds
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 each Fund.
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Each Feeder Fund invests all
of its assets in shares of a Master Portfolio. Accordingly, Feeder Funds
do not invest directly in portfolio securities and do not require management
services. All portfolio management occurs at the Master Portfolio level.
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Management Fee
. Each
Fund has entered into a management agreement with the Manager (the Management
Agreement), pursuant to which the Manager receives for its services
to the Fund monthly compensation at an annual rate based on the average
daily net assets of the Fund. For information regarding fees paid by your
Fund to the Manager for the Funds last three fiscal years or other
applicable periods, see Part I, Section IV Management and Advisory
Arrangements of each Funds Statement of Additional Information.
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Sub-Advisory Fee
. The
Manager of certain Funds has entered into a sub-advisory agreement (the
Sub-Advisory Agreement) with the sub-adviser identified in each
such Funds prospectus (the Sub-Adviser) pursuant to which
the Sub-Adviser provides sub-advisory services to the Manager with respect
to the Fund. For information relating to the fees paid by the Manager to
the Sub-Adviser pursuant to the Sub-Advisory Agreement for the Funds
last three
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fiscal years or other applicable periods, see Part I, Section
IV Management And Advisory Arrangements of each Funds
Statement of Additional Information.
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Payment of Fund Expenses
.
Each Management Agreement obligates the Manager to provide management services
and to pay all compensation of and furnish office space for officers and
employees of a 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 interested persons of the Fund. Each Fund pays all other
expenses incurred in the operation of that 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 FAM
Distributors, Inc. (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 Directors who are not interested persons
of a Fund as defined in the Investment Company Act (the 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. Certain accounting services are provided to each Fund
by State Street Bank and Trust Company (State Street) pursuant
to an agreement between State Street and each Fund. Each Fund pays a fee
for these services. In addition, the Manager provides certain accounting
services to each Fund and the Fund pays the Manager a fee for such services.
The Distributor pays certain promotional expenses of the Funds incurred
in connection with the offering of shares of the Funds. Certain expenses
are financed by each 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
.
Fund Asset Management, L.P. and Merrill Lynch Investment Managers, L.P.
each is a limited partnership. The partners of FAM and MLIM are Merrill
Lynch & Co., Inc. (ML & Co.), a financial services holding
company and the parent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Merrill Lynch), and Princeton Services, Inc. (Princeton
Services). ML & Co. and Princeton Services are controlling
persons of FAM and MLIM (as defined under the Investment Company Act)
because of their ownership of FAMs and MLIMs voting securities
or their power to exercise a controlling influence over FAMs and MLIMs
management or policies. Merrill Lynch Investment Managers International
Limited (MLIMIL) is an affiliate of FAM and MLIM. The ultimate
parent of MLIMIL is ML & Co. ML & Co. is a controlling person of
MLIMIL (as defined under the Investment Company Act) because of its ownership
of MLIMILs voting securities or its power to exercise a controlling
influence over MLIMILs management or policies.
|
The following entities may
be considered controlling persons of Merrill Lynch Asset Management
U.K. Limited (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.
|
Administrative Services
and Administrative Fee
. Each Feeder Fund has entered into an administration
agreement (the Administration Agreement) with an administrator
identified in the Funds Prospectus and Part I of each Funds
Statement of Additional Information (each, an Administrator).
For information regarding administrative fees paid by your Fund to the Administrator
for the periods indicated, see Part I, Section IV Management and Advisory
Arrangements of each Funds Statement of Additional Information.
|
Each Administration Agreement
obligates the Administrator to provide certain administrative services to
the Feeder Fund and to pay, or cause its affiliates to pay, for maintaining
its staff and personnel and to provide office space, facilities and necessary
personnel for the Feeder Fund. Each Administrator is also obligated to pay,
or cause its affiliates to pay, the fees of those officers and Directors
of the Feeder Fund who are affiliated persons of the Administrator or any
of its affiliates.
|
Duration and Termination
.
Unless earlier terminated as described below, each Management Agreement
and, if applicable, each Sub-Advisory Agreement and Administration Agreement
will remain in effect from year to year if approved annually (a) by the
Board or by a vote of a majority of the outstanding voting securities of
the Fund and (b) by a majority of the Directors who are not parties to such
contract or interested persons (as defined in the Investment Company Act)
of any such party. Each Agreement is not assignable and may be terminated
without penalty on 60 days written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.
|
Transfer Agency Services
.
Financial Data Services, Inc. (the Transfer Agent), a subsidiary
of ML & Co., acts as each Funds Transfer Agent pursuant to a Transfer
Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement
(each, a Transfer Agency Agreement). Pursuant to each Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Each Fund currently pays between $16.00 and $20.00 for each Class
I or Class A shareholder account, between $19.00 and $23.00 for each Class
B or Class C shareholder account, depending on the level of service required,
and, where applicable, $16.00 for each Class R shareholder account. Each
Fund reimburses the Transfer Agents reasonable out-of-pocket expenses
and pays a fee of 0.10% of account assets for certain accounts that participate
in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFASM
SM
)
Program (the MFA Program). For purposes of each 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. See Part I, Section IV Management and Advisory Arrangements
Transfer Agency Fees of each Funds Statement of Additional Information
for information on the transfer agency fees paid by your Fund for the periods
indicated.
|
Independent Auditor
.
The Directors of each Fund have selected an independent auditor for that
Fund that audits the Funds financial statements. Please see your Funds
Prospectus for information on your Funds independent auditor.
|
Custodian Services
.
The name and address of the custodian (the Custodian) of each
Fund are identified on the back cover page of the Funds Prospectus.
The Custodian is responsible for safeguarding and controlling the Funds
cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Funds investments. 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.
|
For certain Feeder Funds, the
Custodian also acts as the custodian of the Master Portfolios assets.
|
Accounting Services
.
Each Fund has entered into an agreement with State Street, pursuant to which
State Street provides certain accounting services to the Fund. Each Fund
pays a fee for these services. State Street provides similar accounting
services to the Master Trusts. For Funds operating prior to January 1, 2001,
the Manager or the Administrator (in the case of Feeder Funds) provided
accounting services to each Fund and was reimbursed by each Fund at its
cost in connection with such services. The Manager or the Administrator
continues to provide certain accounting services to each Fund and each Fund
reimburses the Manager or the Administrator for these services.
|
See Part I, Section IV Management
and Advisory Arrangements Accounting Services of each Funds
Statement of Additional Information for information on the amounts paid
by your Fund and Master Trust, if applicable, to State Street and the Manager
or, if applicable, the Administrator for the periods indicated.
|
Distribution Expenses
.
Each Fund has entered into a distribution agreement with FAM Distributors,
Inc 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 these documents 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.
|
The Board of each Fund has
approved a Code of Ethics pursuant to Rule 17j-1 under the Act, which covers
the Fund, the Manager, the Sub-Adviser, if any, and the 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.
|
Each Fund offers multiple classes
of shares under the Merrill Lynch Select Pricing
SM
System: Class A and Class I shares are sold
to investors choosing the initial sales charge alternatives and Class B
and Class C shares are sold to investors choosing the deferred sales charge
alternatives. Prior to April 14, 2003, for all Funds except Small Cap Growth
and International Value, Class I shares were designated Class A
and Class A shares were designated Class D. In addition, certain
Funds offer Class R shares, which are available only to certain retirement
plans and are sold without a sales charge. Please see your Funds Prospectus
to determine whether it offers Class R shares. Each class has different
exchange privileges. See Shareholder Services Exchange Privilege.
|
The Merrill Lynch Select Pricing
SM
System is used by more than 50 registered investment companies advised by
the Managers. Funds that use the Merrill Lynch Select Pricing
SM
System are referred to herein as Select Pricing Funds.
|
The offering price of 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) 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. Purchase orders that are not received by the Distributor
prior to this time will be deemed received on the next business day. Dealers
or other financial intermediaries have the responsibility of submitting
purchase orders to the Distributor not later than 30 minutes after the close
of business on the NYSE in order to purchase shares at that days offering
price.
|
The Fund or the Distributor
may suspend the continuous offering of the Funds shares of any class
at any time in response to conditions in the securities markets or otherwise
and may resume offering of shares from time to time. Any order may be rejected
by the Fund or the Distributor. Neither the Distributor, the securities
dealers nor other financial intermediaries are permitted to withhold placing
orders to benefit themselves by a price change.
|
Initial Sales Charge Alternatives Class I and Class
A Shares
|
Investors who prefer an initial
sales charge alternative may elect to purchase Class A shares or, if an
eligible investor, Class I shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class I shares should purchase
Class I shares rather than Class A shares because there is an account maintenance
fee imposed on Class A 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 I or Class A shares, because over
time the accumulated ongoing account maintenance and distribution fees on
Class B, Class C or Class R shares may exceed the initial sales charges
and, in the case of Class A shares, the account maintenance fee. Although
some investors who previously purchased Class I shares may no longer be
eligible to purchase Class I shares of other Select Pricing Funds, those
previously purchased Class I shares, together with Class A, Class B and
Class C 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, Class C and Class
R shares account maintenance and distribution fees will cause Class B, Class
C and Class R shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class A account maintenance fees will cause Class A shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class
I shares.
|
The term purchase,
as used in the Prospectus and this Statement of Additional Information in
connection with an investment in Class I and Class A shares of a Fund, refers
to (i) a single purchase by an individual, (ii) concurrent purchases 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 (iii) single
purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary
may be involved. The term purchase also includes purchases by
any company, as that term is defined in the Act, but does not
include (i) purchases by any company that has not been in existence for
at least six months, (ii) a company that has no purpose other than the purchase
of shares of a Fund or shares of other registered investment companies at
a discount, or (iii) any group of individuals whose sole organizational
nexus is that its participants 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 I Investors
.
Class I shares are offered to a limited group of investors. Investors who
currently own Class I shares in a shareholder account, including participants
in the Merrill Lynch Blueprint
SM
Program, are entitled to purchase additional
Class I shares of a Fund in that account. Certain employer-sponsored retirement
or savings plans, including eligible 401(k) plans, may purchase Class I
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 I 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 I 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 I
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 investment
companies advised by MLIM, FAM or their affiliates. Certain persons who
acquired shares of certain closed-end funds advised by MLIM or FAM 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 a Fund also may purchase
Class I shares of a Fund if certain conditions are met. In addition, Class
I shares of each Select Pricing Fund are offered at net asset value to shareholders
of certain continuously offered closed-end funds advised by MLIM or FAM
who wish to reinvest the net proceeds from the sale of a certain of their
shares of common stock pursuant to a tender offer conducted by such funds.
See Purchase of Shares Closed-End Fund Reinvestment Options.
|
Other Class I Waivers
.
Class I shares are also offered at net asset value to collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and certain
purchases made in connection with certain fee-based programs.
|
See Part I, Section V Information
on Sales Charges and Distribution Related Expenses Class I and Class
A Sales Charge Information of each Funds Statement of Additional
Information for information about amounts paid to the Distributor in connection
with Class I and A shares for the periods indicated.
|
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 I and Class A shares of
a 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
|
Certain investors may be eligible
for a reduction or waiver of a sales load due to the nature of the investors
and/or the reduced sales efforts necessary to obtain their investments.
|
Reinvested Dividends
.
No sales charges are imposed upon shares issued as a result of the automatic
reinvestment of dividends.
|
Rights of Accumulation
.
Eligible investors may purchase shares of a 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 purchasers
combined holdings of all classes of shares of a Fund and of any other Select
Pricing Funds. The purchaser or the purchasers securities dealer or
other financial intermediary must provide the Distributor at the time of
purchase with sufficient information to confirm 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
Class I or Class A shares of a Fund or any Select Pricing Funds made within
a 13-month period. The Letter of Intent is available
|
only to investors whose accounts are established and maintained
at the Transfer Agent. The Letter of Intent is not available to employee
benefit plans for which affiliates of the Manager provide plan participant
record-keeping services. The Letter of Intent is not a binding obligation
to purchase any amount of Class I or Class A shares. If you bought Class
I or Class A shares prior to signing a Letter of Intent, those shares may
be included under a subsequent Letter of Intent executed within 90 days
of the purchase if you inform the Distributor in writing of your intent
within the 90-day period. The value (at cost or maximum offering price,
whichever is higher) of Class I and Class A shares of a Select Pricing Fund
presently held 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 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), you will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the reduced sales
charge and the applicable sales charge. Class I or Class A 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. You may be entitled to
further reduced sales charges under a right of accumulation for purchases
made during the term of a Letter. You will not, however, be entitled to
further reduced sales charges on any purchases made before the execution
of the Letter.
|
The value of any shares you
redeem 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), a series of Financial
Institutions Series Trust, into a Fund that imposes a sales charge will
count toward completing a Letter of Intent from the Fund.
|
Merrill Lynch Blueprint
SM
Program
. Class A shares of certain Funds are offered to participants
in the Merrill Lynch Blueprint
SM
Program
(Blueprint). In addition, participants in Blueprint who own
Class I shares of a Fund may purchase additional Class I 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 purchasing Class I or Class A
shares of a Fund through Blueprint will acquire the shares at net asset
value plus a sales charge calculated in accordance with the Blueprint sales
charge schedule. Under this schedule, purchase of up to $300 are subject
to a sales charge of 4.25%; purchases of $300.01 up to $5,000 are subject
to a sales charge of 3.25% plus $3; and purchases of $5,000.01 or more are
subject to the standard sales charge rates disclosed in the Prospectus.
