Securities Act File No. 2-60836
| FORM N-1A | ||||
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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| Pre-Effective Amendment No. |
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| Post-Effective Amendment No. 30 |
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and/ or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
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| Amendment No. 29 |
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| (Check appropriate box or boxes) |
Merrill Lynch Small Cap Value Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Registrant’s telephone number, including Area Code (609) 282-2800
TERRY K. GLENN
Copies to:
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Counsel for the Fund
Thomas R. Smith, Jr., Esq. SIDLEY AUSTIN BROWN & WOOD LLP One World Trade Center New York, New York 10048-0557 |
Michael J. Hennewinkel, Esq.
FUND ASSET MANAGEMENT, L.P. P.O. Box 9011 Princeton, New Jersey 08543-9011 |
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing
pursuant to paragraph (b)
on (date) pursuant to
paragraph (b)
60 days after filing
pursuant to paragraph (a)(1)
on (date) pursuant to
paragraph (a)(1)
75 days after filing
pursuant to paragraph (a)(2)
on (date) pursuant to
paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
This
post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Common Stock, par value $.10 per share.
Master Small Cap Value Trust has also executed this Registration Statement
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.
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| KEY FACTS | ||
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| Merrill Lynch Small Cap Value Fund at a Glance | 3 | |
| Risk/ Return Bar Chart | 5 | |
| Fees and Expenses | 6 | |
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| DETAILS ABOUT THE FUND | ||
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| How the Fund Invests | 9 | |
| Investment Risks | 11 | |
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| YOUR ACCOUNT | ||
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| Merrill Lynch Select Pricing SM System | 17 | |
| How to Buy, Sell, Transfer and Exchange Shares | 23 | |
| How Shares are Priced | 27 | |
| Participation in Merrill Lynch Fee-Based Programs | 27 | |
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| MANAGEMENT OF THE FUND | ||
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| Fund Asset Management | 30 | |
| Master/Feeder Structure | 30 | |
| Financial Highlights | 32 | |
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| FOR MORE INFORMATION | ||
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| Shareholder Reports | Back Cover | |
| Statement of Additional Information | Back Cover | |
Common Stock — shares of ownership of a corporation.
Small companies — definition of “small companies” will change over time in response to market conditions; the Fund considers “small companies” to be those with total market capitalization, at the time of initial purchase by the Fund, in the same range as companies in the Russell 2000 Stock Index, a widely known small cap investment benchmark. The Fund may change such categorization to include companies outside this range if circumstances so dictate. As of May 31, 2001, the largest company in the index had an approximate market capitalization of $1.5 billion and the average market capitalization is approximately $5.80 million. The size of companies in the Russell 2000 Stock Index changes with market conditions and the composition of the index.
What is the Fund’s 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 Fund’s main investment strategies?
On September 1, 2000, the Fund converted from a stand-alone mutual fund to a “feeder” fund that invests all of its assets in the Master Small Cap Value Trust (the “Trust”), a mutual fund that has the same objective as the Fund. All investments will be made at the Trust level. This structure is sometimes called a “master/feeder” structure. The Fund’s investment results will correspond directly to the investment results of the Trust. For simplicity, this Prospectus uses the term “Fund” to include the Trust. This structural change in no way affects the investment objective or policies of the Fund, the services provided to the Fund or the expenses incurred by a shareholder in the Fund.
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. The Fund cannot guarantee that the Fund will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund’s investments — and therefore the value of the Fund’s shares — may fluctuate. These changes may occur because a particular market in which the Fund invests is rising or falling. Also, Fund management may select securities that underperform the market, relevant indices or other funds with similar investment objectives and investment strategies. If the value of the Fund’s investments goes down, you may lose money.
Enterprise value-sales ratio — the ratio of a company’s 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 Fund’s investment in a small or emerging growth company may lose substantial value.
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.
Who should invest?
The Fund may be an appropriate investment for you if you:
| • | Are investing with long term goals in mind, such as retirement or funding a child’s education. | ||
| • | Want a professionally managed and diversified portfolio. | ||
| • | Are willing to accept the risk of short-term fluctuations in exchange for the potential for long-term growth of capital. | ||
| • | Are not looking for a significant amount of current income. |
The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance for Class B shares for each of the past ten calendar years, which, except for the last four months in 2000, was prior to its change 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 average annual total returns for each class of the Fund’s shares for the periods shown with those of the Russell 2000 Stock Index. How the Fund performed in the past is not necessarily an indication of how the Fund will perform in the future as a “feeder” fund.
| Average Annual Total Returns | Past One | Past Five | Past Ten Years/ | |||||||||
| (as of December 31, 2000) | Year | Years | Since Inception | |||||||||
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| Merrill Lynch Small Cap Value Fund* — Class A | 9.62% | 16.45% | 18.87% | |||||||||
| Russell 2000 Stock Index** | –3.02% | 10.31% | 15.53% | |||||||||
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| Merrill Lynch Small Cap Value Fund* — Class B | 10.86% | 16.50% | 18.29% | |||||||||
| Russell 2000 Stock Index** | –3.02% | 10.31% | 15.53% | |||||||||
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| Merrill Lynch Small Cap Value Fund* — Class C | 13.62% | 16.49% | 16.44% | † | ||||||||
| Russell 2000 Stock Index** | –3.02% | 10.31% | 12.59% | †† | ||||||||
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| Merrill Lynch Small Cap Value Fund* — Class D | 9.37% | 16.15% | 16.34% | † | ||||||||
| Russell 2000 Stock Index** | –3.02% | 10.31% | 12.59% | †† | ||||||||
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| * | Includes sales charge. |
| ** | This unmanaged index is comprised of approximately 2,000 smaller-capitalization common stocks from various industrial sectors. Past performance is not predictive of future performance. |
| † | Inception date is October 21, 1994. |
| †† | Since October 21, 1994. |
Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses, which the Fund may charge:
Expenses paid directly by the shareholder:
Shareholder Fees — these include sales charges which you may pay when you buy or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.
Management Fee — a fee paid to the Investment Adviser for managing the Trust.
Distribution Fees — fees used to support the Fund’s marketing and distribution efforts, such as compensating Financial Advisors and other financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.
Administrative Fees — Fees paid to the Administrator for providing administrative services to the Fund.
The Fund offers four different classes of shares. Although your
money will be invested the same way no matter which class of
shares you buy, there are differences among the fees and
expenses associated with each class. Not everyone is eligible to
buy every class. After determining which classes you are
eligible to buy, decide which class best suits your needs. Your
Merrill Lynch Financial Advisor can help you with this decision.
This table shows the different fees and expenses that you may
pay if you buy and hold the different classes of shares of the
Fund. The total investment advisory and administrative fee rates
are the same in the “master/feeder” structure as they
were in the past. Among other things, now the fees are divided
between the Trust, which pays a management fee, and the Fund,
which pays an administrative fee. Future expenses may be greater
or less than those indicated below.
(footnotes continued on next page)
Examples:
These examples are intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds.
These examples assume that you invest $10,000 in the Fund for
the time periods indicated, that your investment has a 5% return
each year, that you pay the sales charges, if any, that apply to
the particular class and that the Fund’s operating expenses
remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may
be more or less than the 5% used in 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:
FEES AND EXPENSES
Shareholder Fees (fees paid directly
from your
investment)(a):
Class A
Class B(b)
Class C
Class D
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price)
5.25%(c)
None
None
5.25%(c)
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption proceeds,
whichever is lower)
None(d)
4.00%(c)
1.00%(c)
None(d)
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments
None
None
None
None
Redemption Fee
None
None
None
None
Exchange Fee
None
None
None
None
Annual Fund Operating Expenses (expenses
that are deducted from your investment)(e):
Management Fee(f)
0.49%
0.49%
0.49%
0.49%
Distribution and/or Service (12b-1) Fees(g)
None
1.00%
1.00%
0.25%
Other Expenses(h) (including Administrative
Fees(i))
0.55%
0.57%
0.59%
0.56%
Total Annual Fund Operating Expenses
1.04%
2.06%
2.08%
1.30%
(a)
In addition, Merrill Lynch may charge clients a
processing fee (currently $5.35) when a client buys or sells
shares. See “
Your Account — How to Buy, Sell,
Transfer and Exchange Shares.
”
(b)
Class B shares automatically convert to
Class D shares approximately eight years after you buy them
and will no longer be subject to distribution fees.
(c)
Some investors may qualify for reductions in the
sales charge (load).
(d)
You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one year.
(e)
The fees and expenses shown in the table and the
examples that follow include both the expenses of the Fund and
the Fund’s share of expenses of the Trust.
(f)
The Trust now pays the Investment Adviser a fee
at the annual rate of 0.50% of the average daily net assets of
the Fund for the first $1 billion; 0.475% of the average
daily net assets
(Footnotes continued from previous page)
from $1 billion to $1.5 billion; and
0.45% of the average daily net assets above $1.5 billion.
Prior to master/feeder conversion, total fee payable to the
Investment Adviser from the Fund was equal to 0.74% of the
Fund’s average daily net assets. For the period
September 1, 2000 (commencement of operations of the Trust)
to March 31, 2001, the total fee payable to the Investment
Adviser from the Trust was equal to 0.49% of the Trust’s
average daily net assets.
(g)
The Fund calls the “Service Fee” an
“Account Maintenance Fee.” Account Maintenance Fee is
the term used elsewhere in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares over
time, it may cost you more in distribution (12b-1) fees than the
maximum sales charge that you would have paid if you had bought
one of the other classes.
(h)
The Fund pays the Transfer Agent $11.00 for each
Class A and Class D shareholder account and $14.00 for
each Class B and Class C shareholder account and
reimburses the Transfer Agent’s out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in
the Merrill Lynch Mutual Fund Advisor program. The Fund also
pays a $0.20 monthly closed account charge, which is
assessed upon all accounts that close during the year. This fee
begins the month following the month the account is closed and
ends at the end of the calendar year. For the fiscal year ended
March 31, 2001, the Fund paid the Transfer Agent fees
totaling $3,150,812. The Fund and the Trust entered into an
agreement with State Street Bank and Trust Company, effective
January 1, 2001, pursuant to which State Street provides
certain accounting services to the Fund and the Trust. The Fund
and the Trust pay a fee for these services. For the period
January 1, 2001 through March 31, 2001 the Trust paid
State Street $98,620 and the Fund paid no fees under this
agreement. Prior to January 1, 2001, the Investment Adviser
provided accounting services to the Fund and the Trust at its
cost and the Fund and the Trust reimbursed the Investment
Adviser for these services. The Investment Adviser continues to
provide certain accounting services to the Fund and the Trust.
The Fund and the Trust reimburse the Investment Adviser at its
cost for such services. For the fiscal year ended March 31,
2001, the Fund reimbursed the Investment Adviser an aggregate of
$52,537 and the Trust reimbursed the Investment Adviser an
aggregate of $115,204 for the above-described services.
(i)
In the aggregate, the management and
administrative fee rates charged to a shareholder’s
investment in the master/feeder structure are equal to the
investment advisory fee charged prior to the conversion to a
master/feeder structure. Under the current structure, the
management fee is paid by the Trust while the administrative fee
is paid by the Fund at the annual rate of 0.25%.
1 Year
3 Years
5 Years
10 Years
Class A
$
625
$
839
$
1,069
$
1,729
Class B
$
609
$
946
$
1,308
$
2,197
*
Class C
$
311
$
652
$
1,119
$
2,410
Class D
$
650
$
915
$
1,200
$
2,010
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
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| Class A | $ | 625 | $ | 839 | $ | 1,069 | $ | 1,729 | ||||||||
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| Class B | $ | 209 | $ | 646 | $ | 1,108 | $ | 2,197 | * | |||||||
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| Class C | $ | 211 | $ | 652 | $ | 1,119 | $ | 2,410 | ||||||||
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| Class D | $ | 650 | $ | 915 | $ | 1,200 | $ | 2,010 | ||||||||
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| * | Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses Table. |
Daniel V. Szemis is a Senior Vice President and portfolio manager of the Fund. Mr. Szemis has been a First Vice President of Merrill Lynch Investment Managers since 1997 and was a Vice President of Merrill Lynch Investment Managers from 1996 to 1997. Mr. Szemis was portfolio manager with Prudential Mutual Fund Investment Management Advisors from 1990 to 1996.