In addition, Class I or Class A shares of each Fund are offered at net asset
value plus a sales charge of .50% for corporate or group IRA programs purchasing
shares through Blueprint.
|
Class I and Class A shares
are offered at net asset value to participants in Blueprint through the
Merrill Lynch Directed IRA Rollover Program (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.
|
Shareholder services, including
the exchange privilege, available to Class A, Class B and Class I investors
through Blueprint may differ from those available to other Class A, Class
B or Class I investors. Orders for purchases and redemptions of Class A,
Class B or Class I shares of a 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 I shares are offered
at net asset value to TMA
SM
Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services.
|
Purchase Privileges of Certain
Persons
. Directors of each Fund, members of the Boards of other funds
advised by the Manager or an affiliate, ML & Co. and its subsidiaries
and their directors and employees and any trust, pension, profit-sharing
or other benefit plan for such persons, may purchase Class I shares at net
asset value. A 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 a Fund must satisfy the Funds suitability standards.
|
Class A shares of each Fund
are offered at net asset value, without a sales charge, to an investor that
has a business relationship with a Merrill Lynch Financial Advisor 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
A shares of a Fund with proceeds from a redemption of shares of a mutual
fund that was sponsored by the Financial Advisors 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 the redemption had been
made within 60 days prior to the investment in a Fund and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
|
Class A shares of each 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 Advisor
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 A shares of a 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 A shares
must be made within 90 days after such notice.
|
Class A shares of each Fund
are offered at net asset value, without a sales charge, to an investor that
has a business relationship with a Merrill Lynch Financial Advisor 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 A shares
of a 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 A 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 A 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 I or Class A shares of a Fund through certain financial
advisors, selected securities dealers and other financial intermediaries
that meet and adhere to standards established by the Manager from time to
time.
|
Deferred Sales Charge Alternatives Class B and
Class C Shares
|
Investors choosing the deferred
sales charge alternatives should consider Class B shares if they intend
to hold their shares for an extended period of time and Class C shares if
they are uncertain as to the length of time they intend to hold their assets
in a Fund.
|
The deferred sales charge alternatives
may be particularly appealing to investors who 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, these 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 A shares of the Fund after a conversion
period of approximately eight years, and thereafter investors will be subject
to lower ongoing fees.
|
Merrill Lynch compensates its
Financial Advisors 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 by the Distributor to defray
the expenses of securities dealers or other financial intermediaries (including
Merrill Lynch) related to providing distribution-related services to each
Fund in connection with the sale of the Class B and Class C shares. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of each 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 NASD asset-based sales charge
rule. See Limitations on the Payment of Deferred Sales Charges
below.
|
Contingent Deferred Sales
Charges Class B Shares
. If you redeem Class B shares within six
years of purchase, you may be charged a contingent deferred sales charge
(CDSC) at the rates indicated in the Prospectus and below. The
CDSC will be calculated in a 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. The order of redemption will be
first of shares held for over six years in the case of Class B shares, next
of shares acquired pursuant to reinvestment of dividends, and finally of
shares in the order of those held longest. The same order of redemption
will apply if you transfer shares from your account to another account.
|
The following table sets forth
the Class B CDSC:
|
|
Year Since Purchase
Payment Made
|
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge
|
|
|
0-1
|
|
4.0%
|
|
|
1-2
|
|
4.0%
|
|
|
2-3
|
|
3.0%
|
|
|
3-4
|
|
3.0%
|
|
|
4-5
|
|
2.0%
|
|
|
5-6
|
|
1.0%
|
|
|
6 and thereafter
|
|
None
|
|
|
|
For Class B shares of a Fund purchased before
June 1, 2001, the four-year CDSC schedule in effect at that time will apply.
|
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 they were issued through 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 3.0% (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 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 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 be waived for any Class B shares
that were acquired and held at the time of the redemption in an Employee
Access
SM
Account available through employers providing
eligible 401(k) plans. The Class B CDSC may also be waived for any Class
B shares that are purchased by a Merrill Lynch rollover IRA that was funded
by a rollover from a terminated 401(k) plan managed by MLIM Private Investors
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.
|
Class B shareholders of a Fund exercising the exchange privilege
described under Shareholder Services Exchange Privilege
will continue to be subject to that Funds CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares acquired
as a result of the exchange.
|
Class B shares of certain Funds
are offered through Blueprint only to members of certain affinity groups
with a waiver of the CDSC upon redemption.
|
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 A 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.
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Conversion of Class B Shares
to Class A Shares
. Approximately eight years after purchase (the Conversion
Period), Class B shares of each Fund will convert automatically into
Class A shares of that Fund. The conversion 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 A shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes.
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Shares acquired through reinvestment
of dividends on Class B shares will also convert automatically to Class
A shares. The Conversion Date for dividend reinvestment shares will be calculated
taking into account the length of time the shares underlying the dividend
reinvestment shares were outstanding. If at the Conversion Date the conversion
will result in less than $50 worth of Class B shares being left in an account,
all of the Class B shares of the Fund held in the account will be converted
into Class A shares of the Fund.
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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 you exchange 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.
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If you own shares of a Fund
that issues stock certificates, you must deliver any certificates for Class
B shares of the Fund to be converted to the Transfer Agent at least one
week prior to the Conversion Date applicable to those shares. If the Transfer
Agent does not receive the certificates at least one week prior to the Conversion
Date, your Class B shares will convert to Class A shares on the next scheduled
Conversion Date after the certificates are delivered.
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Contingent Deferred Sales Charges Class C Shares
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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 shareholders 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, for
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withdrawals through the Merrill Lynch Systematic Withdrawal
Plan, and in connection with the redemption of Class C shares by certain
retirement plans. See Shareholder Services Systematic Withdrawal
Plan.
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See Part I, Section V Information
on Sales Charges and Distribution Related Expenses Class B and Class
C Sales Charge Information of each Funds Statement of Additional
Information for information about amounts paid to the Distributor in connection
with Class B and C shares for the periods indicated.
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Certain of the Funds offer
Class R shares as described in each such Funds Prospectus. Class R
shares are available only to certain retirement plans. Class R shares are
not subject to an initial sales charge or a contingent deferred sales charge
but are subject to an ongoing distribution fee of 0.25% and an ongoing account
maintenance fee of 0.25%. Distribution fees are used to support the Funds
marketing and distribution efforts, such as compensating Merrill Lynch Financial
Advisors and other financial intermediaries, advertising and promotion.
Account maintenance fees are used to compensate securities dealers and other
financial intermediaries for account maintenance activities. If Class R
shares are held over time, these fees may exceed the maximum sales charge
that an investor would have paid as a shareholder of one of the other share
classes.
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Closed-End Fund Reinvestment Options
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Class I shares of each Fund
are offered at net asset value to shareholders of certain closed-end funds
advised by a Manager who purchased their 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 such shares in Class I shares, if the conditions
set forth below are satisfied. Alternatively, shareholders of closed-end
funds who purchased shares on or after October 21, 1994 and wish to reinvest
the net proceeds from a sale of those shares may purchase Class I shares
(if eligible to buy Class I shares) or Class A shares of each Fund 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 must
be immediately reinvested in Class I or Class A shares. Second, the closed-end
fund shares must either have been acquired in that funds initial public
offering or represent dividends paid on 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 reinvestment option.
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Subject to the conditions set
forth below, shares of each Fund are offered at net asset value to shareholders
of certain continuously offered closed-end funds advised by a Manager (an
Eligible Fund) who wish to reinvest the net proceeds from a
sale of such shares. Upon exercise of this reinvestment option, shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class I shares
of a Fund and shareholders of Merrill Lynch Senior Floating Rate Fund II,
Inc. will receive Class C shares of a Fund.
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In order to exercise this reinvestment
option, a shareholder of an Eligible Fund must sell his or her 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 a Fund. This option is available only with respect to shares
as to which no Early Withdrawal Charge (each as defined in the Eligible
Funds 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 a 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. This
waiver is subject to the requirement that the investor has 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.
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The distribution plan for each
of the Class A, Class B, Class C and Class R shares of the Select Pricing
Funds (each, a Plan) provides that the Fund pays the Distributor
an account maintenance fee, accrued daily and paid monthly, at an annual
rate based on the average daily net assets of the Fund attributable to shares
of the relevant class. This fee compensates the Distributor, Merrill Lynch,
a selected securities dealer or other financial intermediary (pursuant
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to a sub-agreement) for account maintenance activities with
respect to Class A, Class B, Class C and Class R shares of the Select Pricing
Funds.
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The Plan for each of the Class
B, Class C and Class R shares also provides that the Fund pays the Distributor
a distribution fee, accrued daily and paid monthly, at an annual rate based
on the average daily net assets of the Fund attributable to the shares of
the relevant class. This fee compensates 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 advisors or other financial intermediaries for selling Class
B, Class C and Class R shares of the Fund.
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Each Funds Plans are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
In their consideration of a Plan, the Directors must consider all factors
they deem relevant, including information as to the benefits of the Plan
to the Fund and the related class of shareholders. In approving a Plan in
accordance with Rule 12b-1, the non-Interested Directors concluded that
there is reasonable likelihood that the Plan will benefit the Fund and its
related class of shareholders.
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Each Plan provides that, so
long as the Plan remains in effect, the non-interested Directors then in
office will select and nominate other non-interested Directors. Each 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 a Fund. A Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders. 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 Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that each Fund preserve copies of each
Plan and any report made pursuant to such plan for a period of not less
than six years from the date of the Plan or such report, the first two years
in an easily accessible place.
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Among other things, each Plan
provides that the Directors will review quarterly reports of the account
maintenance and/or distribution fees paid to the Distributor. Payments under
the Plans are based on a percentage of average daily net assets attributable
to the shares regardless of the amount of expenses incurred. As a result,
distribution-related revenues from the Plans may be more or less than distribution-related
expenses of the related class. Information with respect to the distribution-related
revenues and expenses is presented to the Directors for their consideration
quarterly. Distribution-related revenues consist of the account maintenance
fees, the distribution fees and the CDSCs. Distribution-related expenses
consist of financial advisor compensation, branch office and regional operation
center selling and transaction processing expenses, advertising, sales promotion
and marketing expenses and interest expense. The distribution-related revenues
paid with respect to one 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.
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See Part I, Section V Information
on Sales Charges and Distribution Related Expenses of each Select
Pricing Funds Statement of Additional Information for information
relating to the fees paid by your Fund to the Distributor under each Distribution
Plan during the Funds most recent fiscal year.
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Limitations on the Payment of Deferred Sales Charges
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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 borne by Class R shares, and
the distribution fee and the CDSC borne by the Class B and Class C shares.
This limitation does not apply to the account maintenance fee. The maximum
sales charge rule is applied separately to each class and limits the aggregate
of distribution fee payments and CDSCs payable by a Fund to (1) 6.25% of
eligible gross sales of Class B, Class C and Class R shares, computed separately
(excluding 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
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maximum, each 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, each 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 circumstance payment in excess of
the amount payable under the NASD formula will not be made.
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See Part I, Section V Information
on Sales Charges and Distribution Related Expenses Limitation on
the Payment of Deferred Sales Charge of each Funds Statement
of Additional Information for comparative information as of your Funds
most recent fiscal year end with respect to the Class B, Class C and, if
applicable, Class R shares of your Fund.
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Each 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. The value of shares
of each Fund at the time of redemption may be more or less than your cost
at the time of purchase, depending in part on the market value of the securities
held by the Fund at such time. Except for any CDSC that may be applicable,
there will be no redemption charge if your redemption request is sent directly
to the Transfer Agent. If you are liquidating your holdings you will receive
all dividends reinvested through the date of redemption.
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The right to redeem shares
may be suspended for more than seven days only (i) for any period during
which trading on the NYSE is restricted as determined by the Commission
or during which the NYSE is closed (other than customary weekend and holiday
closings), (ii) 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 (iii) for such other periods as the Commission may by order permit for
the protection of shareholders of the Fund.
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Each Fund has entered into
a joint committed line of credit with other investment companies advised
by the Manager 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 shareholders in extraordinary or emergency circumstances.
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If you hold shares with the
Transfer Agent you may redeem without charge by writing to the Funds
Transfer Agent, Financial Data Services, Inc., P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should
be sent to Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. If your Fund has issued share certificates, the letter
must be accompanied by certificates for the shares. Redemption requests
should not be sent to the Fund. A redemption request 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 Agents register. The signature(s)
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), whose existence and validity
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)
the request contains the signature(s) of all persons in whose name(s) shares
are recorded on the Transfer Agents register; (ii) the check is mailed
to the stencil address of record on the Transfer Agents register and
(iii) the stencil address has not changed within 30 days. Certain rules
may apply regarding certain types of accounts, including 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.
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You may also redeem shares
held with the Transfer Agent by calling 1-800-MER-FUND. You must be the
shareholder of record and the request must 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 if: (i) the
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accountholder is deceased, (ii) the proceeds are to be sent
to someone other than the shareholder of record, (iii) funds are to be wired
to the clients bank account, (iv) a systematic withdrawal plan is
in effect, (v) the request is by an individual other than the accountholder
of record, (vi) the account is held by joint tenants who are divorced, (vii)
the address on the account has changed within the last 30 days or share
certificates have been issued on the account, or (viii) to protect against
fraud, 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 Funds or the Transfer Agent may temporarily suspend
telephone transactions at any time.
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If you redeem shares directly
with the Transfer Agent, payments will generally be mailed within seven
days of receipt of the proper notice of redemption. A Fund may delay the
mailing of a redemption check until good payment (that is, cash, Federal
funds or certified check drawn on a U.S. bank) has been collected for the
purchase of Fund shares, which will usually not exceed 10 days. If your
account is held directly with the Transfer Agent and contains a fractional
share balance following a redemption, the fractional share balance will
be automatically redeemed by the Fund.
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A Fund will repurchase its
shares through a selected securities dealer or other financial intermediary.
Each Fund normally will accept orders to repurchase shares by wire or telephone
from dealers for their customers. Shares will be priced at the net asset
value calculated on the day the request is received, provided that your
request for repurchase is submitted to your selected securities dealer or
other financial intermediary prior to the regular close of business on the
NYSE and the request is received by the Fund from your selected securities
dealer or other financial intermediary not later than 30 minutes after the
close of business on the NYSE on the same day.
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These repurchase arrangements
are for your convenience 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
for transmitting the notice of repurchase to the Fund. Each Fund reserves
the right to reject any order for repurchase. A shareholder whose order
for repurchase is rejected by a Fund, however, may redeem shares as set
out above.
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Reinstatement Privilege Class I and Class A Shares
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If you redeemed Class I or
Class A shares of a Fund, you may reinstate your account by buying Class
I or Class A shares, as the case may be, of the Fund at net asset value
without a sales charge up to the dollar amount you redeemed. You may exercise
the reinstatement privilege by sending a notice of exercise along with a
check for the amount to be reinstated to the Transfer Agent or by contacting
your Merrill Lynch Financial Advisor within 30 days after the date the redemption
request 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.
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Each Fund offers a number of
shareholder services described below that are designed to facilitate investment
in its shares. You can obtain more information about these services from
each Fund, by calling the telephone number on the cover page, or from the
Distributor, Merrill Lynch, your selected securities dealer or other financial
intermediary. Certain of these services are available only to U.S. investors.
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If your
account is maintained at the Transfer Agent (an Investment Account)
you will receive statements, at least quarterly, from the Transfer Agent.
These statements will serve as confirmations for automatic investment purchases
and the reinvestment of dividends. The statements also will show any other
activity in your Investment Account since the last statement. You also will
receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of dividends. If
your Investment Account is held at the Transfer Agent you may make additions
to it at any time by mailing a check directly to the Transfer Agent. You
may also maintain an account through Merrill Lynch, a selected securities
dealer or other financial intermediary. If
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you transfer 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 your name may be opened automatically
at the Transfer Agent.
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For Funds that issue share
certificates, share certificates are issued only for full shares and only
upon the specific request of a shareholder who has an Investment Account.
You may request that certificates representing all or only part of the full
shares in your Investment Account be issued directly from the Transfer Agent.
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You may transfer 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, you may
purchase additional shares of Funds owned before the transfer. All future
trading of these assets must be coordinated by the new firm. If you wish
to transfer your shares to a securities dealer or other financial intermediary
that has not entered into an agreement with the Distributor, you must either
(i) redeem your shares, paying any applicable CDSC or (ii) continue to maintain
an Investment Account at the Transfer Agent for those shares. You also may
request that the new securities dealer or other financial intermediary maintain
the shares in an account at the Transfer Agent registered in the name of
the securities dealer or other financial intermediary for your benefit whether
the securities dealer or other financial intermediary has entered into a
selected dealer agreement or not.