ABOUT THE INVESTMENT ADVISER AND ADMINISTRATOR
Fund Asset Management serves as the Investment Adviser and the Administrator.
| HOW THE FUND INVESTS |
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. The Fund will, under normal circumstances, invest at least 65% of its assets in equity securities of small companies and will generally invest at least 80% of its assets in equity securities of small and emerging growth companies. Equity securities consist of:
| • | Common stock | ||
| • | Securities convertible into common stock | ||
| • | Derivative securities, such as options and futures, the values of which are based on a common stock or group of common stocks |
The Fund’s management chooses investments using a fundamental, value-oriented investment style. This means that the Fund seeks to invest in companies that the Fund’s management believes to be undervalued. Fund management may consider a company’s stock to be undervalued when the stock’s current price is less than what the Fund believes a share of the company is worth. A company’s worth can be assessed by several factors, such as financial resources, value of tangible assets, sales and earnings growth, rate of return on capital, product development, quality of management, and overall business prospects. A company’s stock may become undervalued when most investors fail to perceive the company’s strengths in one or more of these areas. Fund management may also determine a company is undervalued if its stock price is down because of temporary factors from which Fund management believes the company will recover. 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.”
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 strong management | ||
| • | 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 strong management | ||
| • | have rapid growth rates or above-average returns on equity | ||
| • | demonstrate successful product development and marketing capabilities |
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 which has suffered a recent earnings decline if Fund management believes that the decline is temporary or cyclical and will not significantly affect the company’s 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 although this is not a principal investment strategy. 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.
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. Because of these factors, the Fund is not intended as a complete investment program but is designated for long term investors seeking to diversify their investments and who are prepared to experience above-average volatility.
The Fund also may, as a temporary defensive measure, and without limitation, hold assets in other types of securities, including non-convertible
The Fund has no stated minimum holding period for investments, and will buy or sell securities whenever the Fund’s management sees an appropriate opportunity.
INVESTMENT RISKS
This section contains a summary discussion of the general risks of investing in the Fund. As with any mutual fund, there can be no guarantee that the Fund will meet its goals or that the Fund’s performance will be positive for any period of time.
The Fund’s principal risks are small cap and emerging growth securities risk, market risk and selection risk.
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 secure than larger, more established companies. They may depend on a small number of key personnel. If a product fails, or if management changes, or there are other adverse developments, the Fund’s investment in a small cap or emerging growth company may lose substantial value.
The securities of small cap and emerging growth companies generally trade in lower volumes and are subject to greater and less predictable price changes than the securities of larger, more established companies. 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.
Market and Selection Risk — Market risk is the risk that markets in one or more countries in which the Fund invests will go down in value, including the possibility that the market will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the markets, the relevant indices or other funds with similar investment objectives and investment strategies.
The Fund also may be subject, to a lesser extent, to the following risks.
Convertibles — Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security, that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risk as the underlying common stock.
Illiquid Securities — The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily 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.
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.
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 are financial instruments whose value is derived from another security, a commodity (such as gold or oil) or an index such as Standard & Poor’s 500 Index. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments. Derivatives are volatile and involve significant risks, including:
| • | Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund. | ||
| • | Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment. | ||
| • | Leverage risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested. | ||
| • | Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. |
Hedging — 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.
There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.
Foreign Market Risk — Since the Fund may invest in foreign securities, it offers the potential for more diversification than an investment only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than securities in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, investment in foreign securities involves the following risks, which are generally greater for investments in emerging markets.
| • | The economies of certain foreign markets often do not compare favorably with the economy of the United States in 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. | ||
| • | The governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices. They could also impair the Fund’s ability to purchase or sell foreign securities or transfer its assets or income back into the United States, or otherwise adversely affect the Fund’s operations. | ||
| • | 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 Fund’s assets may be uninvested and not earning returns. The Fund may miss investment opportunities or be unable to sell an investment because of these delays. |
European Economic and Monetary Union (EMU) — A number of European countries have entered into EMU in an effort to reduce trade barriers between themselves and eliminate fluctuations in their currencies. EMU established a single European currency (the euro), which was introduced on January 1, 1999 and is expected to replace the existing national currencies of all initial EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) have been redenominated in the euro and are traded and make dividend and other payments only in euros. Like other investment companies and business organizations, including the companies in which the Fund may invest, the Fund could be adversely affected if the transition to the euro, or EMU as a whole, does not proceed as planned or if a participating country withdraws from EMU.
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 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.
Securities Lending — The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/ 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 Fund’s portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund’s return. Certain securities that the Fund buys may create leverage including, for example, options.
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information.
The Fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Advisor can help you determine which share class is best suited to your personal financial goals.
For example, if you select Class A or Class D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver.
Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Investment Adviser, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.
If you select Class B or Class C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares.
The Fund’s shares are distributed by FAM Distributors, Inc., an affiliate of the Investment Adviser.
| Class A | Class B | Class C | Class D | |||||
|
|
||||||||
| Availability? |
Limited to certain investors including:
• Current Class A shareholders • Certain Retirement Plans • Participants in certain Merrill Lynch-sponsored programs • Certain affiliates of Merrill Lynch, selected securities dealers and other financial intermediaries. |
Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. | Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. | Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. | ||||
|
|
||||||||
| Initial Sales Charge? | Yes. Payable at time of purchase. Lower sales charges available for larger investments. | No. Entire purchase price is invested in shares of the Fund. | No. Entire purchase price is invested in shares of the Fund. | Yes. Payable at time of purchase. Lower sales charges available for larger investments. | ||||
|
|
||||||||
| Deferred Sales Charge? | No. (May be charged for purchases over $1 million that are redeemed within one year.) | Yes. Payable if you redeem within 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.) | ||||
|
|
||||||||
| Account Maintenance and Distribution Fees? | No. | 0.25% Account Maintenance Fee. 0.75% Distribution Fee. | 0.25% Account Maintenance Fee. 0.75% Distribution Fee. | 0.25% Account Maintenance Fee. No Distribution Fee. | ||||
|
|
||||||||
| Conversion to Class D shares? | No. | Yes, automatically after approximately eight years. | No. | No. | ||||
|
|
||||||||
Letter of Intent
— permits you to pay
the sales charge that would be applicable if you add up all
shares of Merrill Lynch Select Pricing
SM
System funds
that you agree to buy within a 13 month period. Certain
restrictions apply.
Class A and Class D
Shares — Initial Sales Charge Options
If you select Class A or Class D shares, you will pay
a sales charge at the time of purchase as shown in the following
table. Securities dealers’ compensation is shown in the
last column.
Dealer
As a % of
As a % of
Compensation
Offering
Your
as a % of
Your Investment
Price
Investment*
Offering Price
Less than $25,000
5.25%
5.54%
5.00%
$25,000 but less than $50,000
4.75%
4.99%
4.50%
$50,000 but less than $100,000
4.00%
4.17%
3.75%
$100,000 but less than $250,000
3.00%
3.09%
2.75%
$250,000 but less than $1,000,000
2.00%
2.04%
1.80%
$1,000,000 and over**
0.00%
0.00%
0.00%
| * | Rounded to the nearest one-hundredth percent. |
| ** | If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Investment Adviser compensates the selling dealer or other financial intermediary from its own funds. However, if you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer-sponsored retirement or savings plans. |
No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for:
| • | Purchases under a Right of Accumulation or Letter of Intent | ||
| • | Merrill Lynch Blueprint SM Program participants | ||
| • | TMA SM Managed Trusts | ||
| • | Certain Merrill Lynch investment or central asset accounts | ||
| • | Certain employer-sponsored retirement or savings plans | ||
| • | Purchases using proceeds from the sale of certain Merrill Lynch closed-end funds under certain circumstances | ||
| • | Certain investors, including directors or trustees of Merrill Lynch mutual funds and Merrill Lynch employees | ||
| • | Certain fee-based programs of Merrill Lynch and other financial intermediaries that have agreements with the Distributor or its affiliates |
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch Financial Advisor can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A shares since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this “Reinstatement Privilege” may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Advisor, selected securities dealer, other financial intermediary or the Fund’s Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares — Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within 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 Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover 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.
Class B Shares
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
| 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 | ||
| • | Withdrawals through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established | ||
Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes.
Different conversion schedules 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 Fund’s eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund’s conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relating to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying, selling, transferring or exchanging shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Advisor may help you with this decision.
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.
| If You Want to | Your Choices | Information Important for You to Know | ||
|
|
||||
| Buy Shares | First, select the share class appropriate for you | Refer to the Merrill Lynch Select Pricing table on page 18. Be sure to read this prospectus carefully. | ||
|
|
||||
| Next, determine the amount of your investment |
The minimum initial investment for the Fund is
$1,000 for all accounts except:
• $250 for certain Merrill Lynch fee-based programs • $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.) |
|||
|
|
||||
| Have your Merrill Lynch Financial 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 $50 for all accounts except that retirement plans have a
minimum additional purchase of $1 and certain programs, such as
automatic investment plans, may have higher minimums.
(The minimums for additional purchases may be waived under certain circumstances.) |
||
|
|
||||
| Acquire additional shares 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. | |||
|
|
||||
| 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. | ||
|
|
||||
| If You Want to | Your Choices | Information Important for You to Know | ||
|
|
||||
| Transfer Shares to Another Selected Securities Dealer or Other Financial Intermediary (continued) | 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
dealer or other financial intermediary prior to that day’s
close of business on the New York Stock Exchange (generally 4:00
p.m. Eastern time). Certain financial intermediaries 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. |
|||
|
|
||||
| If You Want to | Your Choices | Information Important for You to Know | ||
|
|
||||
| Sell Shares Systematically | Participate in the Fund’s Systematic Withdrawal Plan | You can choose to receive systematic payments from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA®, CBA® or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and 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 fund’s prospectus |
You can exchange your shares of the Fund for
shares of many other Merrill Lynch mutual funds. You must have
held the shares used in the exchange for at least 15 calendar
days before you can exchange to another fund.
Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares, you will exchange into Class D shares. Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or Class D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will 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 A or Class D 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. 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. 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. |
||
|
|
||||
Short-term or excessive trading into and out of the Fund may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any purchase orders, including exchanges, particularly from market timers or investors who, in Fund management’s opinion, have a pattern of short-term or excessive trading or whose trading may have been disruptive to the Fund. For these purposes, Fund management may consider an investor’s trading history in the Fund or other Merrill Lynch funds, and accounts under common ownership or control.
When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open, as of the close of business on the Exchange based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund’s net asset value may change on days when you will not be able to purchase or redeem 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.
Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, and Class D shares will have a higher net asset value than Class B or Class C shares. Also dividends paid on Class A and Class D shares will generally be higher than dividends paid on Class B and Class C shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN FEE-BASED PROGRAMS
If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to
If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary.
DIVIDENDS AND TAXES
The Fund will distribute at least annually any net investment income and any net realized capital gains. 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.
You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Capital gain
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.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if you are a foreign entity, the Fund’s ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
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.
Fund Asset Management, the Trust’s Investment Adviser, manages the Trust’s 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. Prior to master/feeder conversion, total fee payable to the Investment Adviser from the Fund was equal to 0.74% of the Fund’s average daily net assets. For the period September 1, 2000 (commencement of operations of the Trust) to March 31, 2001, the total fee payable to the Investment Adviser from the Trust was equal to 0.49% of the Trust’s average daily net assets. The Fund pays the Investment Adviser 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 $545 billion in investment company and other portfolio assets under management as of May 2001.
MASTER/ FEEDER STRUCTURE
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 portfolio’s 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.
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 Fund’s assets directly.
The Financial Highlights table is intended to help you
understand the Fund’s financial performance for the periods
shown. These periods include operations prior to the change to a
“master/feeder” structure. Certain information
reflects financial results for a single Fund share. The total
returns in the table represent the rate an investor would have
earned or lost on an investment in the Fund (assuming
reinvestment of all dividends). This information has been
audited by Deloitte & Touche
LLP
, whose report, along with the Fund’s financial
statements, is included in the Fund’s Annual Report which
is available upon request.
[Additional columns below]
[Continued from above table, first column repeated]
[Additional columns below]
[Continued from above table, first column repeated]
Class A
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:
2001‡
2000
1999
1998
1997
Per Share Operating
Performance:
Net asset value, beginning of year
$
22.87
$
16.27
$
22.03
$
17.59
$
17.77
Investment income
(loss) — net†
.06
(.02
)
(.02
)
(.03
)
.06
Realized and unrealized gain (loss) from
investments and the Trust — net
1.23
8.84
(4.66
)
7.20
3.01
Total from investment operations
1.29
8.82
(4.68
)
7.17
3.07
Less dividends and distributions:
Investment
income — net
—
—
—
—
(.06
)
Realized gain on
investments — net
(4.35
)
(2.22
)
(1.08
)
(2.73
)
(3.19
)
Total dividends and distributions
(4.35
)
(2.22
)
(1.08
)
(2.73
)
(3.25
)
Net asset value, end of year
$
19.81
$
22.87
$
16.27
$
22.03
$
17.59
Total Investment Return:*
Based on net asset value per share
6.39
%
57.29
%
(22.17
)%
43.18
%
17.62
%
Ratios to Average Net Assets:
Expenses††
1.04
%
1.08
%
1.08
%
1.02
%
1.10
%
Investment income (loss) — net
.27
%
(.12
)%
(.10
)%
(.13
)%
.34
%
Supplemental Data:
Net assets, end of year (in thousands)
$
648,806
$
491,855
$
276,957
$
396,198
$
223,492
Portfolio turnover
42.30
%#
89.18
%
57.82
%
67.02
%
97.87
%
Class B
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:
2001‡
2000
1999
1998
1997
Per Share Operating
Performance:
Net asset value, beginning of year
$
21.59
$
15.37
$
21.03
$
16.91
$
17.21
Investment income
(loss) — net†
(.15
)
(.21
)
(.20
)
(.23
)
(.12
)
Realized and unrealized gain (loss) from
investments and the Trust — net
1.15
8.35
(4.43
)
6.90
2.90
Total from investment operations
1.00
8.14
(4.63
)
6.67
2.78
Less dividends and distributions:
Investment
income — net
—
—
—
—
—
Realized gain on
investments — net
(4.15
)
(1.92
)
(1.03
)
(2.55
)
(3.08
)
Total dividends and distributions
(4.15
)
(1.92
)
(1.03
)
(2.55
)
(3.08
)
Net asset value, end of year
$
18.44
$
21.59
$
15.37
$
21.03
$
16.91
Total Investment Return:*
Based on net asset value per share
5.26
%
55.72
%
(22.96
)%
41.72
%
16.44
%
Ratios to Average Net Assets:
Expenses††
2.06
%
2.11
%
2.10
%
2.05
%
2.13
%
Investment income (loss) — net
(.75
)%
(1.14
)%
(1.12
)%
(1.16
)%
(.68
)%
Supplemental Data:
Net assets, end of year (in thousands)
$
563,316
$
511,780
$
378,610
$
611,364
$
337,716
Portfolio turnover
42.30
%#
89.18
%
57.82
%
67.02
%
97.87
%
*
Total investment returns exclude the effects of
sales charges.
†
Based on average shares outstanding.
††
Includes the Fund’s share of the
Trust’s 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.
#
Portfolio turnover for the Trust for the period
September 1, 2000 (commencement of operations of the Trust)
to March 31, 2001.
Class C
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:
2001‡
2000
1999
1998
1997
Per Share Operating
Performance:
Net asset value, beginning of year
$
21.32
$
15.21
$
20.83
$
16.77
$
17.10
Investment income (loss) — net†
(.15
)
(.21
)
(.20
)
(.23
)
(.13
)
Realized and unrealized gain (loss) on
investments and the Trust — net
1.14
8.25
(4.38
)
6.84
2.89
Total from investment operations
.99
8.04
(4.58
)
6.61
2.76
Less dividends and distributions:
Investment income —
net
—
—
—
—
—
Realized gain on
investments — net
(4.18
)
(1.93
)
(1.04
)
(2.55
)
(3.09
)
Total dividends and distributions
(4.18
)
(1.93
)
(1.04
)
(2.55
)
(3.09
)
Net asset value, end of year
$
18.13
$
21.32
$
15.21
$
20.83
$
16.77
Total Investment Return:*
Based on net asset value per share
5.29
%
56.98
%
(22.99
)%
41.74
%
16.39
%
Ratios to Average Net Assets:
Expenses††
2.08
%
2.12
%
2.12
%
2.06
%
2.14
%
Investment income (loss) — net
(.75
)%
(1.16
)%
(1.14
)%
(1.17
)%
(.70
)%
Supplemental Data:
Net assets, end of year (in thousands)
$
140,610
$
67,390
$
38,249
$
70,159
$
31,182
Portfolio turnover
42.30
%##
89.18
%
57.82
%
67.02
%
97.87
%
Class D
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value:
2001‡
2000
1999
1998
1997
Per Share Operating
Performance:
Net asset value, beginning of year
$
22.80
$
16.19
$
21.97
$
17.56
$
17.74
Investment income (loss) — net†
—#
(.07
)
(.06
)
(.08
)
.01
Realized and unrealized gain (loss) on
investments and the Trust — net
1.23
8.82
(4.65
)
7.18
3.02
Total from investment operations
1.23
8.75
(4.71
)
7.10
3.03
Less dividends and distributions:
Investment income —
net
—
—
—
—
(.04
)
Realized gain on
investments — net
(4.30
)
(2.14
)
(1.07
)
(2.69
)
(3.17
)
Total dividends and distributions
(4.30
)
(2.14
)
(1.07
)
(2.69
)
(3.21
)
Net asset value, end of year
$
19.73
$
22.80
$
16.19
$
21.97
$
17.56
Total Investment Return:*
Based on net asset value per share
6.11
%
56.98
%
(22.37
)%
42.80
%
17.38
%
Ratios to Average Net Assets:
Expenses††
1.30
%
1.33
%
1.33
%
1.27
%
1.35
%
Investment income (loss) — net
(.02
)%
(.37
)%
(.35
)%
(.39
)%
.07
%
Supplemental Data:
Net assets, end of year (in thousands)
$
198,094
$
151,650
$
82,279
$
114,183
$
40,173
Portfolio turnover
42.30
%##
89.18
%
57.82
%
67.02
%
97.87
%
*
Total investment returns exclude the effects of
sales charges.
†
Based on average shares outstanding.
††
Includes the Fund’s share of the
Trust’s 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.
#
Amount is less than $.01 per share.
##
Portfolio turnover for the Trust for the period
September 1, 2000 (commencement of operations of the Trust)
to March 31, 2001.
Shareholder Reports
Additional information about the Fund’s
investments is available in the Fund’s annual and
semi-annual reports to shareholders. In the Fund’s annual
report you will find a discussion of the market conditions and
investment strategies that significantly affected the
Fund’s performance during its last fiscal year. You may
obtain these reports at no cost by calling 1-800-MER-FUND.
Statement of Additional Information
The Fund’s Statement of Additional Information contains further information about the Fund and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.
| Contact your Merrill Lynch Financial Advisor or other financial intermediary or contact the Fund, at the telephone number or address indicated above, if you have any questions. | |
| Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC’s Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by electronic request at the following E-mail address: publicinfo@sec.gov or writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102. | |
Investment Company Act file #811-2809
| Merrill Lynch | |
| Small Cap | |
| Value Fund, Inc. |
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Small Cap Value Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 •
Phone No. (609) 282-2800
Merrill Lynch Small Cap Value Fund, Inc. (the “Fund”)
is a diversified, open-end investment company that seeks
long-term growth of capital by investing in a diversified
portfolio of securities, primarily common stocks, 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
management’s selection of companies in which the Fund will
invest.
The Fund is a “feeder” fund that invests all of its
assets in the Master Small Cap Value Trust (the
“Trust” ) which has the same investment objective as
the Fund. All investments are made at the Trust level. The
Fund’s investment results correspond directly to the
investment results of the Trust. There can be no assurance that
the Fund will achieve its investment objective. For more
information on the Fund’s investment objective and
policies, see “Investment Objective and Policies.”
Pursuant to the Merrill Lynch Select
Pricing
SM
System, the Fund offers four classes of shares,
each with a different combination of sales charges, ongoing fees
and other features. The Merrill Lynch Select
Pricing
SM
System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial
given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant
circumstances. See “Purchase of Shares.”
This Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the Prospectus
of the Fund, dated July 12, 2001 (the
“Prospectus”), which has been filed with the
Securities and Exchange Commission (the “Commission”)
and can be obtained, without charge, by calling 1-800-MER-FUND
or your Merrill Lynch Financial Advisor, or by writing to the
Fund at the address listed above. The Prospectus is incorporated
by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund’s audited financial
statements are incorporated in this Statement of Additional
Information by reference to its 2001 Annual Report. You may
request a copy of the Annual Report at no charge by calling
(800) 637-3863 between 8:00 a.m. and 8:00 p.m.
Eastern time on any business day.
Fund Asset Management — Investment
Adviser
The date of this Statement of Additional Information is
July 12, 2001.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE 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 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.
In attempting to achieve its investment objective, the Fund may
employ various investment strategies. 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 company’s
prospects, primarily through fundamental analysis of its
management, financial structure, product development, marketing
ability and other relevant factors. Management anticipates
applying such a strategy of fundamental analysis to small and
emerging growth companies.
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 company’s 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, the 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, management of the Fund 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 Fund’s cash flow
(primarily, the effects of net purchases or net redemptions of
the Fund’s 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.
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 as the Fund. All
investments are made at the Trust level. This structure is
sometimes called a “master/feeder” structure. The
Fund’s 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 “Board of Directors” to include the Board of
Trustees. There can be no assurance that the investment
objective of the Fund or the investment objective of the Trust
will be realized. 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 Fund’s outstanding voting
securities as defined in the Investment Company Act of 1940, as
amended (the “Investment Company Act”). The investment
objective of the Trust is a fundamental policy of the Trust and
may not be changed without the approval of a majority of the
Trust’s outstanding voting securities as defined in the
Investment Company Act. Please see “How the Fund
Invests” and “Investment Risks” in the Prospectus
for information with respect to the Fund’s and the
Trust’s investment objective and policies.
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
2
Description of Certain Investments
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 the Investment Adviser determines that
economic or financial conditions are adverse for holding or
being fully invested in equity securities. A portion of the
Fund’s assets normally would be held in Temporary
Investments in anticipation of investment in equity securities
or to provide for possible redemptions.
Securities of Small or Emerging Growth Companies.
An
investment in the Fund involves greater risk than is customarily
associated with funds that invest in more established companies.
The securities of small or emerging growth companies may be
subject to more abrupt or erratic market movements than larger,
more established companies or the market average in general.
These companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited
management group. Because of these factors, the Fund believes
that its shares may be suitable for investment by persons who
can invest without concern for current income and who are in a
financial position to assume above-average investment risk in
search of above-average long-term reward. It is not intended as
a complete investment program but is designed for those
long-term investors who are prepared to experience above-average
fluctuations in net asset value.
While the issuers in which the Fund will primarily invest may
offer greater opportunities for capital appreciation than large
cap issuers, investments in small or emerging growth companies
may involve greater risks and thus may be considered
speculative. Management believes that properly selected
companies of this type have the potential to increase their
earnings or market valuation at a rate substantially in excess
of the general growth of the economy. Full development of these
companies and trends frequently takes time and, for this reason,
the Fund should be considered as a long-term investment and not
as a vehicle for seeking short-term profits.
The securities in which the Fund invests will often be traded
only in the over-the-counter market or on a regional securities
exchange and may not be traded every day or in the volume
typical of trading on a national securities exchange. As a
result, the disposition by the Fund of portfolio securities to
meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods
when in management’s judgement such disposition is not
desirable or to make many small sales over a lengthy period of
time.
While the process of selection and continuous supervision by
management does not, of course, guarantee successful investment
results, it does provide access to an asset class not available
to the average individual due to the time and cost involved.
Careful initial selection is particularly important in this area
as many new enterprises have promise but lack certain of the
fundamental factors necessary to prosper. Investing in small and
emerging growth companies requires specialized research and
analysis. In addition, many investors cannot invest sufficient
assets in such companies to provide wide diversification.
Small companies are generally little known to most individual
investors although some may be dominant in their respective
industries. Management of the Fund believes that relatively
small companies will continue to have the opportunity to develop
into significant business enterprises. The Fund may invest in
securities of small issuers in the relatively early stages of
business development which have a new technology, a unique or
proprietary product or service, or a favorable market position.
Such companies may not be counted upon to
3
Equity securities of specific small cap issuers may present
different opportunities for long-term capital appreciation
during varying portions of economic or securities markets
cycles, as well as during varying stages of their business
development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting
attractive investment opportunities at various points during
these cycles.
Smaller companies, due to the size and kinds of markets that
they serve, may be less susceptible than large companies to
intervention from the Federal government by means of price
controls regulations or litigation.
Convertible Securities.
Convertible securities entitle
the holder to receive interest payments paid on corporate debt
securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or
until the holder elects to exercise the conversion privilege.
The characteristics of convertible securities include the
potential for capital appreciation as the value of the
underlying common stock increases, the relatively high yield
received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their
fixed-income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will
consider both the yield on the convertible security relative to
its credit quality and the potential capital appreciation that
is offered by the underlying common stock, among other things.