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If you are considering transferring
a tax-deferred retirement account, such as an individual retirement account,
from Merrill Lynch to another securities dealer or other financial intermediary,
you should be aware that if the new firm will not take delivery of shares
of the Fund, you 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 you must continue to maintain a retirement account at Merrill Lynch for
those shares.
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U.S. shareholders of Class
A, Class B, Class C and Class I shares of each Fund have an exchange privilege
with certain other Select Pricing Funds and Summit, which is a Merrill Lynch-sponsored
money market fund specifically designated for exchange by shareholders of
Select Pricing Funds. In order to qualify for the exchange privilege, the
shares you wish to exchange are required to have a net asset value of at
least $100 and must have been held by you for at least 15 days. Before effecting
an exchange, you should obtain a currently effective prospectus of the fund
into which you wish to make the exchange. 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.
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Exchanges of Class I and
Class A Shares.
You may exchange Class I or Class A shares of a Fund
for Class I shares of a second Select Pricing Fund if you hold any Class
I shares of the second fund in your account at the time of the exchange
or are eligible to purchase Class I shares of the second fund; otherwise,
you will receive Class A shares of the second fund. Class A shares are exchangeable
with shares of the same class of other Select Pricing Funds.
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Exchanges of Class I or Class
A shares outstanding (outstanding Class I or Class A shares)
for Class I or Class A shares of a second Select Pricing Fund, or for Class
A shares of Summit (new Class I or Class A shares) are effected
on the basis of relative net asset value per Class I or Class A share, respectively,
plus an amount equal to the difference, if any, between the sales charge
previously paid on the outstanding Class I or Class A shares and the sales
charge payable at the time of the exchange on the new Class I or Class A
shares. With respect to outstanding Class I or Class A shares received in
a previous exchange, the sales charge previously paid will include
the aggregate of the sales charges paid with respect to such Class I or
Class A shares in the initial purchase and any subsequent exchange. Class
I or Class A shares issued pursuant to dividend reinvestment are not subject
to a sales charge. For purposes of the exchange privilege, however, these
shares will be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class I or Class A shares on which the
dividend was paid. Based on this formula, Class I and Class A shares of
a Fund generally may be exchanged into the Class I or Class A shares, respectively,
of a second Fund with a reduced sales charge or without a sales charge.
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Exchanges of Class B and
Class C Shares.
Shareholders of certain Select Pricing Funds with Class
B and Class C shares outstanding (outstanding Class B or Class C shares)
may exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of a second Select Pricing Fund or for Class B shares of Summit
(new Class B or
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Class C shares) on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC. Certain
Select Pricing Funds impose different CDSC schedules. If you exchange your
Class B shares for shares of a Fund with a different CDSC schedule the higher
schedule will apply. For purposes of computing the CDSC upon redemption
of new Class B or Class C shares, the time you held both the exchanged Class
B or Class C shares and the new Class B shares or Class C shares will count
towards the holding period of the new Class B or Class C shares. For example,
if you exchange Class B shares of a Fund for those of a second Fund after
having held the Funds Class B shares for two-and-a-half years, the
3% CDSC that generally would apply to a redemption would not apply to the
exchange. Four years later if you decide to redeem the Class B shares of
the second Fund and receive cash, there will be no CDSC due on this redemption
since by adding the two-and-a-half year holding period of the Fund Class
B shares to the four year holding period for the second Funds Class
B shares, you will be deemed to have held the second Funds Class B
shares for more than six years. Class B shares of certain Select Pricing
Funds purchased prior to June 1, 2001 are subject to the four-year CDSC
schedule in effect at that time. This four-year CDSC schedule will also
apply to Class B shares received in exchange for such shares.
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Exchanges for Shares of
a Money Market Fund.
You may exchange Class I and Class A shares for
Class A shares of Summit and Class B and Class C shares of a Fund for Class
B shares of Summit. You may exchange Class A shares of Summit back into
Class I or Class A shares of a Fund. You may exchange Class B shares of
Summit back into Class B or Class C shares of a Fund and, in the event of
such an exchange, the period of time that you held Class B shares of Summit
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. Please see your Merrill Lynch Financial Advisor
for further information.
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Prior to October 12, 1998,
exchanges from certain Select Pricing Funds into a money market fund were
directed to certain Merrill Lynch-sponsored money market funds other than
Summit (Other Money Funds). If you exchanged Select Pricing
Fund shares for Other Money Funds and subsequently wish to exchange Other
Money Fund shares for shares of a Select Pricing Fund (Acquired Fund),
you will be subject to the CDSC schedule applicable to the Acquired Fund
shares, if any. The holding period for Other Money Fund shares will not
count toward satisfaction of the holding period requirement for reduction
of the CDSC imposed on Acquired Fund shares, if any, and, with respect to
Class B shares, toward satisfaction of the Conversion Period. However, the
time you held the fund shares originally exchanged for Other Money Fund
shares will count towards the holding period of the Class B or C shares
of the Acquired Fund for purposes of reducing the CDSC or satisfying the
Conversion Period.
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Exchanges by Participants
in Certain Programs.
The exchange privilege is modified with respect
to certain participants in mutual fund advisory programs and other fee-based
programs sponsored by Merrill Lynch. See Fee-Based Programs
below.
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Exercise of the Exchange
Privilege.
To exercise the exchange privilege, you should contact your
Merrill Lynch Financial Advisor, who will advise each Fund of the exchange.
If you own shares of a Fund that has not issued share certificates, you
may exercise the exchange privilege by wire through your securities dealer
or other financial intermediary. Each Fund reserves the right to require
a properly completed exchange application.
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You may also request exchanges
by calling the Transfer Agent at 1-800-MER-FUND if your account is held
with the Transfer Agent for amounts up to $50,000. 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 if: (i) the accountholder is deceased, (ii)
the request is by an individual other than the accountholder of record,
(iii) the account is held by joint tenants who are divorced or the address
on the account has changed within the last 30 days, or (iv) 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.
Each Fund or the Transfer Agent may temporarily suspend telephone transactions
at any time.
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This exchange privilege may
be modified or terminated in accordance with the rules of the Commission.
Each 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 resume
such offering from time to time. The exchange privilege is available only
to U.S. shareholders in states where the exchange legally may
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be made. The exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
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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 I shares at
net asset value. Under specified circumstances, participants in certain
Programs may exchange their shares in the Program for Class I 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 or the automatic exchange of shares to another
class at net asset value. In addition, upon termination of participation
in a Program, shares that have been held for less than specified periods
within the Program may be subject to a fee based on 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 the Programs client agreement and
from the Transfer Agent at 1-800-MER-FUND.
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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 a Fund and certain
of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. There may be fees associated with investing through these plans.
Information with respect to these plans is available on request from Merrill
Lynch.
|
Dividends received in each
of the plans referred to above are exempt from Federal taxation until distributed
from the plans and, in the case of Roth IRAs and education savings plans,
may be exempt from taxation when distributed as well. Investors considering
participation in any retirement or education savings plan should review
specific tax laws relating to the plan and should consult their attorneys
or tax advisers with respect to the establishment and maintenance of any
such plan.
|
Automatic Investment Plans
|
You may make additions to an
Investment Account through a service known as the Automatic Investment Plan.
Under the Automatic Investment Plan, a Fund is authorized, on a regular
basis, to provide systematic additions to your Investment Account through
charges of $50 or more to your regular bank account by either pre-authorized
checks or automated clearing house debits. If you buy shares of a Fund through
Blueprint, no minimum charge to your bank account is required. Alternatively,
if you maintain a CMA® Account you may arrange to have periodic investments
made in a Fund in amounts of $100 ($1 or more for retirement accounts) or
more through the CMA® Automated Investment Program.
|
Automatic Dividend Reinvestment Plan
|
Unless you provide specific
instructions as to the method of payment, dividends will be automatically
reinvested, without sales charge, in additional full and fractional shares
of the same Fund. You may, at any time, elect to have dividends paid in
cash, rather than reinvested in shares of a Fund (provided that, if a payment
on an account maintained at the Transfer Agent would amount to $10.00 or
less, the payment will automatically be reinvested in additional shares).
If your account is maintained with the Transfer Agent, you may contact the
Transfer Agent in writing or by telephone (1-800-MER-FUND). For other accounts,
you should contact your Merrill Lynch Financial Advisor, selected securities
dealer or other financial intermediary. Your instructions will be effected
ten days after the receipt by the Transfer Agent of such notice. A Fund
is not responsible for any failure of delivery to the
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shareholders address of record and no interest will
accrue on amounts represented by uncashed dividend checks. Cash payments
can also be deposited directly in the shareholders bank account.
|
Systematic Withdrawal Plans
|
You may elect to receive systematic
withdrawals from your Investment Account by check or through automatic payment
by direct deposit to your bank account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available if you have
acquired shares of a Fund having a value, based on cost or the current offering
price, of $5,000 or more, and monthly withdrawals are available if your
shares have a value of $10,000 or more.
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At the time of each withdrawal
payment, sufficient shares are redeemed from your account to provide the
withdrawal payment specified by you. You may specify the dollar amount and
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 on the 24th day of
each month or the 24th day of the last month of each quarter, whichever
is applicable. If the NYSE is not open for business on such date, the shares
will be redeemed at the net asset value determined 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 you make systematic withdrawals, dividends
and distributions on all shares in the Investment Account are reinvested
automatically in Fund shares. Your systematic withdrawal plan may be terminated
at any time, without charge or penalty, by you, a Fund, the Transfer Agent
or the Distributor.
|
The maximum number of Class
B or Class C shares that can be redeemed from an Investment Account annually
will 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 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 normally
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 A shares, you must make a new election to join the
systematic withdrawal program with respect to the Class A shares. If you
wish to change the amount being withdrawn in a systematic withdrawal plan,
you should contact your Merrill Lynch Financial Advisor.
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Withdrawal payments should
not be considered as dividends. Withdrawals generally are treated as sales
of shares and may result in taxable gain or loss. If periodic withdrawals
continuously exceed reinvested dividends, the shareholders 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. A Fund will not knowingly
accept purchase orders for shares of a Fund from investors who maintain
a systematic withdrawal plan with respect to that Fund unless such purchase
is equal to at least one years scheduled withdrawals or $1,200, whichever
is greater. Periodic investments may not be made into an Investment Account
in which the shareholder has elected to make systematic withdrawals.
|
Alternatively, if your shares
are held within a CMA
®
or Retirement Account you may elect
to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or
annual basis through the CMA
®
Systematic Redemption Program
or the redemption program of the Retirement Account. The minimum fixed dollar
amount that is redeemable is $50. The proceeds of systematic redemptions
will be posted to your account three business days after the date the shares
are redeemed. All redemptions are made at net asset value. You may elect
to have your 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, you 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
®
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
®
Systematic
Redemption Program, eligible shareholders should contact their Merrill Lynch
Financial Advisor.
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Determination of Net Asset Value
|
The net asset value of each
class of shares of each 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 foreign 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 Years Day, Martin Luther King,
Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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Net asset value per share is
computed by dividing the value of the securities held by a 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 (on a class by class basis), rounded
to the nearest cent. Expenses, including the fees payable to the Manager
and Distributor, are accrued daily.
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The principal asset of each
Feeder Fund will normally be its interest in an underlying Master Portfolio.
The value of that interest is based on the net assets of the Master Portfolio,
which are comprised of the value of the securities held by the Master Portfolio
plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses
of the Master Portfolio). Expenses of a Master Portfolio, including the
investment advisory fees, are accrued daily. The net asset value of a Feeder
Fund is equal to the value of the Feeder Funds proportionate interest
in the net assets of the Master Portfolio plus any cash or other assets,
minus all liabilities (including accrued expenses) of the Feeder Fund. To
determine a Feeder Funds net asset value per share, the Feeder Funds
net asset value is divided by the total number of shares outstanding of
the Feeder Fund at such time (on a class by class basis), rounded to the
nearest cent. Expenses, including fees payable to the Administrator and
Distributor, are accrued daily.
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The per share net asset value
of Class A, Class B, Class C and Class R shares generally will be lower
than the per share net asset value of Class I 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, the daily
expense accruals of the account maintenance fees applicable with respect
to Class A shares and the daily expense accruals of the account maintenance
and distribution fees applicable to Class R shares. Moreover, the per share
net asset value of the Class B, Class C and Class R shares generally will
be lower than the per share net asset value of Class A 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 and the
daily expense accruals of the distribution fees applicable to Class R shares
of a Fund. In addition, the per share net asset value of Class B and Class
C shares generally will be lower than the per share net asset value of Class
R shares due to the daily expense accruals of the higher distribution fees
and higher transfer agency fees applicable to Class B and Class C shares.
It is expected, however, that the per share net asset value of all classes
of a Fund 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.
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Securities that are held by
a Fund that are traded on stock exchanges or NASDAQ National are valued
at the last sale price or official close price on the exchange on which
such securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price
for long positions, and at the last available ask price for short positions.
In cases where securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market by or under
the authority of the Board of each Fund. Long positions in securities traded
in the OTC market, NASDAQ Small Cap or Bulletin Board are valued at the
last available bid price or yield equivalent obtained from one or more dealers
or pricing services approved by the Board of a Fund. Short positions in
securities traded in the OTC market are valued at the last available ask
price. 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 a 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 on the last sale price in the
case of exchange-traded options or, in the case of options traded in the
OTC market, the last ask price. Options purchased by a 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
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investments, including financial futures contracts and related
options, are generally valued at market value. Obligations with remaining
maturities of 60 days or less are valued at amortized cost unless the Manager
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
Board. Such valuations and procedures will be reviewed periodically by the
Board.
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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 a Funds shares are determined as of such times.
Foreign currency exchange rates also are generally determined prior to the
close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at
which they are determined and the close of business on the NYSE that may
not be reflected in the computation of a Funds net asset value. If
events (
e.g.
, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect
the value of such securities, those securities may be valued at their fair
value as determined in good faith by the Board of Directors or by the Manager
using a pricing service and/or procedures approved by the Board of Directors.
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For funds organized in a master-feeder
structure, each investor in a Master Portfolio may add to or reduce its
investment in the Master Portfolio on each day the NYSE is open for trading.
The value of each investors (including a Feeder Funds) interest
in a Master Portfolio will be determined after the close of business on
the NYSE by multiplying the net asset value of the Master Portfolio by the
percentage, effective for that day, that represents that investors
share of the aggregate interests in the Master Portfolio. Any additions
or withdrawals to be effected on that day will then be effected. The investors
percentage of the aggregate beneficial interests in a Master Portfolio will
then be recomputed as the percentage equal to the fraction (i) the numerator
of which is the value of such investors investment in the Master Portfolio
as of the time of determination on such day plus or minus, as the case may
be, the amount of any additions to or withdrawals from the investors
investment in the Master Portfolio effected on such day, and (ii) the denominator
of which is the aggregate net asset value of the Master Portfolio as of
such time on such day plus or minus, as the case may be, the amount of the
net additions to or withdrawals from the aggregate investments in the Master
Portfolio by all investors in the Master Portfolio. The percentage so determined
will then be applied to determine the value of the investors interest
in a Master Portfolio after the close of business of the NYSE or the next
determination of net asset value of the Master Portfolio.