Convertible securities are issued and traded in a number of
securities markets. Even in cases where a substantial portion of
the convertible securities held by the Fund are denominated in
United States dollars, the underlying equity securities may be
quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in
a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed
exchange rate established at the time the security is issued. As
a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in
which the share price is quoted will affect the value of the
convertible security. As described herein, the Fund is
authorized to enter into foreign currency hedging transactions
in which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible
securities is influenced by both the yield of nonconvertible
securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security
viewed without regard to its conversion feature (
i.e.,
strictly on the basis of its yield) is sometimes referred to as
its “investment value.” To the extent interest rates
change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value
of the convertible security will be influenced by its
“conversion value,” which is the market value of the
underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates
directly with the price of the underlying common stock. If,
because of a low price of the common stock the conversion value
is substantially below the investment value of the convertible
security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security
increases to a point that approximates or exceeds its investment
value, the price of the convertible security will be influenced
principally by its conversion value. A convertible security will
sell at a premium over the conversion value to the extent
investors place value on the right to acquire the underlying
common stock while holding a fixed-income security. The yield
and conversion premium of convertible securities issued in Japan
and the Euromarket are frequently determined at levels that
cause the conversion value to affect their market value more
than the securities’ investment value.
4
Holders of convertible securities generally have a claim on the
assets of the issuer prior to the common stockholders but may be
subordinated to other debt securities of the same issuer. A
convertible security may be subject to redemption at the option
of the issuer at a price established in the charter provision,
indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held
by the Fund is called for redemption, the Fund will be required
to redeem the security, convert it into the underlying common
stock or sell it to a third party. Certain convertible debt
securities may provide a put option to the holder which entitles
the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security
under certain circumstances.
Illiquid or Restricted Securities.
The Fund may invest up
to 15% of its net assets in securities that lack an established
secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily
of the security and the price to be obtained upon disposition of
the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade
at a discount from comparable, more liquid investments.
Investment of the Fund’s assets in illiquid securities may
restrict the ability of the Fund to dispose of its investments
in a timely fashion and for a fair price as well as its ability
to take advantage of market opportunities. The risks associated
with illiquidity will be particularly acute where the
Fund’s operations require cash, such as when the Fund
redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring
capital losses on the sale of illiquid investments.
The Fund may invest in securities that are not registered
(“restricted securities”) under the Securities Act of
1933, as amended (the “Securities Act”). Restricted
securities may be sold in private placement transactions between
the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases,
privately placed securities may not be freely transferable under
the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public
trading market, privately placed securities may be less liquid
and more difficult to value than publicly traded securities. To
the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the
sales, due to illiquidity, could be less than those originally
paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Fund may be
required to bear the expenses of registration. Certain of the
Fund’s investments in private placements may consist of
direct investments and may include investments in smaller,
less-seasoned issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management
group. In making investments in such securities, the Fund may
obtain access to material nonpublic information which may
restrict the Fund’s ability to conduct portfolio
transactions in such securities.
144A Securities
. The Fund may purchase restricted
securities that can be offered and sold to “qualified
institutional buyers” under Rule 144A under the
Securities Act. The Board of Directors has determined to treat
as liquid Rule 144A securities that are either freely
tradable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and
procedures adopted by the Fund’s Board. The Board of
Directors has adopted guidelines and delegated to the Investment
Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to
predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will continue
to develop, the Board of Directors will carefully monitor the
Fund’s investments in these securities. This investment
practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in
purchasing these securities.
Repurchase Agreements.
As a temporary investment, the
Fund may invest in securities pursuant to repurchase agreements.
U.S. dollar-denominated repurchase agreements may be entered
into only with a member bank of the Federal Reserve System or a
primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the bank or primary dealer or an
affiliate thereof agrees, upon entering into
5
Investment in Other Investment Companies.
The Fund may
invest in other investment companies whose investment objectives
and policies are consistent with those of the Fund. In
accordance with the Investment Company Act, the Fund may invest
up to 10% of its total assets in securities of other investment
companies. In addition, under the Investment Company Act the
Fund may not own more than 3% of the total outstanding voting
stock of any investment company and not more than 5% of the
value of the Fund’s total assets may be invested in the
securities of any investment company. If the Fund acquires
shares in investment companies, shareholders would bear both
their proportionate share of expenses in the Fund (including
management and advisory fees) and, indirectly, the expenses of
such investment companies (including management and advisory
fees). Investments by the Fund in wholly owned investment
entities created under the laws of certain countries will not be
deemed an investment in other investment companies.
Investment in Foreign Issuers
General.
It is anticipated that, in the immediate future,
not more than 30% of the Fund’s total net assets taken at
market value at the time of their acquisition will be invested
in the securities of foreign issuers. Investment in securities
of foreign issuers involves certain risks not typically involved
in domestic investments, including fluctuations in foreign
exchange rates, future political and economic developments,
different legal systems and the possible imposition of exchange
controls or other foreign governmental laws or restrictions.
Securities prices in different countries are subject to
different economic, financial, political and social factors.
Changes in foreign currency exchange rates will affect the value
of securities in the Fund and the unrealized appreciation or
depreciation of investments. In addition, with respect to
certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, difficulty in
obtaining or enforcing a court judgment, economic, political or
social instability or diplomatic developments that could affect
investments in those countries. Certain foreign investments also
may be subject to foreign withholding taxes. These risks often
are heightened for investments in smaller, emerging capital
markets.
Public Information.
Securities of foreign issuers may not
be registered with the Commission, nor may the issuers thereof
be subject to the reporting requirements of such agency.
Accordingly, there may be less publicly available information
about a foreign issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of U.S.
issuers.
Trading Volume, Clearance and Settlement.
Foreign
financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and
securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic
companies. The foreign markets also have different clearance and
settlement procedures. Delays in settlement could result in
periods when assets of the Fund are uninvested and no return is
earned thereon. The inability to dispose of a portfolio security
due to settlement problems could result either in losses to the
Fund due to subsequent
6
Government Supervision and Regulation.
There generally is
less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the
United States. For example, there may be no comparable
provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with
respect to securities transactions consummated in the United
States. Further, brokerage commissions and other transaction
costs on foreign securities exchanges generally are higher than
in the United States.
European Economic and Monetary Union.
For a number of
years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers
between countries, increase competition among companies, reduce
government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries.
The Treaty on European Union (the “Maastricht Treaty”)
set out a framework for the European Economic and Monetary Union
(“EMU”) among the countries that comprise the European
Union (“EU”). EMU established a single common European
currency (the “euro”) that was introduced on
January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1,
2002. EMU took effect for the initial EMU participants on
January 1, 1999. Certain securities issued in participating
EU countries (beginning with government and corporate bonds)
have been redenominated in the euro, and are listed, traded and
make dividend and other payments only in euros.
No assurance can be given that EMU will take full effect, that
all the changes planned for the EU can be successfully
implemented, or that these changes will result in the economic
and monetary unity and stability intended. There is a
possibility that EMU will not be completed, or will be completed
but then partially or completely unwound. Because any
participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could
choose to abandon EMU, which could diminish its credibility and
influence. Any of these occurrences could have adverse effects
on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of
participants’ national currencies and a significant
increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European
markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt
and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities redenominated
in euros are transferred back into that country’s national
currency, particularly if the withdrawing country is a major
economic power. Such developments could have an adverse impact
on the Fund’s investments in Europe generally or in
specific countries participating in EMU. Gains or losses from
euro conversions may be taxable to Fund shareholders under
foreign or, in certain limited circumstances, U.S. tax laws.
Derivatives
The Fund may use instruments referred to as Derivatives.
Derivatives are financial instruments the value of which is
derived from another security, a commodity (such as gold or
oil), a currency or an index (a measure of value or rates, such
as the Standard & Poor’s 500 Index or the prime lending
rate). Derivatives allow the Fund to increase or decrease the
level of risk to which the Fund is exposed more quickly and
efficiently than transactions in other types of instruments.
Hedging.
The Fund may use Derivatives for hedging
purposes. Hedging is a strategy in which a Derivative is used to
offset the 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
the Fund, in which case any losses on the holdings being hedged
may not be reduced.
7
The Fund may use derivative instruments and trading strategies
including the following:
Options on Securities and Securities Indices
Purchasing Put Options.
The Fund may purchase put options
on securities held in its portfolio or securities or interest
rate indices that are correlated with securities held in its
portfolio. When the Fund purchases a put option, in
consideration for an up-front payment (the “option
premium”) the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified
price (the “exercise price”) on or before a specified
date (the “expiration date”), in the case of an option
on securities, or to receive from another party a payment based
on the amount a specified securities index declines below a
specified level on or before the expiration date, in the case of
an option on a securities index. The purchase of a put option
limits the Fund’s risk of loss in the event of a decline in
the market value of the portfolio holdings underlying the put
option prior to the option’s expiration date. If the market
value of the portfolio holdings associated with the put option
increases rather than decreases, however, the Fund will lose the
option premium and will consequently realize a lower return on
the portfolio holdings than would have been realized without the
purchase of the put. Purchasing a put option may involve
correlation risk, and may also involve liquidity and credit risk.
Purchasing Call Options.
The Fund may also purchase call
options on securities it intends to purchase or securities or
interest rate indices, which are correlated with the types of
securities it intends to purchase. When the Fund purchases a
call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified
securities at the exercise price on or before the expiration
date, in the case of an option on securities, or to receive from
another party a payment based on the amount a specified
securities index increases beyond a specified level on or before
the expiration date, in the case of an option on a securities
index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases
in the market value for the security during a period when the
Fund is contemplating its purchase, in the case of an option on
a security, or attempting to identify specific securities in
which to invest in a market the Fund believes to be attractive,
in the case of an option on an index (an “anticipatory
hedge”). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose
the entire option premium. Purchasing a call option involves
correlation risk, and may also involve liquidity and credit risk.
The Fund is also authorized to purchase put or call options in
connection with closing out put or call options it has
previously sold. However, the Fund will not purchase options on
securities if, as a result of such purchase, the aggregate cost
(option plus premiums paid) of all outstanding options on
securities held by the Fund would exceed 5% of the market value
of the Fund’s total assets.
Writing Call Options.
The Fund may write (
i.e.,
sell) call options on securities held in its portfolio or
securities indices the performance of which correlates with
securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another
party the right to buy specified securities owned by the Fund at
the exercise price on or before the expiration date, in the case
of an option on securities, or agrees to pay to another party an
amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case
of an option on a securities index. The Fund may write call
options to earn income, through the receipt of option premiums.
In the event the party to which the Fund has written an option
fails to exercise its rights under the option because the value
of the underlying securities is less than the exercise price,
the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium.
By writing a call option, however, the Fund limits its ability
to sell the underlying securities, and gives up the opportunity
to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains
outstanding. Writing a call option may involve correlation risk.
Writing Put Options.
The Fund may also write put options
on securities or securities indices. When the Fund writes a put
option, in return for an option premium the Fund gives another
party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay to another party an
amount based on any decline in a specified securities index
below a specified level on or before the expiration date, in the
case of an option on a securities index. The Fund may
8
The Fund is also authorized to sell call or put options in
connection with closing out call or put options it has
previously purchased.
Other than with respect to closing transactions, the Fund will
only write call or put options that are “covered.” A
call or put option will be considered covered if the Fund has
segregated assets with respect to such option in the manner
described in “Risk Factors in Derivatives” below. A
call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the
option (or, in the case of an option on a securities index,
securities which substantially correlate with the performance of
such index) or owns a call option, warrant or convertible
instrument which is immediately exercisable for, or convertible
into, such security.
The Fund may not write covered options on underlying securities
exceeding 50% of its net assets, taken at market value. The Fund
will not purchase options on securities (including stock index
options) if as a result of such purchase, the aggregate cost of
all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund’s total assets.
Types of Options.
The Fund may engage in transactions in
options on securities or securities indices on exchanges and in
the over-the-counter (“OTC”) markets. In general,
exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against
their obligations, and the performance of the parties’
obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have
more flexible terms negotiated between the buyer and the seller,
but generally do not require the parties to post margin and are
subject to greater credit risk. OTC options also involve greater
liquidity risk. See “Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives”
below.
Futures
The Fund may engage in transactions in futures and options
thereon. Futures are standardized, exchange-traded contracts
which obligate a purchaser to take delivery, and a seller to
make delivery, of a specific amount of an asset at a specified
future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a
futures contract the Fund is required to deposit collateral
(“margin”) equal to a percentage (generally about 5%)
of the contract value. Each day thereafter until the futures
position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures
position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the
prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund’s risk of
loss through a decline in the market value of portfolio holdings
correlated with the futures contract prior to the futures
contract’s expiration date. In the event the market value
of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize
a loss on the futures position and a lower return on the
portfolio holdings than would have been realized without the
purchase of the futures contract.