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Computation of Offering Price Per Share
|
See Part I, Section VI Computation
of Offering Price of each Funds Statement of Additional Information
for an illustration of the computation of the offering price for Class A,
Class B, Class C, Class I, and, if applicable, Class R shares of your Fund.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
|
Transactions in Portfolio Securities
|
Subject to policies established
by the Directors of each Fund, the Manager is primarily responsible for
the execution of a Funds portfolio transactions and the allocation
of brokerage. The Manager does not execute transactions through any particular
broker or dealer, but 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, operational
facilities of the firm and the firms risk and skill in positioning
blocks of securities. While the Manager generally seeks reasonable trade
execution costs, a Fund does not necessarily pay the lowest spread or commission
available. Subject to applicable legal requirements, the Manager may select
a broker based partly upon brokerage or research services provided to the
Manager and its clients, including a Fund. In return for such services the
Manager may cause a Fund to pay a higher commission than other brokers would
charge if the Manager determines in good faith that the commission is reasonable
in relation to the services provided.
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In the case of Feeder Funds,
because each Feeder Fund will invest exclusively in beneficial interests
of a Master Portfolio, it is expected that all transactions in portfolio
securities will be entered into by the Master Portfolio.
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Section 28(e) of the Exchange
Act (Section 28(e)) permits a Manager, under certain circumstances,
to cause an account to pay a broker a commission for effecting a transaction
that exceeds the amount another broker or dealer would have charged for
effecting the same transaction in recognition of the value of brokerage
and research services provided by that broker or dealer. This includes commissions
paid on riskless principal transactions under certain conditions. 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 to securities transactions (such as clearance, settlement, and
custody). The Manager believes that access to independent investment research
is beneficial to its investment decision-making processes and, therefore,
to a Fund.
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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 that assists in the valuation of investments. Examples
of research-oriented services for which the Manager might use 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 some or 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 Managers individually managed portfolios is not necessarily
shared by and between such personnel. Any investment advisory or other fees
paid by a Fund to the Manager are not reduced as a result of the Managers
receipt of research services.
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In some cases the Manager may
receive a service from a broker that has both a research and
a non-research use. When this occurs the Manager 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 Manager 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 Manager faces a potential conflict of interest, but the Manager 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.
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From time to time, a Fund may
purchase new issues of securities in a fixed price offering. In these situations,
the broker may be a member of the selling group that will, in addition to
selling securities, provide the Manager with research services. The NASD
has adopted rules expressly permitting these types of arrangements under
certain circumstances. Generally, the broker will provide research credits
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).
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In addition, consistent with
the Conduct Rules of the NASD and policies established by the Directors
of a Fund and subject to best execution, the Manager may consider sales
of shares of the Fund as a factor in the selection of brokers and 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.
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Each Fund anticipates that
its brokerage transactions involving foreign securities generally will be
conducted primarily on the principal stock exchanges of the applicable country.
Foreign equity securities may be held by a Fund in the form of Depositary
Receipts, or other securities convertible into foreign equity securities.
Depositary Receipts may be listed on stock exchanges, or traded in over-the-counter
markets in the United States or Europe, as the case may be. American Depositary
Receipts, like other securities traded in the United States, will be subject
to negotiated commission rates. Because the shares of each Fund are redeemable
on a daily basis in U.S. dollars, each 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 significant effect
on a Funds portfolio strategies.
|
See Part I, Section VII Portfolio
Transactions and Brokerage of each Funds Statement of Additional
Information for information about the brokerage commissions paid by your
Fund, including commissions paid to Merrill Lynch, if any, for the periods
indicated.
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Each Fund may invest in certain
securities traded in the OTC market and intends to deal directly with the
dealers who make a market in the particular securities, except in those
circumstances in which better prices and execution are available elsewhere.
Under the Investment Company Act, persons affiliated with a 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 Funds will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, an affiliated person of a 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, a 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 the Fund that
either comply with rules adopted by the Commission or with interpretations
of the Commission staff.
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Each Fund has received an exemptive
order from the Commission permitting it to lend portfolio securities to
Merrill Lynch or its affiliates. Pursuant to that order, each Fund also
has retained an affiliated entity of the Manager as the securities lending
agent (the lending agent) for a fee, including a fee based on
a share of the returns on investment of cash collateral. Please see Part
I, Section VII Portfolio Transactions and Brokerage of each
Funds Statement of Additional Information for information on the securities
lending fees paid the lending agent by your Fund. In connection with securities
lending activities, the lending agent may, on behalf of a Fund, invest cash
collateral received by the Fund for such loans, among other things, in a
private investment company managed by the lending agent or in registered
money market funds advised by the Manager or its affiliates, or in a private
investment company managed by the lending agent. If a Fund acquires shares
in either the private investment company or an affiliated money market fund,
shareholders would bear both their proportionate share of the Funds
expenses, and indirectly, the expense of such other entities. However, in
accordance with the exemptive order, the manager to the private investment
company will not charge any advisory fees with respect to shares purchased
by a Fund. Such shares also will not be subject to a sales load, redemption
fee, distribution fee or service fee, or in the case of the shares of an
affiliated money market fund, the payment of any such sales load, redemption
fee, distribution fee or service fee will be offset by the Managers
waiver of a portion of its advisory fee.
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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 a Fund in any of its
portfolio transactions executed on any securities exchange of which it is
a member, appropriate consents have been obtained from each Fund and annual
statements as to aggregate compensation will be provided to each Fund.
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The Directors of each Fund
have 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 each Fund to a Manager. After
considering all factors deemed relevant, the Directors of each Fund made
a determination not to seek such recapture. The Directors of each Fund will
reconsider this matter from time to time.
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Because of different objectives
or other factors, a particular security may be bought for one or more funds
or clients advised by the Manager or its affiliates (collectively, clients)
when one or more clients of the Manager or its affiliates are selling the
same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve a Fund or other clients or
funds for which the Manager or an affiliate act as investment
|
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 its affiliates during the same period may increase the
demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
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Each Fund intends to distribute
substantially all of its net investment income, if any. Dividends from such
net investment income are paid as set forth in each Funds prospectus.
Each Fund will also distribute all net realized capital gains, if any, to
its shareholders at least annually. From time to time, a Fund may declare
a special distribution at or about the end of the calendar year in order
to comply with Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the year. If in
any fiscal year, a Fund has net income from certain foreign currency transactions,
such income will be distributed at least annually.
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For information concerning
the manner in which dividends may be reinvested automatically in shares
of each Fund, see Shareholder Services Automatic Dividend Reinvestment
Plan. Shareholders may also elect in writing to receive any such dividends
in cash. Dividends are taxable to shareholders, as discussed below, whether
they are reinvested in shares of the Fund or received in cash. The per share
dividends on Class A, Class B, Class C and Class R shares will be lower
than the per share dividends on Class I shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable to
Class B and Class C shares, the account maintenance fees applicable to Class
A shares, and the account maintenance and distribution fees applicable to
Class R shares. Similarly, the per share dividends on Class B, Class C and
Class R shares will be lower than the per share dividends on Class A shares
as a result of the distribution fees and higher transfer agency fees applicable
to Class B and Class C shares and the distribution fees applicable to Class
R shares, and the per share dividends on Class B and Class C shares will
be lower than the per share dividends on Class R shares as a result of the
distribution fees and higher transfer agency fees applicable to Class B
and Class C shares.
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Each Fund intends to qualify,
or continue to qualify, for the special tax treatment afforded to regulated
investment companies (RICs) under the Code. As long as a 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
I shareholders (together, the shareholders). Each Fund intends
to distribute substantially all of such income and gains.
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If, in any taxable year, a
Fund fails to qualify as a RIC under the Code, such Fund would be taxed
in the same manner as an ordinary corporation and all distributions from
earnings and profits to its shareholders would be taxable as ordinary 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 the previous years.
While each Fund intends to distribute its income and capital gains in the
manner necessary to avoid imposition of the 4% excise tax, there can be
no assurance that sufficient amounts of a Funds taxable income and
capital gains will be distributed to achieve this objective. In such event,
a Fund will be liable for the tax only on the amount by which it does not
meet the foregoing distribution requirements.
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Dividends paid by a Fund from
its ordinary income or from an excess of net short-term capital gains over
net long term capital losses (together referred to as ordinary income
dividends) are taxable to shareholders as ordinary income. Distributions
made from an excess of net long term capital gains over net short term capital
losses (including gains or losses from certain transactions in futures and
options) (capital gain dividends) are taxable to shareholders
as long term capital gains, regardless of the length of time the shareholder
has owned Fund shares. Any loss upon the sale or exchange of Fund shares
held for six months or less will be treated as long term capital loss to
the extent of any capital gain dividends received by the shareholder. Distributions
in excess of a Funds
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earnings and profits will first reduce the adjusted tax basis
of a shareholders shares and, after such adjusted tax basis is reduced
to zero, will constitute capital gains to such shareholder (assuming the
shares are held as a capital asset). Long term capital gains (
i.e.
gains, from a sale or exchange of capital assets held for more than one
year) are generally taxed at preferential rates to non-corporate taxpayers.
Generally not later than 60 days after the close of its taxable year, each
Fund will provide its shareholders with a written notice designating the
amount of dividends paid during the year that qualify as capital gain dividends
and as ordinary income dividends.
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Dividends are taxable to shareholders
even if they are reinvested in additional shares of a Fund. A portion of
a Funds ordinary income dividends attributable to the dividends received
from domestic corporations may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements are met.
For this purpose, each Fund will allocate any dividends eligible for the
dividends received deduction among the Class A, Class B, Class C, Class
I and Class R shareholders of the Select Pricing Funds 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, Class I and Class R shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. To the extent that a Funds dividends are attributable
to dividends received from foreign corporations, payments on certain types
of preferred stock and other distributions ineligible for the deduction,
they will not qualify for the dividends received deduction. If a 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 the dividend was declared.
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For the Select Pricing Funds
no gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class A shares. A shareholders basis
in the Class A shares acquired upon conversion will be the same as the shareholders
basis in the converted Class B shares, and the holding period of the acquired
Class A shares will include the holding period for the converted Class B
shares.
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If a shareholder of a Select
Pricing Fund exercises an exchange privilege within 90 days of acquiring
the shares of a Fund, then the loss that the shareholder recognizes on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid on the exchanged shares reduces any sales charge the shareholder
would have owed upon the purchase of the new shares in the absence of the
exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
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A loss realized on a sale or
exchange of shares of a Fund will be disallowed if such 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
on which the shares are disposed of. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
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A Fund may invest in zero coupon
U.S. Treasury bonds and other debt securities that are issued at a discount
or provide for deferred interest. Even though a Fund receives no actual
interest payments on these securities, it will be deemed to receive income
equal, generally, to a portion of the excess of the face value of the securities
over their issue price (original issue discount) each year that
the securities are held. Since the original issue discount income earned
by a Fund in a taxable year may not be represented by cash income, it may
have to dispose of securities, which it might otherwise have continued to
hold, or borrow to generate cash in order to satisfy its distribution requirements.
In addition, a Funds investment in foreign currencies or foreign currency
denominated or referenced debt securities, certain asset-backed securities
and contingent payment and inflation-indexed debt instruments also may increase
or accelerate the Funds recognition of income, including the recognition
of taxable income in excess of cash generated by such investments.
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Ordinary income dividends paid
to shareholders who are non-resident 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 is provided under applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisors concerning the applicability
of the United States withholding tax.
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Under certain provisions of
the Code, some shareholders may be subject to a withholding tax on ordinary
income dividends, capital gain dividends and redemption payments (backup
withholding). Generally, shareholders
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subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Funds
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.
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Dividends and interest received
by a Fund may give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain foreign countries and the U.S.
may reduce or eliminate such taxes.
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Shareholders of certain Funds
that invest more than 50% of the value of their assets at the close of a
taxable year in foreign securities may be able to claim U.S. foreign tax
credits with respect to such foreign taxes paid by the Fund, subject to
certain requirements and limitations contained in the Code. For example,
certain retirement accounts cannot claim foreign tax credits on investments
in foreign securities held in a Fund. In addition, a foreign tax credit
may be claimed with respect to withholding tax on a dividend only if the
shareholder meets certain holding period requirements. A Fund also must
meet these holding period requirements, and if a Fund fails to do so, it
will not be able to pass through to shareholders the ability
to claim a credit or a deduction for the related foreign taxes paid by the
Fund. If a Fund satisfies the applicable requirements, such Fund will be
eligible, and intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to include their
proportionate shares of such foreign taxes in their U.S. income tax returns
as gross income, treat such proportionate shares as taxes paid by them,
and deduct such proportionate shares in computing their taxable incomes
or, alternatively, use them as foreign tax credits against their U.S. income
taxes. No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from a Funds election described in this
paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
A Fund will report annually to its shareholders the amount per share of
such foreign taxes and other information needed to claim the foreign tax
credit. For this purpose, a Fund will allocate foreign source income among
each class of shareholders according to a method similar to that described
above for the allocation of dividends eligible for the dividends received
deduction.
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The transactions of certain
Funds are subject to special tax rules of the Code that may, among other
things, (a) affect the character of gains and losses realized (with capital
gains generally subject to tax at lower rates than ordinary income), (b)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, and (c) accelerate the recognition of income without a corresponding
receipt of cash (with which to make the necessary distributions to satisfy
distribution requirements applicable to RICs). Operation of these rules
could, therefore, affect the character, amount and timing of distributions
to shareholders. Special tax rules also will require a Fund to mark to market
certain types of positions in its portfolio (
i.e.
, treat them as
sold on the last day of the taxable year), and may result in the recognition
of income without a corresponding receipt of cash. Funds engaging in transactions
affected by these provisions intend to monitor their transactions, make
appropriate tax elections and make appropriate entries in their books and
records to lessen the effect of these tax rules and avoid any possible disqualification
for the special treatment afforded RICs under the Code.
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Passive Foreign Investment Companies
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If a Fund purchases shares
of an investment company (or similar investment entity) organized under
foreign law, the Fund will generally be treated as owning shares in a passive
foreign investment company (PFIC) for U.S. Federal income tax
purposes. A Fund may be subject to U.S. Federal income tax, and an interest
charge (at the rate applicable to tax underpayments) on tax liability treated
as having been deferred with respect to certain distributions from such
a company and on gain from the disposition of the shares of such a company
(collectively referred to as excess distributions), even if
such excess distributions are paid by the Fund as a dividend to its shareholders.
A Fund may be eligible to make an election with respect to certain PFICs
in which it owns shares that will allow it to avoid the taxes on excess
distributions. However, such election may cause a Fund to recognize income
in a particular year in excess of the distributions received from such PFICs.
Alternatively, a Fund could elect to mark to market at the end
of each taxable year all shares that it holds in PFICs. If it made this
election, a Fund would recognize as ordinary income any increase in the
value of such shares as of the close of the taxable year over their adjusted
basis and as ordinary loss any decrease in such value but only to the extent
of previously recognized mark-to-market gains. By making the
mark-to-market election, a Fund could avoid imposition of the interest charge
with
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respect to excess distributions from PFICs, but in any particular
year might be required to recognize income in excess of the distributions
it received from PFICs.