9
The purchase of a futures contract may protect the Fund from
having to pay more for securities as a consequence of increases
in the market value for such securities during a period when the
Fund was attempting to identify specific securities in which to
invest in a market the Fund believes to be attractive. In the
event that such securities decline in value or the Fund
determines not to complete an anticipatory hedge transaction
relating to a futures contract, however, the Fund may realize a
loss relating to the futures position.
The Fund will limit transactions in futures and options on
futures to financial futures contracts (
i.e.,
contracts
for which the underlying asset is a currency or securities or
interest rate index) purchased or sold for hedging purposes
(including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a
“commodity pool” under regulations of the Commodity
Futures Trading Commission.
An order has been obtained from the Commission exempting the
Fund from the provisions of Section 17(f) and
Section 18(f) of the Investment Company Act in connection
with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin.
Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Fund from issuing a
“senior security” other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a
futures contract may be a “senior security” under the
Investment Company Act.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange
transactions and currency swaps, purchase and sell options on
currencies and purchase and sell currency futures and related
options thereon (collectively, “Currency Instruments”)
for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated
against the U.S. dollar.
Forward Foreign Exchange Transactions.
Forward foreign
exchange transactions are OTC contracts to purchase or sell a
specified amount of a specified currency or multinational
currency unit at a price and future date set at the time of the
contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will
enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position.
The Fund may enter into a foreign exchange transaction for
purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or
selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio
position by selling forward a currency in which a portfolio
position of the Fund is denominated or by purchasing a currency
in which the Fund anticipates acquiring a portfolio position in
the near future. The Fund may also hedge portfolio positions
through currency swaps, which are transactions in which one
currency is simultaneously bought for a second currency on a
spot basis and sold for the second currency on a forward basis.
Forward foreign exchange transactions involve substantial
currency risk, and also involve credit and liquidity risk.
Currency Futures.
The Fund may also hedge against the
decline in the value of a currency against the U.S. dollar
through use of currency futures or options thereon. Currency
futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts.
See “Futures.” Currency futures involve substantial
currency risk, and also involve leverage risk.
Currency Options.
The Fund may also hedge against the
decline in the value of a currency against the U.S. dollar
through the use of currency options. Currency options are
similar to options on securities, but in consideration for an
option premium the writer of a currency option is obligated to
sell (in the case of a call option) or purchase (in the case of
a put option) a specified amount of a specified currency on or
before the expiration date for a specified amount of another
currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See “Types
of Options” above and “Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives”
below. Currency options involve substantial currency risk, and
may also involve credit, leverage or liquidity risk.
10
Limitations on Currency Hedging.
The Fund will not
speculate in Currency Instruments. Accordingly, the Fund will
not hedge a currency in excess of the aggregate market value of
the securities which it owns (including receivables for
unsettled securities sales), or has committed to or anticipates
purchasing, which are denominated in such currency. The Fund
may, however, hedge a currency by entering into a transaction in
a Currency Instrument denominated in a currency other than the
currency being hedged (a “cross-hedge”). The Fund will
only enter into a cross-hedge if the Investment Adviser believes
that (i) there is a demonstrable high correlation between
the currency in which the cross-hedge is denominated and the
currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated
will be significantly more cost-effective or provide
substantially greater liquidity than executing a similar hedging
transaction by means of the currency being hedged.
Risk Factors in Hedging Foreign Currency Risks.
Hedging
transactions involving Currency Instruments involve substantial
risks, including correlation risk. While the Fund’s use of
Currency Instruments to effect hedging strategies is intended to
reduce the volatility of the net asset value of the Fund’s
shares, the net asset value of the Fund’s shares will
fluctuate. Moreover, although Currency Instruments will be used
with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk
that anticipated currency movements will not be accurately
predicted and that the Fund’s hedging strategies will be
ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may
realize losses, and decrease its total return as the result of
its hedging transactions. Furthermore, the Fund will only engage
in hedging activities from time to time and may not be engaging
in hedging activities when movements in currency exchange rates
occur.
It may not be possible for the Fund to hedge against currency
exchange rate movements, even if correctly anticipated, in the
event that (i) the currency exchange rate movement is so
generally anticipated that the Fund is not able to enter into a
hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect
to which Currency Instruments are not available and it is not
possible to engage in effective foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks,
including:
Credit Risk
— the risk that the counterparty on
a Derivative transaction will be unable to honor its financial
obligation to the Fund.
Currency Risk
— the risk that changes in the
exchange rate between two currencies will adversely affect the
value (in U.S. dollar terms) of an investment.
Leverage Risk
— the risk associated with
certain types of investments or trading strategies (such as
borrowing money to increase the amount of investments) that
relatively small market movements may result in large changes in
the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
Liquidity Risk
— the risk that certain
securities may be difficult or impossible to sell at the time
that the seller would like or at the price that the seller
believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation
risk. If the value of the Derivative moves more or less than the
value of the hedged instruments the Fund will experience a gain
or loss which will not be completely offset by movements in the
value of the hedged instruments.
The Fund intends to enter into transactions involving
Derivatives only if there appears to be a liquid secondary
market for such instruments or, in the case of illiquid
instruments traded in OTC transactions, such instruments satisfy
the criteria set forth below under “Additional Risk Factors
of OTC Transactions; Limitations on the Use of OTC
Derivatives.” However, there can be no assurance that, at
any specific time, either a liquid secondary market will exist
for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be
possible to close a position in a Derivative without incurring
substantial losses, if at all.
11
Certain transactions in Derivatives (such as futures
transactions or sales of put options) involve substantial
leverage risk and may expose the Fund to potential losses, which
exceed the amount originally invested by the Fund. When the Fund
engages in such a transaction, the Fund will deposit in a
segregated account at its custodian liquid securities with a
value at least equal to the Fund’s exposure, on a
mark-to-market basis, to the transaction (as calculated pursuant
to requirements of the Commission). Such segregation will ensure
that the Fund has assets available to satisfy its obligations
with respect to the transaction, but will not limit the
Fund’s exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on
the Use of OTC Derivatives
Certain Derivatives traded in OTC markets, including OTC
options, involve substantial liquidity risk. The absence of
liquidity may make it difficult or impossible for the Fund to
sell such instruments promptly at an acceptable price. The
absence of liquidity may also make it more difficult for the
Fund to ascertain a market value for such instruments. The Fund
will therefore acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains
a formula price at which the instrument may be terminated or
sold, or (ii) for which the Investment Adviser anticipates
the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealer’s quotation
may be used.
Because Derivatives traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require
payment of margin, to the extent that the Fund has unrealized
gains in such instruments or has deposited collateral with its
counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The
Fund will attempt to minimize the risk that a counterparty will
become bankrupt or otherwise fail to honor its obligations by
engaging in transactions in Derivatives traded in OTC markets
only with financial institutions which have substantial capital
or which have provided the Fund with a third-party guaranty or
other credit enhancement.
Other Investment Policies and Practices
Securities Lending.
The Fund may lend securities with a
value not exceeding 20% of its total assets to banks, brokers
and other financial institutions. In return, the Fund receives
collateral in cash or securities issued or guaranteed by the
U.S. Government which will be maintained at all times in an
amount equal to at least 100% of the current market value of the
loaned securities. Where the Fund receives securities as
collateral for the loaned securities, the Fund typically
receives the income on both the loaned securities and the
collateral and, as a result, the Fund’s yield may increase.
In certain circumstances, the Fund may receive a flat fee for
its loans. Such loans are terminable at any time and the
borrower, after notice, is required to return borrowed
securities within five business days. The Fund may pay
reasonable finder’s, lending agent, administrative and
custodial fees in connection with its loans. In the event that
the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the
Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of
the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.
Suitability
The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment
Adviser and its affiliates. Because of its emphasis on equity
securities which the Fund believes are undervalued, the Fund
should be considered a vehicle for diversification and not as a
balanced investment program. The suitability for any particular
investor of a purchase of shares in the Fund will depend upon,
among other things, such investor’s investment objectives
and such investor’s ability to accept the risks associated
with investing in undervalued equity securities, including the
risk of loss of principal.
12
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its
assets and its activities. The fundamental policies set forth
below may not be changed without the approval of the holders of
a majority of the Fund’s outstanding voting securities
(which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the Fund’s shares
present at a meeting at which more than 50% of the outstanding
shares of the Fund are represented or (ii) more than 50% of
the Fund’s outstanding shares).
Under the fundamental investment restrictions, provided that
none of the following restrictions shall prevent the Fund from
investing all of its assets in shares of another registered
investment company with the same investment objective (in a
master/feeder structure), the Fund may not:
The Trust has adopted investment restrictions substantially
identical to the foregoing, which are fundamental policies of
the Trust and may not be changed with respect to the Trust
without the approval of the holders of the interests of the
Trust.
13
In addition, the Fund has adopted non-fundamental restrictions
that may be changed by the Board of Directors without
shareholder approval. Like the fundamental restrictions, none of
the non-fundamental restrictions, including but not limited to
restriction (a) below, shall prevent the Fund from
investing all of its assets in shares of another registered
investment company with the same investment objective (in a
master/feeder structure). Under the non-fundamental investment
restrictions, the Fund may not:
The Trust has adopted investment restrictions substantially
identical to the foregoing, which are non-fundamental policies
of the Trust and may be changed by the Trustees without the
approval of the holders of the interests of the Trust.
Portfolio securities of the Fund generally may not be purchased
from, sold or loaned to the Investment Adviser or its affiliates
or any of their directors, officers or employees, acting as
principal, unless pursuant to a rule or exemptive order under
the Investment Company Act.
The staff of the Commission has taken the position that
purchased OTC options and the assets used as cover for written
OTC options are illiquid securities. Therefore, the Fund has
adopted an investment policy pursuant to which it will not
purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options
currently outstanding that are held by the Fund, the market
value of the underlying securities covered by OTC call options
currently outstanding that were sold by the Fund and margin
deposits on the Fund’s existing OTC options on financial
futures contracts exceeds 15% of the net assets of the Fund,
taken at market value, together with all other assets of the
Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid
such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is
“in-the-money” (
i.e.,
current market value of
the underlying securities minus the option’s
14
In addition, as a non-fundamental policy which may be changed by
the Board of Directors and to the extent required by the
Commission or its staff, the Fund will, for purposes of
investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the
obligations of a single issuer.
As another non-fundamental policy, the Fund will not invest in
securities that are subject to material legal restrictions on
repatriation of assets or (b) cannot be readily resold
because of legal or contractual restrictions or which are not
otherwise readily marketable, including repurchase agreements
and purchase and sale contracts maturing in more than seven
days, if, regarding all such securities, more than 15% of its
net assets, taken at market value, would be invested in such
securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner
& Smith Incorporated (“Merrill Lynch”) with the
Investment Adviser, the Fund and the Trust are prohibited from
engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary
commissions or transactions pursuant to an exemptive order under
the Investment Company Act. Included among such restricted
transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal. See
“Portfolio Transactions and Brokerage.” Without such
an exemptive order, the Fund is prohibited from engaging in
portfolio transactions with Merrill Lynch or its affiliates
acting as principal.
Portfolio Turnover
The rate of portfolio turnover is not a limiting factor and,
given the Fund’s investment policies, it is anticipated
that there may be periods when high portfolio turnover will
exist. The use of covered call options at times when the
underlying securities are appreciating in value may result in
higher portfolio turnover. The Fund pays brokerage commissions
in connection with writing call options and effecting closing
purchase transactions, as well as in connection with purchases
and sales of portfolio securities. The portfolio turnover rate
is calculated by dividing the lesser of the Fund’s annual
sales or purchases of portfolio securities (exclusive of
purchases or sales of U.S. Government securities and all other
securities with maturities at the time of acquisition of one
year or less) by the monthly average value of the securities in
the portfolio during the year. A high portfolio turnover rate
involves certain tax consequences, such as an increase in
capital gain dividends. See “Dividends and Taxes.”
High portfolio turnover may also involve correspondingly greater
transaction costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the Fund.
MANAGEMENT OF THE FUND
Directors/Trustees 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 Directors of the Fund are also the
Trustees of the Trust. The five Directors who are not interested
persons of the Fund similarly comprise the Trustees who are not
interested persons of the Trust, and are sometimes referred to
herein as the “non-interested Directors/Trustees.” The
Directors are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on
the directors of investment companies by the Investment Company
Act.
Information about the Directors/ Trustees, executive officers
and the portfolio manager of the Fund, including their ages and
their principal occupations for at least the last five years, is
set forth below. Unless
15
TERRY K. GLENN (60) —
President and
Director/Trustee
(1)(2) — Executive Vice President
of the Investment Adviser and its affiliate, Merrill Lynch
Investment Managers, L.P. (“MLIM”) (which terms as
used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services,
Inc. (“Princeton Services”) since 1993; President of
FAM Distributors, Inc. (“FAMD” or the
“Distributor”) since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988;
Director of Financial Data Services, Inc. since 1985.
M. COLYER CRUM (69) —
Director/Trustee
(2)(3) — 104 Westcliff
Road, Weston, Massachusetts 02493-1410. James R. Williston
Professor of Investment Management Emeritus, Harvard Business
School since 1996; James R. Williston Professor of Investment
Management, Harvard Business School from 1971 to 1996; Director
of Cambridge Bancorp.
LAURIE SIMON HODRICK (38) —
Director/Trustee
(2)(3) — 809 Uris Hall,
3022 Broadway, New York, New York 10027. Professor of
Finance and Economics, Graduate School of Business, Columbia
University since 1998; Associate Professor of Finance and
Economics, Graduate School of Business, Columbia University from
1996 to 1998; Associate Professor of Finance, J. L. Kellogg
Graduate School of Management, Northwestern University from 1992
to 1996.
STEPHEN B. SWENSRUD (68) —
Director/Trustee
(2)(3) — 88 Broad Street,
2nd Floor, Boston, Massachusetts 02110. Chairman, Fernwood
Advisors (investment advisor) since 1996; Principal of Fernwood
Associates (financial consultants) since 1975; Chairman of RPP
Corporation (manufacturing company) since 1978; Director of
International Mobile Communications, Inc. (telecommunications
company) since 1998.
J. THOMAS TOUCHTON (62) —
Director/Trustee
(2)(3) — Suite 3405, One
Tampa City Center, 201 North Franklin Street, Tampa, Florida
33602. Managing Partner of The Witt-Touchton Company and its
predecessor, The Witt Co. (a private investment partnership),
since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (an electric utility holding
company).
FRED G. WEISS (59) —
Director/Trustee
(2)(3) — 16450 Maddalena Place,
Delray Beach, Florida 33446. Managing Director of FGW Associates
since 1997; Vice President, Planning Investment, and Development
of Warner Lambert Co. from 1979 to 1997; Director of Watson
Pharmaceutical, Inc. (a pharmaceutical company) since 2000;
Director of the Michael J. Fox Foundation for
Parkinson’s Research.
DANIEL V. SZEMIS (41) —
Senior Vice President and
Portfolio Manager
(1) — First Vice President of
MLIM since 1997; Vice President of MLIM from 1996 to 1997;
Portfolio Manager with Prudential Mutual Fund Investment
Management Advisors from 1990 to 1996.
DONALD C. BURKE (41) —
Vice President and
Treasurer
(1)(2) — First Vice President of the
Investment Adviser and MLIM since 1997 and Treasurer thereof
since 1999; Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of FAMD since 1999; Vice
President of the Investment Adviser and MLIM from 1990 to 1997;
Director of Taxation of MLIM since 1990.
THOMAS D. JONES, III (36) —
Secretary
(1)(2) — Director (Legal Advisory) of
MLIM since 2000; Vice President of MLIM from 1998 to 2000;
Attorney with the Investment Adviser and MLIM since 1992.
As of June 29, 2001, the Directors/Trustees and officers of
the Fund and the Trust as a group (9 persons) owned an
aggregate of less than 1% of the outstanding shares of the Trust
and the Fund. At such date, Mr. Glenn, a Director/Trustee
and officer of the Trust and the Fund, and the other officers of
the Fund owned an aggregate of less than 1% of the outstanding
shares of common stock of Merrill Lynch & Co., Inc.
(“ML & Co.”).
16
Compensation of Directors/Trustees
The Trust pays fees to each non-interested Director/Trustee, for
service to the Fund and the Trust, a fee of $6,000 per year plus
$500 per in-person Board meeting attended. The Trust also
compensates members of the Audit and Nominating Committee (the
“Committee”), which consists of all of the
non-interested Directors/Trustees, at the rate of $4,000 per
year plus $500 per in-person Committee meeting attended. The
Trust pays the Chairman of the Committee an additional fee of
$1,000 per year. The Trust reimburses each non-interested
Director/Trustee for his or her out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table shows the compensation earned by the
non-interested Directors/Trustees for the fiscal year ended
March 31, 2001, and the aggregate compensation paid to them
from all registered investment companies advised by the
Investment Adviser and its affiliate, MLIM
(“MLIM/FAM-advised funds”), for the calendar year
ended December 31, 2000.
The Directors of the Fund and the Trustees of the Trust may
purchase Class A shares of the Fund at net asset value. See
“Purchase of Shares — Initial Sales Charge
Alternatives — Class A and Class D
Shares — Reduced Initial Sales Charges —
Purchase Privilege of Certain Persons.”
Management and Advisory Arrangements
Management Arrangements.
Prior to the conversion to a
“master/feeder” structure, all management and
administrative services were provided directly at the Fund level
and were paid pursuant to the Fund’s investment advisory
contract 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 services provided to the Fund included all those described
below in “Investment Advisory Services,” “Payment
of Trust Expenses” and “Administrative Services and
Administrative Fee.”
As discussed in “Management of the Fund — Fund
Asset Management” in the Prospectus, the Investment Adviser
receives for its services to the Trust monthly compensation at
an annual rate of 0.50% of the Trust’s average daily net
assets for the first $1 billion; 0.475% of the Trust’s
average daily net assets from $1 billion to $1.5 billion; and
.45% of the Trust’s 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. Prior to master/feeder conversion, total fee payable to
the Investment Adviser from the Fund was equal to 0.74% of the
Fund’s 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 Trust’s average daily net assets.
17
The table below sets forth information about the total fees paid
by the Fund and/or the Trust to FAM for the periods indicated.
Investment Advisory Services.
The Fund invests all of its
assets in shares of the Trust. Accordingly, the Fund does not
invest directly in portfolio securities and does not require
investment advisory services. All portfolio management occurs at
the level of the Trust. The Trust has entered into an investment
advisory agreement with the Investment Adviser (the
“Investment Advisory Agreement”). Subject to the
supervision of the Trustees, the Investment Adviser is
responsible for the actual management of the Trust’s
portfolio and constantly reviews the Trust’s holdings in
light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser.
The Investment Adviser performs certain of the other
administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of
the Trust.
Securities held by the Trust may also be held by, or be
appropriate investments for, other funds or investment advisory
clients for which the Investment Adviser or its affiliates act
as an adviser. Because of different objectives or other factors,
a particular security may be bought for one or more clients of
the Investment Adviser or an affiliate when one or more clients
of the Investment Adviser or an affiliate are selling the same
security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the
Fund or other clients or funds for which the Investment Adviser
or an affiliate act as manager, transactions in such securities
will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment
Adviser or an affiliate during the same period may increase the
demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Payment of Trust Expenses.
The Investment Advisory
Agreement obligates the Investment Adviser to provide investment
advisory services and to pay, or cause an affiliate to pay, for
maintaining its staff and personnel and to provide office space,
facilities and necessary personnel for the Trust. The Investment
Adviser is also obligated to pay, or cause an affiliate to pay,
the fees of all officers, Trustees, and Directors who are
affiliated persons of the Investment Adviser or any affiliate.
The Trust pays, or causes to be paid, all other expenses
incurred in the operation of the Trust including, among other
things, taxes, expenses, legal and auditing services, costs of
preparing, printing and mailing proxies, shareholder reports,
prospectuses and statements of additional information, charges
of the custodian, any sub-custodian and the transfer agent,
expenses of portfolio transactions, expenses of redemption of
shares, Commission fees, expenses of registering the shares
under Federal, state or foreign laws, fees and actual
out-of-pocket expenses of non-interested Trustees; accounting
and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and
other extraordinary or non-recurring expenses, and other
expenses properly payable by the Trust. The Distributor will pay
certain of the expenses of the Fund incurred in connection with
the continuous offering of its shares. Certain accounting
services are provided to the Trust by State Street Bank and
Trust Company (“State Street”) pursuant to an
agreement between State Street and the Trust. The Trust pays a
fee for these services. In addition, the Trust reimburses the
Investment Adviser for the cost of other accounting services.
Administrative Services and Administrative Fees.
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. For the period September 1, 2000 to March 31,
2001, the total fees paid by the Fund to the Administrator was
$2,106,893.
18
Payment of Fund Expenses.
The Administration Agreement
obligates the Administrator to provide certain administrative
services to the 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 Fund. The
Administrator is also obligated to pay, or cause its affiliates
to pay, the fees of those officers, Directors and Trustees who
are affiliated persons of the Administrator or any of its
affiliates. The Fund pays, or causes to be paid, all other
expenses incurred in the operation of the Fund (except to the
extent paid by the Distributor), including, among other things,
taxes, expenses for legal and auditing services, costs of
printing proxies, shareholder reports and prospectuses and
statements of additional information, charges of the custodian,
any sub-custodian and Financial Data Services, Inc. (the
“Transfer Agent”), expenses of portfolio transactions,
expenses of redemption of shares, Commission fees, expenses of
registering the shares under Federal, state or non-U.S. laws,
fees and actual out-of-pocket expenses of Directors who are not
affiliated persons of the Administrator, or of an affiliate of
the Administrator, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest,
brokerage costs, litigation and other extraordinary or
non-recurring expenses, and other expenses properly payable by
the Fund. The Distributor will pay certain of the expenses of
the Fund incurred in connection with the continuous offering of
its shares. Certain expenses will be financed by the Fund
pursuant to distribution plans in compliance with
Rule 12b-1 under the Investment Company Act. See
“Purchase of Shares — Distribution Plans.”
Accounting services are provided to the Fund by the
Administrator, and the Fund reimburses the Administrator for its
costs in connection with such services.
Organization of the Investment Adviser.
The Investment
Adviser is a limited partnership, the partners of which are ML
& Co., a financial services holding company and the parent
of Merrill Lynch, and Princeton Services. ML & Co. and
Princeton Services are “controlling persons” of the
Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities and their
power to exercise a controlling influence over its management or
policies.
Duration and Termination.
Unless earlier terminated as
described below, the Advisory Agreement will continue in effect
for two years from its effective date. Thereafter, they will
remain in effect from year to year if approved annually
(a) by the Board of Trustees of the Trust or by a majority
of the outstanding shares of the Trust and (b) by a
majority of the Trustees of the Trust who are not parties to the
Advisory Agreement or interested persons (as defined in the
Investment Company Act) of any such party. The Advisory
Agreement is not assignable and will automatically terminate in
the event of its assignment. In addition, such contract may be
terminated by the vote of a majority of the outstanding voting
securities of the Trust or by the Investment Adviser without
penalty on 60 days’ written notice to the other party.
Unless earlier terminated as described below, the Administration
Agreement will remain in effect for two years from its effective
date. Thereafter, it will remain in effect from year to year if
approved annually (a) by the Board of Directors and
(b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not
assignable and may be terminated without penalty on
60 days’ written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
Transfer Agency Services.
Financial Data Services, Inc
(the “Transfer Agent”), a subsidiary of ML & Co.,
acts as the Fund’s Transfer Agent pursuant to a Transfer
Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the “Transfer Agency Agreement”).
Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D
account and $14.00 per Class B or Class C account and
is entitled to reimbursement for out-of-pocket expenses incurred
by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be
assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the
month the account is closed. For purposes of the Transfer Agency
Agreement, the term “account” includes a shareholder
account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of
ML & Co.
19
Accounting Services.
The Fund and the Trust entered into
an agreement with State Street, effective January 1, 2001,
pursuant to which State Street provides certain accounting
services to the Fund and the Trust. The Fund and the Trust pay a
fee for these services. Prior to January 1, 2001, the
Investment Adviser provided accounting services to the Fund and
the Trust and was reimbursed by the Fund and the Trust for such
services. The Investment Adviser continues to provide certain
accounting services to the Fund and the Trust. The Fund and the
Trust reimburse the Investment Adviser for the cost of these
services.
The table below shows the amounts paid by the Fund and the Trust
to State Street and to the Investment Adviser for the periods
indicated:
Distribution Expenses.