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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.
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Ordinary income and capital
gain dividends may also be subject to state and local taxes.
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Certain states exempt from
state income taxation dividends paid by RICs that are derived from interest
on U.S. Government obligations. State law varies as to whether dividend
income attributable to U.S. Government obligations is exempt from state
income tax.
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Shareholders of each Fund are
urged to consult their tax advisers regarding specific questions as to Federal,
foreign, state or local taxes with respect to their Fund. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in a Fund.
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In the case of a Feeder Fund,
such Fund is entitled to look to the underlying assets of the Master Portfolio
in which it has invested for purposes of satisfying various qualification
requirements of the Code applicable to RICs. Each Master Portfolio is classified
as a partnership for tax purposes. If applicable tax provisions were to
change, then the Board of a Feeder Fund will determine, in its discretion,
the appropriate course of action for the Feeder Fund. One possible course
of action would be to withdraw the Feeder Funds investments from the
Master Portfolio and to retain an investment manager to manage the Feeder
Funds assets in accordance with the investment policies applicable
to the Feeder Fund.
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From time to time a Fund may
include its average annual total return and other total return data, and
if applicable, yield in advertisements or information furnished to present
or prospective shareholders. Total return is based on a Funds historical
performance and is not intended to indicate future performance. Average
annual total return is determined separately for Class A, Class B, Class
C, Class I and Class R shares in accordance with a formula specified by
the Commission.
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Quotations of average annual
total return, before tax, 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 before taxes is computed assuming all dividends are reinvested
and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, if any, in the case of Class I and Class
A shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class
B and Class C shares but does not take into account taxes payable on dividends
or on redemption.
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Quotations of average annual
total return, after taxes, on dividends for the specified periods are computed
by finding the average annual compounded rates of return that would equate
the initial amount invested to the ending value of such investment at the
end of each period assuming payment of taxes on dividends received during
such period. Average annual total return after taxes on dividends is computed
assuming all dividends, less the taxes due on such dividends, are reinvested
and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, if any, in the case of Class I and Class
A shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class
B and Class C shares. The taxes due on dividends are calculated by applying
to each dividend the highest marginal Federal individual income tax rates
in effect on the reinvestment date for that dividend. The rates used correspond
to the tax character of each dividend. The taxable amount and tax character
of each dividend are specified by each Fund on the dividend declaration
date, but may be adjusted to reflect subsequent recharacterizations of distributions.
The applicable tax rates may vary over the measurement period. The effects
of state and local taxes are not reflected. Applicable tax credits, such
as foreign credits, are taken into account according to Federal law. The
ending value is determined
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assuming complete redemption at the end of the applicable
periods with no tax consequences associated with such redemption.
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Quotations of average annual
total return, after taxes, on both dividends and redemption for the specified
periods are computed by finding the average annual compounded rates of return
that would equate the initial amount invested to the ending value of such
investment at the end of each period assuming payment of taxes on dividends
received during such period as well as on complete redemption. Average annual
total return after taxes on distributions and redemption is computed assuming
all dividends, less the taxes due on such dividends, are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, if any, in the case of Class I and Class
A shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Class
B and Class C shares and assuming, for all classes of shares, complete redemption
and payment of taxes due on such redemption. The ending value is determined
assuming complete redemption at the end of the applicable periods, subtracting
capital gains taxes resulting from the redemption and adding the presumed
tax benefit from capital losses resulting from redemption. The taxes due
on dividends and on the deemed redemption are calculated by applying the
highest individual marginal Federal individual income tax rates in effect
on the reinvestment and/or the redemption date. The rates used correspond
to the tax character of each component of each dividend and/or the redemption
payment. The applicable tax rates may vary over the measurement period.
The effects of state and local taxes are not reflected.
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A 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, if any, 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.
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Yield quotations will be computed
based on a 30-day period by dividing (a) the net income based on the yield
of each security earned during the period by (b) the average daily number
of shares outstanding during the period that were entitled to receive dividends
multiplied by the maximum offering price per share on the last day of the
period.
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Each Fund also may quote annual,
average annual and annualized total return and aggregate total return performance
data, both as a percentage and 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.
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See Part I, Section VIII Fund
Performance of each Funds Statement of Additional Information
for performance information for the Class A, Class B, Class C, Class I and,
if applicable, Class R shares of your Fund for the periods indicated.
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A Funds total return
will vary depending on market conditions, the securities comprising a Funds
portfolio, a Funds operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in a Fund will fluctuate and an investors shares, when
redeemed, may be worth more or less than their original cost.
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In order to reflect the reduced
sales charges in the case of Class I or Class A shares or the waiver of
the CDSC in the case of Class B or Class C shares applicable to certain
investors, as described under Purchase of Shares and
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Redemption of Shares, respectively, the total
return data quoted by a Fund in advertisements directed to such investors
may take into account the reduced, and not the maximum, sales charge or
may take into account the CDSC waiver and therefore may reflect greater
total return since, due to the reduced sales charges or the waiver of sales
charges, a lower amount of expenses is deducted.
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On occasion, a Fund may compare
its performance to, among other things, the Funds benchmark index
indicated in the Prospectus, the Value Line Composite Index, the Dow Jones
Industrial Average, or to other published indices, or to performance data
published by Lipper Analytical Services, Inc. Morningstar Publications (MorningStar),
Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine,
Fortune Magazine
or other industry publications. When comparing its
performance to a market index, a Fund may refer to various statistical measures
derived from the historic performance of a Fund and the index, such as standard
deviation and beta. As with other performance data, performance comparisons
should not be considered indicative of a Funds relative performance
for any future period. In addition, from time to time a Fund may include
the Funds Morningstar risk-adjusted performance ratings assigned by
Morningstar in advertising or supplemental sales literature. From time to
time a Fund may quote in advertisements or other materials other applicable
measures of Fund performance and may also make reference to awards that
may be given to the Manager. Certain Funds may also compare their performance
to composite indices developed by Fund management.
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A 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 or general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of a Funds portfolio
composition, investment philosophy, strategy or investment techniques, comparisons
of the Funds 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. A 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.
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PROXY VOTING POLICIES AND PROCEDURES
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Each Funds Board of Directors/Trustees
has delegated to the Manager authority to vote all proxies relating to the
Funds portfolio securities. The Manager has adopted policies and procedures
(Proxy Voting Procedures) with respect to the voting of proxies
related to the portfolio securities held in the account of one or more of
its clients, including a Fund. Pursuant to these Proxy Voting Procedures,
the Manager primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its shareholders,
and to act in a manner that the Manager believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that that the Manager considers the interests
of its clients, including the Funds, and not the interests of the Manager,
when voting proxies and that real (or perceived) material conflicts that
may arise between the Managers interest and those of the Managers
clients are properly addressed and resolved.
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In order to implement the Proxy
Voting Procedures, the Manager has formed a Proxy Voting Committee (the
Committee). The Committee is comprised of the Managers
Chief Investment Officer (the CIO), one or more other senior
investment professionals appointed by the CIO, portfolio managers and investment
analysts appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Managers Legal department appointed by the Managers General
Counsel. The Committees membership shall be limited to full-time employees
of the Manager. No person with any investment banking, trading, retail brokerage
or research responsibilities for the Managers affiliates may serve
as a member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested knowledgeable parties
not affiliated with the Manager might be asked to do so). The Committee
determines how to vote the proxies of all clients, including a Fund, that
have delegated proxy voting authority to the Manager and seeks to ensure
that all votes are consistent with the best interests of those clients and
are free from unwarranted and inappropriate influences. The Committee establishes
general proxy voting policies for the Manager and is responsible for determining
how those policies are applied to specific proxy votes, in light of each
issuers unique structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences of alternate
actions. In so doing, the Committee may determine to vote a particular proxy
in a manner contrary to its generally stated policies. In
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addition, the Committee will be responsible for ensuring
that all reporting and recordkeeping requirements related to proxy voting
are fulfilled.
The Committee may determine that the subject
matter of a recurring proxy issue is not suitable for general voting policies
and requires a case-by-case determination. In such cases, the Committee
may elect not to adopt a specific voting policy applicable to that issue.
The Manager believes that certain proxy voting issues require investment
analysis such as approval of mergers and other significant corporate
transactions akin to investment decisions, and are, therefore, not
suitable for general guidelines. The Committee may elect to adopt a common
position for the Manager on certain proxy votes that are akin to investment
decisions, or determine to permit the portfolio manager to make individual
decisions on how best to maximize economic value for a Fund (similar to
normal buy/sell investment decisions made by such portfolio managers). While
it is expected that the Manager will generally seek to vote proxies over
which the Manager exercises voting authority in a uniform manner for all
the Managers clients, the Committee, in conjunction with a Funds
portfolio manager, may determine that the Funds specific circumstances
require that its proxies be voted differently.
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To assist the Manager in voting
proxies, the Committee has retained Institutional Shareholder Services (ISS).
ISS is an independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment managers,
plan sponsors, custodians, consultants, and other institutional investors.
The services provided to the Manager by ISS include in-depth research, voting
recommendations (although the Manager is not obligated to follow such recommendations),
vote execution, and recordkeeping. ISS will also assist the Fund in fulfilling
its reporting and recordkeeping obligations under the Investment Company
Act.
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The Managers Proxy Voting
Procedures also address special circumstances that can arise in connection
with proxy voting. For instance, under the Proxy Voting Procedures, the
Manager generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Manager will vote proxies related to securities of foreign
issuers only on a best efforts basis and may elect not to vote at all in
certain countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at any time
override these general policies if it determines that such action is in
the best interests of a Fund.
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From time to time, the Manager
may be required to vote proxies in respect of an issuer where an affiliate
of the Manager (each, an Affiliate), or a money management or
other client of the Manager (each, a Client) is involved. The
Proxy Voting Procedures and the Managers adherence to those procedures
are designed to address such conflicts of interest. The Committee intends
to strictly adhere to the Proxy Voting Procedures in all proxy matters,
including matters involving Affiliates and Clients. If, however, an issue
representing a non-routine matter that is material to an Affiliate or a
widely known Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular proxy
matter is not addressed by the guidelines) and vote impartially, the Committee
may, in its discretion for the purposes of ensuring that an independent
determination is reached, retain an independent fiduciary to advise the
Committee on how to vote or to cast votes on behalf of the Managers
clients.
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In the event that the Committee
determines not to retain an independent fiduciary, or it does not follow
the advice of such an independent fiduciary, the powers of the Committee
shall pass to a subcommittee, appointed by the CIO (with advice from the
Secretary of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where appropriate,
only persons whose job responsibilities do not include contact with the
Client and whose job evaluations would not be affected by the Managers
relationship with the Client (or failure to retain such relationship). The
subcommittee shall determine whether and how to vote all proxies on behalf
of the Managers clients or, if the proxy matter is, in their judgment,
akin to an investment decision, to defer to the applicable portfolio managers,
provided that
, if the subcommittee determines to alter the Managers
normal voting guidelines or, on matters where the Managers policy
is case-by-case, does not follow the voting recommendation of any proxy
voting service or other independent fiduciary that may be retained to provide
research or advice to the Manager on that matter,
no proxies relating
to the Client may be voted
unless the Secretary, or in the Secretarys
absence, the Assistant Secretary of the Committee concurs that the subcommittees
determination is consistent with the Managers fiduciary duties.
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In addition to the general
principles outlined above, the Manager has adopted voting guidelines with
respect to certain recurring proxy issues that are not expected to involve
unusual circumstances. These policies are guidelines only, and the Manager
may elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Funds best interest
to do so. In addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the vote
of a majority of Committee members present at a Committee meeting at which
there is a quorum.
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The Manager has adopted specific
voting guidelines with respect to the following proxy issues:
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Proposals related to the composition of the Board
of Directors of issuers other than investment companies. As a general matter,
the Committee believes that a companys Board of Directors (rather
than shareholders) is most likely to have access to important, nonpublic
information regarding a companys business and prospects, and is therefore
best-positioned to set corporate policy and oversee management. The Committee,
therefore, believes that the foundation of good corporate governance is
the election of qualified, independent corporate directors who are likely
to diligently represent the interests of shareholders and oversee management
of the corporation in a manner that will seek to maximize shareholder value
over time. In individual cases, the Committee may look at a nominees
history of representing shareholder interests as a director of other companies
or other factors, to the extent the Committee deems relevant.
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Proposals related to the selection of an issuers
independent auditors. As a general matter, the Committee believes that corporate
auditors have a responsibility to represent the interests of shareholders
and provide an independent view on the propriety of financial reporting
decisions of corporate management. While the Committee will generally defer
to a corporations choice of auditor, in individual cases, the Committee
may look at an auditors history of representing shareholder interests
as auditor of other companies, to the extent the Committee deems relevant.
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Proposals related to management compensation and
employee benefits. As a general matter, the Committee favors disclosure
of an issuers compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally best determined
by an issuers board of directors, rather than shareholders. Proposals
to micro-manage an issuers compensation practices or to
set arbitrary restrictions on compensation or benefits will, therefore,
generally not be supported.
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Proposals related to requests, principally from
management, for approval of amendments that would alter an issuers
capital structure. As a general matter, the Committee will support requests
that enhance the rights of common shareholders and oppose requests that
appear to be unreasonably dilutive.
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Proposals related to requests for approval of amendments
to an issuers charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
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Routine proposals related to requests regarding
the formalities of corporate meetings.
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Proposals related to proxy issues associated solely
with holdings of investment company shares. As with other types of companies,
the Committee believes that a funds Board of Directors (rather than
its shareholders) is best-positioned to set fund policy and oversee management.
However, the Committee opposes granting Boards of Directors authority over
certain matters, such as changes to a funds investment objective,
that the Investment Company Act envisions will be approved directly by shareholders.
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Proposals related to limiting corporate conduct
in some manner that relates to the shareholders environmental or social
concerns. The Committee generally believes that annual shareholder meetings
are inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions micromanaging corporate conduct or requesting
release of information that would not help a shareholder evaluate an investment
in the corporation as an economic matter. While the Committee is generally
supportive of proposals to require corporate disclosure of matters that
seem relevant and material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require disclosure
of corporate matters for other purposes.
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Shareholders of a Fund are
entitled to one vote for each full share held and fractional votes for fractional
shares held in the election of Directors and generally on other matters
submitted to the vote of shareholders of the Fund. Shareholders of a class
bearing distribution and account maintenance expenses have exclusive voting
rights with respect to matters relating to such distribution and account
maintenance expenditures (except that Class B shareholders may vote upon
any material changes to expenses charged under the Class A Distribution
Plan). Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in the election of Directors can, if they choose
to do so, elect all the Directors of a Fund, in which event the holders
of the remaining shares would be unable to elect any person as a Director.
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Each Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of a management agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in each Funds Prospectus. Each share of Class
A, of Class B, Class C, Class I and Class R Common Stock is entitled to
participate equally in dividends and distributions declared by a Fund and
in the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities. Stock certificates will be issued by the Transfer
Agent only on specific request. Certificates for fractional shares are not
issued in any case.