The Fund has entered into a
distribution agreement with the Distributor in connection with
the continuous offering of shares of the Fund (the
“Distribution Agreement”). The Distribution Agreement
obligates the Distributor to pay certain expenses in connection
with the offering of the shares of the Fund. After the
prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to
shareholders, the Distributor pays for the printing and
distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for
other supplementary sales literature and advertising costs. The
Distribution Agreement is subject to the same renewal
requirements and termination provisions as the Investment
Advisory Agreement described above.
Code of Ethics
The Board of Trustees of the Trust and the Board of Directors of
the Fund each have adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act that covers the
Trust, the Fund, the Investment Adviser 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 Trust.
PURCHASE OF SHARES
Reference is made to “Your Account — How to Buy,
Sell, Transfer and Exchange Shares” in the Prospectus for
certain information as to the purchase of Fund shares.
The Fund offers four classes of shares under the Merrill Lynch
Select Pricing
SM
System: shares of Class A and Class D
are sold to investors choosing the initial sales charge
alternatives and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C or Class D share
of the Fund represents an identical interest in the Fund and has
the same rights, except that Class B, Class C and
Class D shares bear the expenses of the ongoing account
maintenance fees (also known as service fees) and Class B
and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The
contingent deferred sales charges (“CDSCs”),
distribution fees and account maintenance fees that are imposed
on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, are
imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect
the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid
by the Fund for each class of shares are calculated in the same
manner at the same time and differ only to the extent that
account maintenance and distribution fees and any
20
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and
Class D shares are the same as those of the CDSCs and
distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related
revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling
different classes of shares.
The Merrill Lynch Select Pricing
SM
System is used by more than 50 registered
investment companies advised by the Investment Adviser or MLIM.
Funds advised by the Investment Adviser or MLIM that utilize the
Merrill Lynch Select Pricing
SM
System are referred to herein as “Select
Pricing Funds.”
The Fund offers its shares at a public offering price equal to
the next determined net asset value per share plus any sales
charge applicable to the class of shares selected by the
investor. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Distributor. As to purchase
orders received by securities dealers or other financial
intermediaries prior to the close of business on the New York
Stock Exchange (the “NYSE”) (generally 4:00 p.m.,
Eastern time) which includes orders received after the
determination of net asset value on the previous day, the
applicable offering price will be based on the net asset value
on the day the order is placed with the Distributor, provided
that the orders are received by the Distributor prior to
30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received prior to
30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business
day. Dealers or other financial intermediaries have the
responsibility of submitting purchase orders to the Fund not
later than 30 minutes after the close of business on the
NYSE in order to purchase shares at that day’s offering
price.
The Fund or the Distributor may suspend the continuous offering
of the Fund’s shares of any class at any time in response
to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may
be rejected by the Fund or the Distributor. Neither the
Distributor, the dealers nor other financial intermediaries are
permitted to withhold placing orders to benefit themselves by a
price change. Selected securities dealers or other financial
intermediaries, including Merrill Lynch may charge its customers
a processing fee (presently $5.35) to confirm a sale of shares
to such customers. The fees charged by other securities dealers
or financial intermediaries may be higher or lower. Purchases
made directly through the Transfer Agent are not subject to the
processing fee.
Initial Sales Charge Alternatives — Class A
and Class D Shares
Investors who prefer an initial sales charge alternative may
elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial
sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial
sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying
for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time
the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the
initial sales charges and, in the case of Class D shares,
the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to
purchase Class A shares of other Select Pricing Funds,
those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will
count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge on new initial sales
charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than
the initial sales charge shares. The ongoing Class D account
21
The term “purchase,” as used in the Prospectus and
this Statement of Additional Information in connection with an
investment in Class A and Class D shares of the Fund,
refers to a single purchase by an individual or to concurrent
purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and
their children under the age of 21 years purchasing shares
for his, her or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one
beneficiary is involved. The term “purchase” also
includes purchases by any “company,” as that term is
defined in the Investment Company Act, but does not include
purchases by any such company that has not been in existence for
at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance
company, customers of either a bank or broker-dealer or clients
of an investment adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors
and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own
Class A shares in a shareholder’s account, including
participants in the Merrill Lynch Blueprint
SM
Program, are entitled to purchase additional
Class A shares of the Fund in that account. Certain
Employer-Sponsored Retirement or Savings Plans, including
eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number
of eligible employees or required amount of assets advised by
the Investment Adviser or any of its affiliates. Class A
shares are available at net asset value to corporate warranty
insurance reserve fund programs and U.S. branches of foreign
banking institutions, provided that the program or the bank has
$3 million or more initially invested in Select Pricing
Funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment programs
including TMA
SM
Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves
as trustee and certain purchases made in connection with certain
fee-based programs. In addition, Class A shares are offered
at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of
MLIM/ FAM-advised investment companies including the Fund.
Certain persons who acquired shares of certain MLIM/ FAM-advised
closed-end funds who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares
of the Fund also may purchase Class A shares of the Fund if
certain conditions are met. In addition, Class A shares of
the Fund and certain other Select Pricing Funds are offered at
net asset value to shareholders of certain MLIM/FAM-advised
continuously offered closed-end funds who wish to reinvest the
net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer conducted by such funds. See
“Purchase of Shares — Closed-End Fund
Reinvestment Options.”
Class A and Class D Sales Charge Information
Class A Shares
22
Class D Shares
The Distributor may reallow discounts to selected securities
dealers and other financial intermediaries and retain the
balance over such discounts. At times the Distributor may
reallow the entire sales charge to such dealers. Since
securities dealers and other financial intermediaries selling
Class A and Class D shares of the Fund will receive a
concession equal to most of the sales charge, they may be deemed
to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales load
are due to the nature of the investors and/or the reduced sales
efforts that will be needed in obtaining such investments.
Reinvested Dividends.
No initial sales charges are
imposed upon Class A and Class D shares issued as a
result of the automatic reinvestment of dividends.
Right of Accumulation.
Reduced sales charges are
applicable through a right of accumulation under which eligible
investors are permitted to purchase shares of the Fund subject
to an initial sales charge at the offering price applicable to
the total of (a) the public offering price of the shares
then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the
purchaser’s combined holdings of all classes of shares of
the Fund and of any other Select Pricing Funds. For any such
right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or the
purchaser’s selected securities dealer or other financial
intermediary, with sufficient information to permit confirmation
of qualification. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or
terminated at any time. Shares held in the name of a nominee or
custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify
for the right of accumulation.
Letter of Intent.
Reduced sales charges are applicable to
purchases aggregating $25,000 or more of the Class A or
Class D shares of the Fund or any Select Pricing Funds made
within a 13-month period starting with the first purchase
pursuant to a Letter of Intent. The Letter of Intent is
available only to investors whose accounts are established and
maintained at the Fund’s Transfer Agent. The Letter of
Intent is not available to employee benefit plans for which
Merrill Lynch provides plan participant record keeping services.
The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales
charge at the appropriate quantity purchase level. A purchase
not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within
90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other
Select Pricing Funds presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase
under the Letter of Intent, may be included as a credit toward
the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intent (minimum of
$25,000), the investor will be notified and must pay, within
20 days of the execution of such Letter, the difference
between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least 5.0% of
the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intent
must be at least 5.0% of the dollar amount of such Letter. If a
purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of
accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the further reduced percentage sales
charge that would be applicable to a single
23
The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of
Intent will be deducted from the total purchases made under such
Letter. An exchange from the Summit Cash Reserves Fund
(“Summit”), a series of Financial Institutions Series
Trust, into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intent from the
Fund.
Merrill Lynch Blueprint
SM
Program.
Class D shares of the Fund are
offered to participants in the Merrill Lynch
Blueprint
SM
Program (“Blueprint”). In addition,
participants in Blueprint who own Class A shares of the
Fund may purchase additional Class A shares of the Fund
through Blueprint. Blueprint is directed to small investors,
group IRAs and participants in certain affinity groups such as
credit unions and trade associations. Investors placing orders
to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in
accordance with the Blueprint sales charge schedule
(
i.e.,
up to $300 at 4.25%, from $300.01 to $5,000 at
3.25% plus $3.00 and $5,000.01 or more at the standard sales
charge rates disclosed in the Prospectus). In addition,
Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of .50% of 1% for
corporate or group IRA programs placing orders to purchase their
Class A or Class D shares through Blueprint. Services,
including the exchange privilege, available to Class A or
Class D investors through Blueprint, however, may differ
from those available to other investors in Class A or
Class D shares.
Class A and Class D shares are offered at net asset
value to Blueprint participants through the Merrill Lynch
Directed IRA Rollover Program (the “IRA Rollover
Program”) available from Merrill Lynch Business Financial
Services, a business unit of Merrill Lynch. The IRA Rollover
Program is available to custodian rollover assets from
employer-sponsored retirement and savings plans whose trustee
and/or plan sponsor has entered into a Merrill Lynch Directed
IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or
Class D shares of the Fund may be grouped for execution
purposes which, in some circumstances, may involve the execution
of such orders two business days following the day such orders
are placed. The minimum initial purchase price is $100, with a
$50 minimum for subsequent purchases through Blueprint. There
are no minimum initial or subsequent purchase requirements for
participants who are part of an automatic investment plan.
Additional information concerning purchases through Blueprint,
including any annual fees and transaction charges, is available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint
SM
Program, P.O. Box 30441, New Brunswick, New Jersey
08989-0441.
TMA
SM
Managed Trusts.
Class A shares are
offered at net asset value to TMA
SM
Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services.
Employee Access
SM
Accounts.
Provided applicable threshold
requirements are met, either Class A or Class D shares
are offered at net asset value to Employee
Access
SM
Accounts available through authorized employers.
The initial minimum investment for such accounts is $500, except
that the initial minimum investment for shares purchased for
such accounts pursuant to the Automatic Investment Program is
$50.
Employer-Sponsored Retirement or Savings Plans and Certain
Other Arrangements.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase
Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the
plan in specified investments and/or the services provided by
Merrill Lynch to the plan. Additional information regarding
purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill
Lynch Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons.
Members of the
Board of Directors of the Fund and Trustees of the Trust and of
other investment companies advised by the Investment Adviser or
its affiliates, directors and employees of ML & Co. and its
subsidiaries (the term “subsidiaries,” when used
herein with respect to ML & Co., includes MLIM, FAM and
certain other entities directly or indirectly wholly owned and
controlled by
24
Class D shares of the Fund are offered at net asset value,
without a sales charge, to an investor that has a business
relationship with a Financial 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 D shares of the Fund with proceeds from
a redemption of shares of a mutual fund that was sponsored by
the Financial Advisor’s previous firm and was subject to a
sales charge either at the time of purchase or on a deferred
basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the
investment in the Fund and the proceeds from the redemption had
been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset
value, without a sales charge, to an investor that has a
business relationship with a Merrill Lynch Financial 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 D shares of the
Fund with proceeds from a redemption of shares of such other
mutual fund and the shares of such other fund were subject to a
sales charge either at the time of purchase or on a deferred
basis; and, second, such purchase of Class D shares must be
made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value,
without a sales charge, to an investor that has a business
relationship with a Merrill Lynch Financial 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 D shares of the Fund with proceeds from the
redemption of shares of such other mutual fund and that such
shares have been outstanding for a period of no less than six
months; and, second, such purchase of Class D shares must
be made within 60 days after the redemption and the
proceeds from the redemption must be maintained in the interim
in cash or a money market fund.
Acquisition of Certain Investment Companies.
Class D
shares may be offered at the net asset value in connection with
the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment
company.
Purchases Through Certain Financial Intermediaries.
Reduced sales charges may be applicable for purchases of
Class A or Class D shares of the Fund through certain
financial advisors, selected securities dealers and other
financial intermediaries that meet and adhere to standards
established by the Investment Adviser or an affiliate from time
to time.
Deferred Sales Charge Alternatives — Class B
and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares
for an extended period of time and Class C shares if they
are uncertain as to the length of time they intend to hold their
assets in Select Pricing Funds.
Because no initial sales charges are deducted at the time of the
purchase, Class B and Class C shares provide the
benefit of putting all of the investor’s dollars to work
from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors that do
not qualify for the reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing
account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially
may be offset to the extent any return is realized on the
additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be
converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter
investors will be subject to lower ongoing fees.
25
The public offering price of Class B and Class C
shares for investors choosing the deferred sales charge
alternatives is the next determined net asset value per share
without the imposition of a sales charge at the time of
purchase. See “Pricing of Shares — Determination
of Net Asset Value” below.