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For Funds organized as Maryland
corporations, the by-laws of the Fund require that a special meeting of
shareholders be held upon the written request of a minimum percentage of
the outstanding shares of the Fund entitled to vote at such meeting, if
they comply with applicable Maryland law.
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Certain of the Funds are organized
as Massachusetts business trusts. Under Massachusetts law, shareholders
of such a trust may, under certain circumstances, be held personally liable
as partners for its obligations. However, the
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Declaration of Trust establishing
a trust, a copy of which for each applicable Fund, together with all amendments
thereto (the Declaration of Trust), is on file in the office
of the Secretary of the Commonwealth of Massachusetts, contains an express
disclaimer of shareholder liability for acts or obligations of the trust
and provides for indemnification and reimbursement of expenses out of the
trust property for any shareholder held personally liable for the obligations
of the trust. The Declaration of Trust also provides that at trust may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the trust itself was unable to meet its obligations.
|
See Part I, Section IX Additional
Information Description of Shares of each Funds Statement
of Additional Information for additional capital stock information for your
Fund.
|
Under a separate agreement,
ML & Co. has granted each 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 a Fund at any time or to grant the use of such name to any other
company, and each 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.
|
See Part I, Additional
Information Principal Shareholders section of each Funds
Statement of Additional Information for information on the holders of 5%
or more of any class of shares of your Fund.
|
DESCRIPTION OF BOND RATINGS
|
Description of Moodys Investors Service, Inc.s
(Moodys) Bond 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 thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in this
class.
|
B
|
Bonds which are rated B generally
lack characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
|
Caa
|
Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest.
|
Ca
|
Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
|
C
|
Bonds which are rated C are the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
|
Note:
Moodys applies
numerical modifiers 1, 2, and 3 in each generic rating classification from
Aa through Caa. The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that
generic rating category.
|
Description of Moodys U.S. Short-Term Ratings
|
MIG 1/VMIG 1
|
This designation denotes superior
credit quality. Excellent protection is afforded by established cash flows,
highly reliable liquidity support, or demonstrated broad-based access to
the market for refinancing.
|
MIG 2/VMIG 2
|
This designation denotes strong credit
quality. Margins of protection are ample, although not as large as in the
preceding group.
|
MIG 3/VMIG 3
|
This designation denotes acceptable
credit quality. Liquidity and cash-flow protection may be narrow, and market
access for refinancing is likely to be less well-established.
|
SG
|
This designation denotes speculative-grade
credit quality. Debt instruments in this category may lack sufficient margins
of protection.
|
Description of Moodys Commercial Paper Ratings
|
Moodys 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. Moodys
employs the following three designations, all judged to be investment grade,
to indicate the relative repayment capacity of rated issuers:
|
Issuers rated Prime-1 (or supporting
institutions) have a superior ability for repayment of short term promissory
obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well established access to a range of financial markets
and assured sources of alternate liquidity.
|
Issuers rated Prime-2 (or supporting
institutions) have a strong ability for repayment of short term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
|
Issuers rated Prime-3 (or supporting
institutions) have an acceptable ability for repayment of short term promissory
obligations. The effects of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result
in changes to the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is maintained.
|
Issuers rated Not Prime do
not fall within any of the Prime rating categories.
|
Description of Standard & Poors, a Division
of The McGraw-Hill Companies, Inc. (Standard & Poors),
Debt Ratings
|
A Standard & Poors
issue credit rating is a current opinion of the creditworthiness of an obligor
with respect to a specific financial obligation, a specific class of financial
obligations or a specific program. It takes into consideration the creditworthiness
of guarantors, insurers, or other forms of credit enhancement on the obligation.
|
The issue credit rating is
not a recommendation to purchase, sell or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
|
The issue credit ratings are
based on current information furnished by the obligors or obtained by Standard
& Poors from other sources Standard & Poors considers
reliable. Standard & Poors does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
|
The issue credit ratings are
based, in varying degrees, on the following considerations:
|
I. Likelihood of paymentcapacity
and willingness of the obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the obligation;
|
II. Nature of and provisions
of the obligation;
|
III. Protection afforded to,
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.
|
Long Term Issue Credit Ratings
|
AAA
|
An obligation rated AAA
has the highest rating assigned by Standard & Poors. Capacity
to meet its financial commitment on the obligation is extremely strong.
|
AA
|
An obligation rated AA
differs from the highest rated issues only in small degree. The Obligors
capacity to meet its financial commitment on the obligation is very strong.
|
A
|
An obligation rated A
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated categories. However, the
obligors capacity to meet its financial commitment on the obligation
is still strong.
|
BBB
|
An obligation rated BBB
exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the obligation.
|
BB
B
CCC
CC
C
|
An obligation rated BB,
B, CCC, CC and C are regarded
as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
risk exposures to adverse conditions.
|
D
|
An obligation rated D
is in payment default. The D rating category is used when payments
on an obligation are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors believes that
such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking
of similar action if payments on an obligation are jeopardized.
|
c
|
The c subscript is used
to provide additional information to investors that the bank may terminate
its obligation to purchase tendered bonds if the long term credit rating
of the issuer is below an investment-grade level and/or the issuers
bonds are deemed taxable.
|
p
|
The letter p indicates
that the rating is provisional. A provisional rating assumes the successful
completion of the project financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent
upon the successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to the completion of the project,
makes no comment on the likelihood of or the risk of default upon failure
of such completion. The investor should exercise his own judgment with respect
to such likelihood and risk.
|
*
|
Continuance of the ratings is contingent
upon Standard & Poors receipt of an executed copy of the escrow
agreement or closing documentation confirming investments and cash flows.
|
r
|
This symbol is attached to the ratings
of instruments with significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not addressed in the
credit rating.
|
N.R.
|
This indicates that no rating has
been requested, that there is insufficient information on which to base
a rating, or that Standard & Poors does not rate a particular
obligation as a matter of policy.
|
Plus
(+) or
Minus
(-): The ratings from AA to CCC may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
|
Description of Standard & Poors Commercial Paper
Ratings
|
A Standard & Poors
commercial paper rating is a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Ratings
are graded into several categories, ranging from A-1 for the
highest-quality obligations to D for the lowest. These categories
are as follows:
|
A-1
|
A short-term obligation rated A-1
is rated in the highest category by Standard & Poors. The obligors
capacity to meet its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+).
This indicates that the obligors capacity to meet its financial commitment
on these obligations is extremely strong.
|
A-2
|
A short-term obligation rated A-2
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating categories. However,
the obligors capacity to meet its financial commitment on the obligation
is satisfactory.
|
A-3
|
A short-term obligation rated A-3
exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the obligation.
|
B
|
A short-term obligation rated B
is regarded as having significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment on the obligation;
however, it faces major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
|
C
|
A short-term obligation rated C
is currently vulnerable to nonpayment and is dependent upon favorable business,
financial and economic conditions for the obligor to meet its financial
commitment on the obligation.
|
D
|
A short-term obligation rated D
is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poors
believes that such payments will be made during such grace period. The D
rating will also be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
|
c
|
The c subscript is used
to provide additional information to investors that the bank may terminate
its obligation to purchase tendered bonds if the long term credit rating
of the issuer is below an investment-grade level and/or the issuers
bonds are deemed taxable.
|
p
|
The letter p indicates
that the rating is provisional. A provisional rating assumes the successful
completion of the project financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely dependent
upon the successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project,
makes no comment on the likelihood of or the risk of default upon failure
of such completion. The investor should exercise his own judgment with respect
to such likelihood and risk.
|
*
|
Continuance of the ratings is contingent
upon Standard & Poors receipt of an executed copy of the escrow
agreement or closing
|
r
|
The r highlights derivative,
hybrid, and certain other obligations that Standard & Poors believes
may experience high volatility or high variability in expected returns as
a result of noncredit risks. Examples
|
|
of such obligations are securities
with principal or interest return indexed to equities, commodities, or currencies;
certain swaps and options, and interest-only and principal-only mortgage
securities. The absence of an r symbol should not be taken as
an indication that an obligation will exhibit no volatility or variability
in total return.
|
A commercial paper rating is
not a recommendation to purchase or sell a security. The ratings are based
on current information furnished to Standard & Poors by the issuer
or obtained by Standard & Poors 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 Standard & Poors
note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating.
Notes maturing beyond three years will most likely receive a long term debt
rating. The following criteria will be used in making that assessment.
|
|
Amortization schedulethe larger the
final maturity relative to other maturities, the more likely it will be
treated as a note.
|
|
Source of paymentthe more dependent
the issue is on the market for its refinancing, the more likely it will
be treated as a note.
|
Note rating symbols are as
follows:
|
SP-1
|
Strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
|
SP-2
|
Satisfactory capacity to pay principal
and interest with some vulnerability to adverse financial and economic changes
over the term of the notes.
|
SP-3
|
Speculative capacity to pay principal
and interest.
|
Description of Fitch Ratings (Fitch)
Investment Grade Bond Ratings
|
Fitch investment grade bond
ratings provide a guide to investors in determining the credit risk associated
with a particular security. The rating represents Fitchs assessment
of the issuers ability to meet the obligations of a specific debt
issue or class of debt in a timely manner.
|
The rating takes into consideration
special features of the issue, its relationship to other obligations of
the issuer, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and
political environment that might affect the issuers future financial
strength and credit quality.
|
Fitch ratings do not reflect
any credit enhancement that may be provided by insurance policies or financial
guarantees unless otherwise indicated.
|
Bonds carrying the same rating
are of similar but not necessarily identical credit quality since the rating
categories do not fully reflect small differences in the degrees of credit
risk.
|
Fitch ratings are not recommendations
to buy, sell, or hold any security. Ratings do not comment on the adequacy
of market price, the suitability of any security for a particular investor,
or the tax-exempt nature or taxability of payments made in respect of any
security.
|
Fitch ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not audit or
verify the truth or accuracy of such information. Ratings may be changed,
suspended, or withdrawn as a result of changes in, or the unavailability
of, information or for other reasons.
|
AAA
|
Bonds considered to be investment
grade and of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is unlikely to
be affected by reasonably foreseeable events.
|
AA
|
Bonds considered to be investment
grade and of very high credit quality. The obligors ability to pay
interest and repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally rated
F-1+.
|
A
|
Bonds considered to be investment
grade and of high credit quality. The obligors ability to pay interest
and repay principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds with
higher ratings.
|
BBB
|
Bonds considered to be investment
grade and of satisfactory-credit quality. The obligors ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade
is higher than for bonds with higher ratings.
|
Plus
(+) or
Minus
(-): Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category.
|
Description of Fitchs Speculative Grade Bond Ratings
|
Fitch speculative grade bond
ratings provide a guide to investors in determining the credit risk associated
with a particular security. The ratings (BB to C)
represent Fitchs assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating (DDD
to D) is an assessment of the ultimate recovery value through
reorganization or liquidation. The rating takes into consideration special
features of the issue, its relationship to other obligations of the issuer,
the current and prospective financial condition and operating performance
of the issuer and any guarantor, as well as the economic and political environment
that might affect the issuers future financial strength.
|
Bonds that have the rating
are of similar but not necessarily identical credit quality since rating
categories cannot fully reflect the differences in degrees of credit risk.
|
BB
|
Bonds are considered speculative.
The obligors ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying its debt
service requirements.
|
B
|
Bonds are considered highly speculative.
While bonds in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and interest reflects
the obligors limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
|
CCC
|
Bonds have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
|
CC
|
Bonds are minimally protected. Default
in payment of interest and/or principal seems probable over time.
|
C
|
Bonds are in imminent default in payment
of interest or principal.
|
D
DD
DDD
|
Bonds are in default on interest and/or
principal payments. Such bonds are extremely speculative and should be valued
on the basis of their ultimate recovery value in liquidation or reorganization
of the obligor. DDD represents the highest potential for recovery
on these bonds, and D represents the lowest potential for recovery.
|
|
Plus
(+) or
Minus
(-):
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the DDD, DD, or D categories.
|
Description of Fitchs Short term Ratings
|
Fitchs short term ratings
apply to debt obligations that are payable on demand or have original maturities
of up to three years, including commercial paper, certificates of deposit,
medium-term notes, and investment notes.
|
The short term rating places
greater emphasis than a long term rating on the existence of liquidity necessary
to meet the issuers obligations in a timely manner.
|
Fitch short term ratings are
as follows:
|
F-1+
|
Exceptionally Strong Credit Quality.
Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
|
F-1
|
Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+.
|
F-2
|
Good Credit Quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned F-1+ and F-1
ratings.
|
F-3
|
Fair Credit Quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
|
F-S
|
Weak Credit Quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
|
D
|
Default. Issues assigned this rating are in actual
or imminent payment default.
|
LOC
|
The symbol LOC indicates that the rating
is based on a letter of credit issued by a commercial bank.
|
NR
|
Indicates that Fitch does not rate the specific
issue.
|
Conditional
|
A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
|
Suspended
|
A rating is suspended when Fitch deems the amount
of information available from the issuer to be inadequate for rating purposes.
|
Withdrawn
|
A rating will be withdrawn when an issue matures
or is called or refinanced and, at Fitchs discretion, when an issuer
fails to furnish proper and timely information.
|
FitchAlert
|
Ratings are placed on FitchAlert to
notify investors of an occurrence that is likely to result in a rating change
and the likely direction of such change. These are designated as Positive,
indicating a potential upgrade, Negative, for potential downgrade,
or Evolving, where ratings may be raised or lowered. FitchAlert
is relatively short term, and should be resolved within 12 months.
|
Ratings Outlook: An outlook
is used to describe the most likely direction of any rating change over
the intermediate term. It is described as Positive or Negative.
The absence of a designation indicates a stable outlook.
|
PART C. OTHER INFORMATION
|
Exhibit
Number
|
|
Description
|
<R>
|
1
|
(a)
|
|
Articles of Incorporation of the Registrant,
dated February 22, 1978.(a)
|
|
(b)
|
|
Articles of Amendment to Articles of Incorporation
of the Registrant, dated October 3, 1988.(a)
|
|
(c)
|
|
Articles Supplementary to the Articles of
Incorporation of the Registrant, dated October 17, 1994.(a)
|
|
(d)
|
|
Articles of Amendment to the Articles of Incorporation
of the Registrant, dated October 17, 1994.(a)
|
|
(e)
|
|
Articles of Amendment to the Articles of Incorporation
of the Registrant, dated May 2, 2000. (b)
|
|
(f)
|
|
Articles of Amendment to the Articles of Incorporation
of the Registrant, dated July 31, 2000.(c)
|
|
(g)
|
|
Articles of Transfer from the Registrant to
the Master Special Value Trust, (the Trust) dated September
5, 2000.(l)
|
|
(h)
|
|
Articles Supplementary Increasing the Authorized
Capital Stock of the Corporation and Creating an Additional Class of Common
Stock, dated December 9, 2002.(o)
|
|
(i)
|
|
Articles of Amendment to the Articles of Incorporation
of the Registrant dated March 21, 2003.
|
2
|
|
|
Amended and Restated By-Laws of the Registrant.
|
3
|
|
|
Portions of the Articles of Incorporation,
as amended, and the By-Laws of the Registrant defining the rights of holders
of shares of common stock of the Registrant.(e)
|
4
|
|
|
Not Applicable
|
5
|
|
|
Form of Distribution Agreement between the
Registrant and FAM Distributors, Inc.(f)
|
6
|
|
|
None.
|
7
|
|
|
Not Applicable.
|
8
|
(a)
|
|
Form of Administration Agreement between the
Registrant and Fund Asset Management, L.P.(c)
|
|
(b)(1)
|
|
Form of Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between the Registrant
and Financial Data Services, Inc.(a)
|
|
(b)(2)
|
|
Form of Amendment to the Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement, dated July
1, 2001.(i)
|
|
(b)(3)
|
|
Amendment to the Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement dated January
1, 2003.(s)
|
|
(c)
|
|
Form of Administrative Services Agreement
between the Registrant and State Street Bank and Trust Company.(k)
|
|
(d)(1)
|
|
Amended and Restated Credit Agreement between
the Registrant and a syndicate of banks.(m)
|
|
(d)(2)
|
|
Form of Second Amended and Restated Credit
Agreement between the Fund, a syndicate of banks and certain other parties.(n)
|
|
(d)(3)
|
|
Form of Third Amended and Restated Credit
Agreement between the Registrant, a syndicate of banks and certain other
parties.(o)
|
|
(e)
|
|
Form of Securities Lending Agency Agreement
between the Registrant and QA Advisors, LLC dated August 10, 2001.(p)
|
9
|
|
|
Opinion and Consent of Brown & Wood
LLP
, counsel to the Registrant.(g)
|
10
|
|
|
Consent of Deloitte & Touche
LLP
, independent auditors for the Registrant and the Trust.
|
11
|
|
|
None.
|
12
|
|
|
None.
|
13
|
(a)
|
|
Amended and Restated Class A Distribution
Plan of the Registrant.(r)
|
|
(b)
|
|
Form of Amended and Restated Class B Distribution
Plan of the Registrant.(h)
|
|
(c)
|
|
Form of Amended and Restated Class C Distribution
Plan of the Registrant.(h)
|
|
(d)
|
|
Form of Class R Distribution Plan.(q)
|
14
|
|
|
Revised Merrill Lynch Select Pricing
SM
System Plan pursuant to Rule 18f-3.(r)
|
15
|
|
|
Code of Ethics.(j)</R>
|
(a)
|
|
Previously filed with Post-Effective Amendment
No. 21 to the Registrants Registration Statement on Form N-1A under
the Securities Act of 1933, as amended (File No. 2-60836) (the Registration
Statement) on July 28, 1995.
|
(b)
|
|
Previously filed with Post-Effective Amendment
No. 27 to the Registrants Registration Statement on July 28, 2000.
|
(c)
|
|
Previously filed with Post-Effective Amendment
No. 28 to the Registrants Registration Statement on August 3, 2000.
|
(d)
|
|
Previously filed with Post-Effective Amendment
No. 19 to the Registrants Registration Statement on July 28, 1994.
|
(e)
|
|
Reference is made to Article IV, Article V (Sections
3, 5, 6 and 7), Articles VI, VII and IX of the Registrants Articles
of Incorporation, as amended, filed as Exhibits 1(a), 1(b), 1(c) and 1(d)
to the Registration Statement and to Article II, Article III (Sections 1,
3, 5 and 6), Articles VI, VII, XIII and XIV of the Registrants By-Laws,
previously filed as Exhibit 2 to the Registrants Statement.
|
<R></R>
|
<R>
|
(f)
|
|
Incorporated by reference to Exhibit 5 to Post-Effective
Amendment No. 38 to the Registration Statement on Form N-1A of Merrill Lynch
Balanced Capital Fund, Inc. (File No. 2-49007) filed on June 30, 2000.
|
(g)
|
|
Previously filed with Post-Effective Amendment
No. 25 to the Registrants Registration Statement on May 26, 1999.
|
(h)
|
|
Incorporated by reference to Exhibit 13 to Post-Effective
Amendment No. 38 to the Registration Statement on Form N-1A of Merrill Lynch
Balanced Capital Fund, Inc. (File No. 2-49007) filed on June 30, 2000.
|
(i)
|
|
Previously filed with Post-Effective Amendment
No. 31 to the Registrants Registration Statement on July 25, 2002.
|
(j)
|
|
Incorporated by reference to Exhibit 15 to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A of Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust (File No. 33-50417),
filed on November 22, 2000.
|
(k)
|
|
Incorporated by reference to Exhibit 8(d) to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
of Merrill Lynch Focus Twenty Fund, Inc. (File No. 333-89775) filed on March
20, 2001.
|
(l)
|
|
Previously filed with Post-Effective Amendment
No. 30 to the Registrants Registration Statement on July 12, 2001.
|
(m)
|
|
Incorporated by reference to Exhibit (b) to the
Tender Offer Statement on Schedule TO of Merrill Lynch Senior Floating Rate
Fund, Inc. (File No. 333-15973), filed on December 14, 2000.
|
(n)
|
|
Incorporated by reference to Exhibit (b)(2) of
the Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior
Floating Rate Fund, Inc. (File No. 333-39837) filed on December 14, 2001.
|
(o)
|
|
Incorporated by reference to Exhibit (b)(3) to
the Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior
Floating Rate Fund, Inc. (File No. 333-39837), filed on December 13, 2002.
|
(p)
|
|
Incorporated by reference to Exhibit 8(f) to
Post Effective Amendment No. 5 to the Registration Statement on Form N-1A
of Merrill Lynch Global Technology Fund, Inc. (File No. 333-48929), filed
on July 24, 2002.
|
(q)
|
|
Incorporated by reference to Exhibit 13(d) to
Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A
of Merrill Lynch Basic Value Fund, Inc. (File No. 2-58521), filed December
20, 2002.
|
(r)
|
|
Incorporated by reference to Exhibits 13 or 14
to Post-Effective Amendment No. 36 to the Registration Statement on Form
N-1A of Merrill Lynch Pacific Fund, Inc. (File No. 2-58521), filed on April
17, 2003.
|
(s)
|
|
Previously filed with Post-Effective Amendment
No. 32 to the Registrants Registration Statement on February 3, 2003.
|
</R>
Item 24.
Persons Controlled by or under
Common Control with Registrant.
|
The Registrant is
not controlled by or under common control with any other person.
|
Item 25.
Indemnification.
|
Reference is made
to Article VI of the Registrants Articles of Incorporation, Article VI of the
Registrants By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9
of the Distribution Agreement.
|
Insofar as the
conditional advancing of indemnification monies for actions based on the Investment
Company Act of 1940, as amended (the Investment Company Act) may be concerned, Article
VI of the Registrants By-Laws provides that such payments will be made only on the
following conditions: (i) advances may be made only on receipt of a written affirmation
of such persons good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay any such advance if it is
ultimately determined that the standard of conduct has not been met and (ii) (a) such
promise must be secured by a security for the undertaking in form and amount acceptable
to the Registrant, (b) the Registrant is insured against losses arising by receipt of the
advance, or (c) a majority of a quorum of the Registrants disinterested, non-party
Directors, or an independent legal counsel in a written opinion, shall determine, based
upon a review of readily available facts, that at the time the advance is proposed to be
made, there is reason to believe that the person seeking indemnification will ultimately
be found to be entitled to indemnification.
|
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, as amended (the Securities
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 Securities 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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
|
Item 26.
Business and Other Connections
of Investment Adviser.
|
<R>Fund Asset Management,
L.P. (FAM or the Investment Adviser) acts as the
investment adviser for a number of affiliated open-end and closed-end registered
investment companies.
|
Merrill Lynch Investment Managers,
L.P. (MLIM), an affiliate of the Investment Adviser, acts as
the investment adviser for a number of affiliated open-end and closed-end
registered investment companies, and also acts as sub-adviser to certain
other portfolios.
|
The address of each of these
registered investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds for Institutions
Series is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665.
The address of the Investment Adviser, MLIM, Princeton Services, Inc. (Princeton
Services) and Princeton Administrators, L.P. (Princeton Administrators)
is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
FAM Distributors, Inc., (FAMD) is P.O. Box 9081, Princeton,
New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (Merrill Lynch) and Merrill Lynch & Co.,
Inc. (ML & Co.) is World Financial Center, North Tower 250
Vesey Street, New York, New York 10080. The address of the Funds transfer
agent, Financial Data Services, Inc. (FDS), is 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.</R>
|
<R>Set forth below is
a list of each executive officer and partner of the Investment Adviser indicating
each business, profession, vocation or employment of a substantial nature
in which each such person or entity has been engaged since April 1, 2001
for his, her or its own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Burke is Vice President and Treasurer
of all or substantially all of the investment companies advised by FAM,
MLIM or their affiliates, and Mr. Doll is an officer of one or more of such
companies.
|
Name
|
|
Position(s) with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
ML & Co.
|
|
Limited Partner
|
|
Financial Services Holding Company;
Limited Partner of MLIM
|
|
|
|
|
|
Princeton Services
|
|
General Partner
|
|
General Partner of MLIM
|
|
|
|
|
|
Robert C. Doll, Jr.
|
|
President
|
|
President of MLIM; Director of
Princeton Services
|
|
|
|
|
|
Donald C. Burke
|
|
First Vice President and Treasurer
|
|
First Vice President, Treasurer
and Director of Taxation of MLIM; Senior Vice President and Treasurer of
Princeton Services from 1997 to 2002; Vice President of FAMD
|
|
|
|
|
|
Lawrence D. Haber
|
|
First Vice President and Chief
Financial Officer
|
|
First Vice President and Chief
Financial Officer of MLIM; Senior Vice President and Treasurer of Princeton
Services, Inc.
|
|
|
|
|
|
Brian A. Murdock
|
|
First Vice President and Chief
Operating Officer
|
|
Executive Vice President of Princeton
Services; First Vice President and Chief Investment Officer of MLIM; EMEA
Pacific Region and Global CIO for Fixed Income and Alternative Investments;
Head of MLIMs Pacific Region and President of MLIM Japan, Australia
and Asia
|
|
|
|
|
|
Andrew J. Donohue
|
|
General Counsel
|
|
General Counsel of
MLIM and Princeton Services
|
</R>
|
|
|
|
|
Item 27.
Principal Underwriters.
|
<R>(a) FAMD acts as the
principal underwriter for each of the following open-end registered investment
companies, including the Registrant: Financial Institutions Series Trust,
Mercury Basic Value Fund, Inc., Mercury Global Holdings, Inc., Mercury Funds
II, Merrill Lynch Balanced Capital Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Bond Fund, Inc., Merrill Lynch California Municipal
Series Trust, Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Equity Income Fund, Merrill Lynch EuroFund, Merrill Lynch Focus Twenty
Fund, Inc., Merrill Lynch Focus Value Fund, Inc., Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Funds for Institutions Series, Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Balanced Fund of
Mercury Funds, Inc., Merrill Lynch Global Financial Services Fund, Inc.,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Index Funds,
Inc., Merrill Lynch International Equity Fund, Merrill Lynch International
Fund of Mercury Funds, Inc., Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Large Cap Growth V.I. Fund of Mercury VI Funds, Inc., Merrill Lynch
Large Cap Series Funds, Inc., Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Natural Resources Trust, Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Pan-European Growth Fund of Mercury Funds, Inc.,
Merrill Lynch Principal Protected Trust, Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short Term U.S. Government Fund, Inc., Merrill Lynch Small
Cap Value Fund, Inc., Merrill Lynch U.S. Government Mortgage Fund, Merrill
Lynch U.S. High Yield Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utilities and Telecommunications
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World
Income Fund, Inc. and The Asset Program, Inc. FAMD also acts as the principal
underwriter for the following closed-end registered investment companies:
Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund II, Inc.</R>
|
(b) Set forth below is information
concerning each director and officer of FAMD. The principal business address
of each such person is P.O. Box 9081, Princeton, New Jersey 08543-9081.
|
Name
|
|
Position(s) and Office(s)
with FAMD
|
|
Position(s) and Office(s)
with Registrant
|
|
Brian A. Murdock
|
|
President
|
|
None
|
|
Michael G. Clark
|
|
Treasurer and Director
|
|
None
|
|
Thomas J. Verage
|
|
Director
|
|
None
|
|
Donald C. Burke
|
|
Vice President
|
|
Vice President and Treasurer
|
|
</R>
|
|
|
|
|
|
Item 28.
Location of Accounts and
Records.
|
All accounts,
books and other documents required to be maintained by Section 31(a) of the Investment
Company Act and the rules thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its transfer agent, Financial Data
Services, Inc. (4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484).
|
Item 29.
Management Services.
|
Other than as set forth under
the caption Management of the Fund Fund Asset Management
in the Prospectus constituting Part A of the Registration Statement and
under Management of the Fund Management and Advisory Arrangements
in the Statement of Additional Information constituting Part B of the Registration
Statement, the Registrant is not a party to any management-related service
contract.
|
<R>Pursuant to the requirements
of the Securities Act and the Investment Company Act, the Registrant certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act and has duly
caused this Registration Statement to be signed on its behalf by the undersigned,
duly authorized, in the Township of Plainsboro, and State of New Jersey,
on the 18
th
day of July, 2003.</R>
|
|
M
ERRILL
L
YNCH
S
MALL
C
AP
V
ALUE
F
UND
, I
NC.
(Registrant)
|
|
|
|
By:
|
/s/
D
ONALD
C.
B
URKE
|
|
|
|
<R>(Donald
C. Burke,
Vice President and Treasurer)</R>
|
Pursuant to the
requirements of the Securities Act, this Post-Effective Amendment to the Registration
Statement has been signed below by the following persons in the capacities and on the
date(s) indicated.
|
<R>
|
Signature
|
|
Title
|
|
Date
|
|
T
ERRY
K. G
LENN
*
|
|
President (Principal Executive
Officer) and Director
|
|
|
|
(Terry K. Glenn)
|
|
|
|
|
|
|
|
|
|
|
|
D
ONALD
C. B
URKE
*
|
|
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
|
|
|
|
(Donald C. Burke)
|
|
|
|
|
|
|
|
|
|
|
|
D
ONALD
W. B
URTON
*
|
|
Director
|
|
|
|
(Donald W. Burton)
|
|
|
|
|
|
|
|
|
|
|
|
M. C
OLYER
C
RUM
*
|
|
Director
|
|
|
|
(M. Colyer Crum)
|
|
|
|
|
|
|
|
|
|
|
|
L
AURIE
S
IMON
H
ODRICK
*
|
|
Director
|
|
|
|
(Laurie Simon Hodrick)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
(David H. Walsh)
|
|
|
|
|
|
|
|
|
|
|
|
F
RED
G. W
EISS
*
|
|
Director
|
|
|
|
(Fred G. Weiss)
|
|
|
|
|
|
|
|
|
|
|
*By:
|
/s/ D
ONALD
C. B
URKE
|
|
|
|
July 18, 2003</R>
|
|
(Donald C. Burke, Attorney-in-Fact)
|
|
|
|
|
<R>Master Small Cap Value
Trust has duly caused this Registration Statement of Merrill Lynch Small
Cap Value Fund, Inc. to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Plainsboro, and State of New Jersey,
on the 18
th
day of July, 2003.<R>
|
|
M
ASTER
S
MALL
C
AP
V
ALUE
T
RUST
.
(Registrant)
|
|
|
|
By:
|
/s/ D
ONALD
C.
B
URKE
|
|
|
|
<R>(Donald C. Burke,
Vice President and Treasurer)</R>
|
Pursuant to the
requirements of the Securities Act, this Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
|
<R>
|
Signature
|
|
Title
|
|
Date
|
|
T
ERRY
K. G
LENN
*
|
|
President, (Principal Executive
Officer) and Trustee
|
|
|
|
(Terry K. Glenn)
|
|
|
|
|
|
|
|
|
|
|
|
D
ONALD
C. B
URKE
*
|
|
Vice President and Treasurer (Principal Financial
and Accounting Officer)
|
|
|
|
(Donald C. Burke)
|
|
|
|
|
|
|
|
|
|
|
|
D
ONALD
W. B
URTON
*
|
|
Trustee
|
|
|
|
(Donald W. Burton)
|
|
|
|
|
|
|
|
|
|
|
|
M. C
OLYER
C
RUM
*
|
|
Trustee
|
|
|
|
(M. Colyer Crum)
|
|
|
|
|
|
|
|
|
|
|
|
L
AURIE
S
IMON
H
ODRICK
*
|
|
Trustee
|
|
|
|
(Laurie Simon Hodrick)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
|
|
(David H. Walsh)
|
|
|
|
|
|
|
|
|
|
|
|
F
RED
G. W
EISS
*
|
|
Trustee
|
|
|
|
(Fred G. Weiss)
|
|
|
|
|
|
|
|
|
|
|
*By:
|
/s/ D
ONALD
C. B
URKE
|
|
|
|
July 18, 2003</R>
|
|
(Donald C. Burke, Attorney-in-Fact)
|
|
|
|
|
<R>
|
|
|
Exhibit
Number
|
|
Description
|
1
|
(i)
|
|
Articles of Amendment to the Articles
of Incorporation of the Registrant dated March 21, 2003.
|
2
|
|
|
Amended and Restated By-Laws of
the Registrant.</R>
|
10
|
|
|
Consent of Deloitte & Touche
LLP
, independent auditors for the Registrant.
|
Exhibit 2
Revised and Effective April 14, 2003
AMENDED AND RESTATED
BY-LAWS
OF
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
Adopted May 5, 1994
Revised April 14, 2003
AMENDED AND RESTATED BY-LAWS
OF
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
ARTICLE I.
Offices
Section 1.01. Principal Office. The principal office of the Corporation
shall be in the City of Baltimore, State of Maryland.
Section 1.02. Principal Executive Office. The principal executive office
of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 1.03. Other Offices. The Corporation may have such other offices
in such places as the Board of Directors may from time to time determine.
ARTICLE II.
Meetings of Stockholders
Section 2.01. Annual Meeting. The Corporation shall not be required to
hold an annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940. In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors by the Investment Company Act of
1940, as amended, such meeting shall be held no later than 120 days after the
occurrence of the event requiring the meeting. Any stockholders' meeting held in
accordance with this Section shall for all purposes constitute the annual
meeting of stockholders for the year in which the meeting is held.
Section 2.02. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by a
majority of the Board of Directors, the President, or on the written request of
the holders of at least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with Section
2-502(b) or (c) of the Maryland General Corporation Law.
Section 2.03. Place of Meetings. Meetings of the stockholders shall be
held at such place within the United States as the Board of Directors may from
time to time determine.
Section 2.04. Notice of Meetings; Waiver of Notice. Notice of the place,
date and time of the holding of each stockholders' meeting and, if the meeting
is a special meeting, the purpose or purposes of the special meeting, shall be
given personally or by mail, not less than ten nor more than ninety days before
the date of such meeting, to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 2.05. Quorum. At all meetings of the stockholders, the holders of
shares of stock of the Corporation entitled to cast a majority of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more classes of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast a majority of the votes entitled to be cast by each class entitled to vote
as a separate class shall constitute a quorum. In the absence of a quorum no
business may be transacted, except that the holders of a majority of the shares
of stock present in person or by proxy and entitled to vote may adjourn the
meeting from time to time, without notice other than announcement thereat except
as otherwise required by these By-Laws, until the holders of the requisite
amount of shares of stock shall be so present. At any such adjourned meeting at
which a quorum may be present any business may be transacted which might have
been transacted at the meeting as originally called. The absence from any
meeting, in person or by proxy, of holders of the number of shares of stock of
the Corporation in excess of a majority thereof which may be required by the
laws of the State of Maryland, the Investment Company Act of 1940, as amended,
or other applicable statute, the Articles of Incorporation, or these By-Laws,
for action upon any given matter shall not prevent action at such meeting upon
any other matter or matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the number of shares
of stock of the Corporation required for action in respect of such other matter
or matters.
Section 2.06. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, shall act
as chairman of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall act as secretary
of the meeting and keep the minutes thereof.
Section 2.07. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
Section 2.08. Voting. Except as otherwise provided by statute or the
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have been
so fixed, then at the later of (i) the close of business on the day on which
notice of the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact.
2
No proxy shall be valid after the expiration of eleven months from the date
thereof, unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the stockholder executing it, except in those cases where
such proxy states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute, the Articles of
Incorporation or these By-Laws, any corporate action to be taken by vote of the
stockholders (other than the election of directors, which shall be by plurality
vote) shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 2.09. Fixing of Record Date. The Board of Directors may set a
record date for the purpose of determining stockholders entitled to vote at any
meeting of the stockholders. The record date, which may not be prior to the
close of business on the day the record date is fixed, shall be not more than
ninety nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time, and
not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 2.10. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, may be
required to take and sign an oath to execute faithfully the duties of inspector
at such meeting with strict impartiality and according to the best of his
ability. The inspectors may be empowered to determine the number of shares
outstanding and the voting powers of each, the number of shares represented at
the meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as inspector of an
election of directors. Inspectors need not be stockholders.
Section 2.11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
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ARTICLE III.
Board of Directors
Section 3.01. General Powers. Except as otherwise provided in the Articles
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation may
be exercised by or under authority of the Board of Directors except as conferred
on or reserved to the stockholders by law or by the Articles of Incorporation or
these By-Laws.
Section 3.02. Number of Directors. The number of directors shall be fixed
from time to time by resolution of the Board of Directors adopted by a majority
of the entire Board of Directors; provided, however, that the number of
directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders.
Section 3.03. Election and Term of Directors. Directors shall be elected
annually by written ballot at a meeting of stockholders held for that purpose;
provided, however, that if no meeting of the stockholders of the Corporation is
required to be held in a particular year pursuant to Section 1 of Article II of
these By-Laws, directors shall be elected at the next meeting held. The term of
office of each director shall be from the time of his election and qualification
until the election of directors next succeeding his election and until his
successor shall have been elected and shall have qualified, or until his death,
or until he shall have resigned, or until December 31 of the year in which he
shall have reached seventy-two years of age, or until he shall have been removed
as hereinafter provided in these By-Laws, or as otherwise provided by statute or
the Articles of Incorporation.
Section 3.04. Resignation. A director of the Corporation may resign at any
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 3.05. Removal of Directors. Any director of the Corporation may be
removed by the stockholders by a vote of a majority of the votes entitled to be
cast for the election of directors.
Section 3.06. Vacancies. Any vacancies in the Board, whether arising from
death, resignation, removal, an increase in the number of directors or any other
cause, may be filled by a vote of the majority of the Board of Directors then in
office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a special meeting of
the stockholders shall be held as promptly as possible and in any event within
sixty days, for the purpose of filling said vacancy or vacancies.
4
Section 3.07. Place of Meetings. Meetings of the Board may be held at such
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 3.08. Regular Meetings. Regular meetings of the Board may be held
without notice at such time and place as may be determined by the Board of
Directors.
Section 3.09. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 3.10. Telephone Meetings. Members of the Board of Directors or of
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 3.11. Notice of Special Meetings. Notice of each special meeting
of the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone
or any standard form of telecommunication, at least twenty-four hours before the
time at which such meeting is to be held, or by first-class mail, postage
prepaid, addressed to him at his residence or usual place of business, at least
three days before the day on which such meeting is to be held.
Section 3.12. Waiver of Notice of Meetings. Notice of any special meeting
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver or notice of any meeting need not state the
purposes of such meeting.
Section 3.13. Quorum and Voting. One-third, but not less than two, of the
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or
other applicable statute, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present thereat may adjourn such meeting to another time and place until a
quorum shall be present thereat. Notice of the time and place of any such
adjourned meeting shall be given to the directors who were not present at the
time of the adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other directors. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
Section 3.14. Organization. The Board may, by resolution adopted by a
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his absence
or inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The Secretary
(or, in his absence or inability to act, any person appointed by the Chairman)
shall act as secretary of the meeting and keep the minutes thereof.
5
Section 3.15. Written Consent of Directors in Lieu of a Meeting. Subject
to the provisions of the Investment Company Act of 1940, as amended, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writings
or writing are filed with the minutes of the proceedings of the Board or
committee.
Section 3.16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 3.17. Investment Policies. It shall be the duty of the Board of
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation,
as filed from time to time with the Securities and Exchange Commission and as
required by the Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the administration of its
day to day operations to an individual or corporate management company and/or
investment adviser pursuant to a written contract or contracts which have
obtained the requisite approvals, including the requisite approvals of renewals
thereof, of the Board of Directors and/or the stockholders of the Corporation in
accordance with the provisions of the Investment Company Act of 1940, as
amended.
ARTICLE IV.
Committees
Section 4.01. Executive Committee. The Board may, by resolution adopted by
a majority of the entire board, designate an Executive Committee consisting of
two or more of the directors of the Corporation, which committee shall have and
may exercise all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles of
Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the Investment
Company Act of 1940, as amended, or the taking of any other action required to
be taken by the Board of Directors by the Investment Company Act of 1940, as
amended;
(e) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(f) the amendment or repeal of any resolution of the Board which by
its terms may be amended or repealed only by the Board;
6
(g) the declaration of dividends and the issuance of capital stock
of the Corporation; and
(h) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties shall
not be prejudiced by such revision or alteration.
Section 4.02. Other Committees of the Board. The Board of Directors may
from time to time, by resolution adopted by a majority of the whole Board,
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors may, by resolution, prescribe.
Section 4.03. General. One-third, but not less than two, of the members of
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation.
ARTICLE V.
Officers, Agents and Employees
Section 5.01. Number and Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors. The Board of Directors may elect or appoint one or
more Vice Presidents and may also appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more offices may be
held by the same person, except the offices of President and Vice President, but
no officer shall execute, acknowledge or verify any instrument in more than one
capacity. Such officers shall be elected by the Board of Directors each year at
a meeting of the Board of Directors, each to hold office for the ensuing year
and until his successor shall have been duly elected and shall have qualified,
or until his death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-Laws. The Board may from time to time elect, or
delegate to the President the power to appoint, such officers (including one or
more Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. Such officers
7
and agents shall have such duties and shall hold their offices for such terms as
may be prescribed by the Board or by the appointing authority.
Section 5.02. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of resignation to the Board, the Chairman of
the Board, President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective shall
not be specified therein, immediately upon its receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall be necessary to make
it effective.
Section 5.03. Removal of Officer, Agent or Employee. Any officer, agent or
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any, but
the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 5.04. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5.05. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 5.06. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 5.07. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he shall preside at all meetings of the stockholders and of the
Board Directors. He shall have, subject to the control of the Board of
Directors, general charge of the business and affairs of the Corporation. He may
employ and discharge employees and agents of the Corporation, except such as
shall be appointed by the Board, and he may delegate these powers.
Section 5.08. Vice President. Each Vice President shall have such powers
and perform such duties as the Board of Directors or the President may from time
to time prescribe.
Section 5.09. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act of
1934, as amended) pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian of the property
of the Corporation;
8
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking proper
vouchers therefor; and
(f) in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 5.10. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation (unless
the seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 5.11. Delegation of Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI.
Indemnification
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under the Maryland General Corporation
Law, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, the decision
9
by the Corporation to indemnify such person must be based upon the reasonable
determination of independent legal counsel in a written opinion 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 office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the Maryland General Corporation Law 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 Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
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 Corporation for his undertaking; (b) the Corporation 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 Corporation 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 Corporation 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 activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
ARTICLE VII.
Capital Stock
Section 7.01. Stock Certificates. Unless otherwise provided by a
resolution of the Board of Directors, each holder of stock of the Corporation
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him, provided, however, that certificates for
fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of the
Corporation by the Chairman, President or a Vice President and by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed
with the seal of the Corporation. Any or all of the signatures or the seal on
10
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were still
in office at the date of issue.
Section 7.02. Books of Account and Record of Stockholders. There shall be
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of shares of stock
issued during a specified period not to exceed twelve months and the
consideration received by the Corporation for each such share.
Section 7.03. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
Section 7.04. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 7.05. Lost, Destroyed or Mutilated Certificates. The holder of any
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 7.06. Fixing of a Record Date for Dividends and Distributions. The
Board may fix, in advance, a date not more than ninety days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for
11
the determination of the stockholders entitled to receive any such dividend,
distribution, allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, allotment, rights or interests.
Section 7.07. Information to Stockholders and Others. Any stockholder of
the Corporation or his agent may inspect and copy during usual business hours
the Corporation's By-Laws, minutes of the proceedings of its stockholders,
annual statements of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII.
Seal
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland." Said seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced.
ARTICLE IX.
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of March.
ARTICLE X
Depositories and Custodians
Section 9.01. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
Section 9.02. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain provisions complying
with the Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
ARTICLE X.
Execution of Instruments
Section 10.01. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 10.02. Sale or Transfer of Securities. Stock certificates, bonds
or other securities at any time owned by the Corporation may be held on behalf
of the Corporation or sold,
12
transferred or otherwise disposed of subject to any limits imposed by these
By-Laws and pursuant to authorization by the Board and, when so authorized to be
held on behalf of the Corporation or sold, transferred or otherwise disposed of,
may be transferred from the name of the Corporation by the signature of the
President or a Vice President or the Treasurer or pursuant to any procedure
approved by the Board of Directors, subject to applicable law.
ARTICLE XI.
Independent Public Accountants
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and, if
required by the provisions of the Investment Company Act of 1940, as amended,
ratified by the stockholders.
ARTICLE XII.
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report to
the stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be available at
the annual meeting of stockholders, if any, and within 20 days after the meeting
(or, in the absence of an annual meeting, within 120 days after the end of the
fiscal year), shall be placed on file at the Corporation's principal office.
Each such report shall show the assets and liabilities of the Corporation as of
the close of the annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then invested. Such report
shall also show the Corporation's income and expenses for the period from the
end of the Corporation's preceding fiscal year to the close of the annual or
quarterly period covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such other
matters as the Board or such firm of independent public accountants shall
determine.
ARTICLE XIII.
Amendments
These By-Laws or any of them may be amended, altered or repealed by the
Board of Directors. The stockholders shall have no power to make, amend, alter
or repeal By-Laws.
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