Contingent Deferred Sales Charges — Class B
Shares
Class B shares that are redeemed within six years of
purchase may be subject to a CDSC at the rates set forth below
charged as a percentage of the dollar amount subject thereto. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest applicable rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset
value above the initial purchase price. In addition, no CDSC
will be assessed on shares derived from reinvestment of
dividends. It will be assumed that the redemption is first of
shares held for over six years or shares acquired pursuant to
reinvestment of dividends and then of shares held longest during
the six-year period. A transfer of shares from a
shareholder’s account to another account will be assumed to
be made in the same order as a redemption.
The following table sets forth the Class B CDSC:
To provide an example, assume an investor purchased 100 shares
at $10 per share (at a cost of $1,000) and in the third
year after purchase, the net asset value per share is
$12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of
50 shares (proceeds of $600), 10 shares will not be
subject to a CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to
the original cost of $10 per share and not to the increase
in net asset value of $2 per share. Therefore, $400 of the
$600 redemption proceeds will be charged at a rate of 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 Internal Revenue Code of 1986, as amended) of a
shareholder (including one who owns the Class B shares as
joint tenant with his or her spouse), provided the redemption is
requested within one year of the death or initial determination
of disability or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived
on redemptions of shares by certain eligible 401(a) and 401(k)
plans in connection with group plans placing orders through the
Merrill Lynch Blueprint
SM
Program. The CDSC may also be waived for any
Class B shares that are purchased by eligible 401(k) or
eligible 401(a) plans that are rolled over into a Merrill Lynch
or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC may be
waived for any Class B shares that were acquired and held
at the time of the redemption in an Employee
Access
SM
Account available through employers providing
eligible 401(k) plans. The Class B CDSC may also be waived
for any Class B shares that are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLIM Private Portfolio
Group and held in such account at the time of redemption. The
Class B CDSC may also be waived or its terms may be
modified in connection with certain fee-based programs. The
Class B CDSC may also be waived in connection with
involuntary termination of an account in which Fund shares are
held or for withdrawals through the Merrill Lynch Systematic
Withdrawal Plan. See “Shareholder Services —
Fee-Based Programs” and “— Systematic
Withdrawal Plan.”
26
Employer-Sponsored Retirement or Savings Plans and Certain
Other Arrangements.
Certain employer-sponsored retirement or
savings plans and certain other arrangements may purchase
Class B shares with a waiver of the CDSC upon redemption,
based on the number of employees or number of employees eligible
to participate in the plan, the aggregate amount invested by the
plan in specified investments and/or the services provided by
Merrill Lynch to the plan. Such Class B shares will convert
into Class D shares approximately ten years after the plan
purchases the first share of any Select Pricing Fund. Minimum
purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial
Services at (800) 237-7777.
Merrill Lynch Blueprint
SM
Program.
Class B shares are
offered to certain participants in Blueprint. Blueprint is
directed to small investors, group IRAs and participants in
certain affinity groups such as trade associations and credit
unions. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through
Blueprint by members of such affinity groups. Services,
including the exchange privilege, available to Class B
investors through Blueprint, however, may differ from those
available to other Class B investors. Orders for purchases
and redemptions of Class B Shares of the Fund will be
grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following
the day such orders are placed. The minimum initial purchase
price is $100, with a $50 minimum for subsequent purchases
through Blueprint. There is no minimum initial or subsequent
purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning
these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The
Blueprint
SM
Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares.
After approximately eight years (the “Conversion
Period”), Class B shares will be converted
automatically into Class D shares of the Fund. Class D
shares are subject to an ongoing account maintenance fee of
0.25% of the average daily net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will
occur at least once each month (on the “Conversion
Date”) on the basis of the relative net asset value of the
shares of the two classes on the Conversion Date, without the
imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends
on Class B shares also will convert automatically to
Class D shares. The Conversion Date for dividend
reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment
shares were outstanding. If at the Conversion Date the
conversion of Class B shares to Class D shares of the
Fund in a single account will result in less than $50 worth
of Class B shares being left in the account, all of the
Class B shares of the Fund held in the account on the
Conversion Date will be converted to Class D shares of the
Fund.
In general, Class B shares of equity Select Pricing Funds
will convert approximately eight years after initial purchase
and Class B shares of taxable and tax-exempt fixed income
Select Pricing Funds will convert approximately ten years after
initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year
Conversion Period for Class B shares with a ten-year
Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange
will apply and the holding period for the shares exchanged will
be tacked on to the holding period for the shares acquired. The
Conversion Period also may be modified for investors that
participate in certain fee-based programs. See “Shareholder
Services — Fee-Based Programs.”
Class B shareholders of the Fund exercising the exchange
privilege described under “Shareholder Services —
Exchange Privilege” will continue to be subject to the
Fund’s CDSC schedule if such schedule is higher than the
CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Share certificates for Class B shares of the Fund to be
converted must be delivered to the Transfer Agent at least one
week prior to the Conversion Date applicable to those shares. In
the event such certificates are not
27
Contingent Deferred Sales Charges — Class C
Shares
Class C shares that are redeemed within one year of
purchase may be subject to a 1.0% CDSC charged as a percentage
of the dollar amount subject thereto. In determining whether a
Class C CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C
CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no Class C CDSC will
be assessed on shares derived from reinvestment of dividends. It
will be assumed that the redemption is first of shares held for
over one year or shares acquired pursuant to reinvestment of
dividends and then of shares held longest during the one-year
period. A transfer of shares from a shareholder’s account
to another account will be assumed to be made in the same order
as a redemption. The Class C CDSC may be waived in
connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Merrill Lynch
Systematic Withdrawal Plans. See “Shareholder
Services — Systematic Withdrawal Plan.”
Class B and Class C Sales Charge Information
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 in whole or in part
by the Distributor to defray the expenses of dealers or other
financial intermediaries (including Merrill Lynch) related to
providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial
advisors for selling Class B and Class C shares from a
dealer’s own funds. The combination of the CDSC and the
ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge
being deducted at the time of purchase. See “Distribution
Plans” below. Imposition of the CDSC and the distribution
fee on Class B and Class C shares is limited by the
National Association of Securities Dealers, Inc. (the
“NASD”) asset-based sales charge rule. See
“Limitations on the Payment of Deferred Sales Charges”
below.
Closed-End Fund Reinvestment Options
Class A shares of the Fund (“Eligible Class A
Shares”) are offered at net asset value to holders of the
common stock of certain closed-end funds advised by FAM or MLIM
who purchased such closed-end fund shares prior to
October 21, 1994 (the date the Merrill Lynch Select
Pricing
SM
System commenced operations) and wish to reinvest
the net proceeds from a sale of such shares in Eligible
Class A Shares, if the conditions set forth below are
satisfied. Alternatively, holders of the common stock of
closed-end funds who
28
Subject to the conditions set forth below, shares of the Fund
are offered at net asset value to holders of the common stock of
certain MLIM/FAM-advised continuously offered closed-end funds
who wish to reinvest the net proceeds from a sale of such
shares. Upon exercise of this reinvestment option, shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. will receive
Class A shares of the Fund, shareholders of Merrill Lynch
Senior Floating Rate Fund II, Inc. will receive Class C
shares of the Fund and shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except
that shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc. who
already own Class A shares of the Fund may be eligible to
purchase additional Class A shares pursuant to this option,
if such additional Class A shares will be held in the same
account as the existing Class A shares and the other
requirements pertaining to the reinvestment privilege are met.
In order to exercise this reinvestment option, a shareholder of
one of the above-referenced continuously offered closed-end
funds (an “eligible fund”) must sell his or her shares
of common stock of the eligible fund (the “eligible
shares”) back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the
Fund. This option is available only with respect to eligible
shares as to which no Early Withdrawal Charge or CDSC (each as
defined in the eligible fund’s prospectus) is applicable.
Purchase orders from eligible fund shareholders wishing to
exercise this reinvestment option will be accepted only on the
day that the related tender offer terminates and will be
effected at the net asset value of the designated class of
shares of the Fund on such day. The Class C CDSC may be
waived upon redemption of Class C shares purchased by an
investor pursuant to this closed-end fund reinvestment option.
Such waiver is subject to the requirement that the investors
have held the tendered shares for a minimum of one year and to
such other conditions as are set forth in the prospectus for the
related closed-end fund.
Distribution Plans
Reference is made to “Key Facts — Fees and
Expenses” in the Prospectus for certain information with
respect to the separate distribution plans for Class B,
Class C and Class D shares pursuant to Rule 12b-1
under the Investment Company Act (each a “Distribution
Plan”) with respect to the account maintenance and/ or
distribution fees paid by the Fund to the Distributor with
respect to such classes.
The Distribution Plans for each of the Class B,
Class C and Class D shares provide that the Fund pays
the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at
the annual rate of 0.25% of the average daily net assets of the
Fund attributable to shares of the relevant class in order to
compensate the Distributor, Merrill Lynch, a selected securities
dealer or other financial intermediary (pursuant to a
sub-agreement) in connection with account maintenance activities
with respect to Class B, Class C and Class D
shares. Each of those classes has exclusive voting rights with
respect to the Distribution Plan adopted with respect to such
class pursuant to which account maintenance and/or distribution
fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the
Class D Distribution Plan).
The Distribution Plans for each of the Class B and
Class C shares each provides that the Fund also pays the
Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual
rate of 0.75% of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to
compensate the Distributor, Merrill Lynch, a selected securities
dealer or other financial intermediary (pursuant to a
sub-agreement) for providing shareholder and distribution
services and bearing
29
The Fund’s Distribution Plans are subject to the provisions
of Rule 12b-1 under the Investment Company Act. In their
consideration of each Distribution Plan, the Directors must
consider all factors they deem relevant, including information
as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in
effect, the selection and nomination of non-interested Directors
shall be committed to the discretion of the non-interested
Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Directors
concluded that there is reasonable likelihood that each
Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the
non-interested Directors or by the vote of the holders of a
majority of the outstanding related class of voting securities
of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the
approval of the related class of shareholders and all material
amendments are required to be approved by the vote of Directors,
including a majority of the non-interested Directors who have no
direct or indirect financial interest in the Distribution Plans,
cast in person at a meeting called for that purpose.
Rule 12b-1 further requires that the Fund preserve copies
of the Distribution Plans and any report made pursuant to such
plan for a period of not less than six years from the date of
the Distribution Plan or such report, the first two years in an
easily accessible place.
Among other things, each Distribution Plan provides that the
Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the account maintenance
and/or distribution fees paid to the Distributor. Payments under
the Distribution Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly,
distribution-related revenues from the Distribution Plans may be
more or less than distribution-related expenses. Information
with respect to the distribution-related revenues and expenses
is presented to the Directors for their consideration quarterly
and in connection with their deliberations as to the continuance
of the Class B and Class C Distribution Plans
annually, as of December 31 of each year, on a “fully
allocated accrual” basis and quarterly on a “direct
expense and revenue/cash” basis. On the fully allocated
accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues,
and expenses consist of financial advisor compensation, branch
office and regional operation center selling and transaction
processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses
consist of financial advisor compensation.
As of March 31, 2001, direct cash revenues for the period since
the commencement of operations of Class B shares exceeded
direct cash expenses by $22,563,961 (4.01% of Class B net
assets at that date). As of March 31, 2001, direct cash
revenues for the period since the commencement of operations of
Class C shares exceeded direct cash expenses by $2,037,988
(1.45% of Class C net assets at that date).
For the fiscal year ended March 31, 2001, the Fund paid the
Distributor $5,267,059 pursuant to the Class B Distribution
Plan (based on average daily net assets subject to such
Class B Distribution Plan of approximately
$528.2 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related
activities and services in connection with Class B shares.
For the fiscal year ended March 31, 2001, the Fund paid the
Distributor $958,324 pursuant to the Class C Distribution
Plan (based on average daily net assets subject to such
Class C Distribution Plan of approximately
$96.1 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related
activities and services in connection with Class C shares.
For the fiscal year ended March 31, 2001, the Fund paid the
Distributor $419,935 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such
Class D Distribution Plan of approximately
$168.4 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with
Class D shares.
30
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD
imposes a limitation on certain asset-based sales charges such
as the distribution fee and the CDSC borne by the Class B
and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class.
As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by
the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the
unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment
of the distribution fee and the CDSC). In connection with the
Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the
“voluntary maximum”) in connection with the
Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest
charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any
CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess
of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of
March 31, 2001 with respect to the Class B and
Class C shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the
Distributor’s voluntary maximum.
31
REDEMPTION OF SHARES
Reference is made to “Your Account — How to Buy,
Sell, Transfer and Exchange Shares” in the Prospectus.
The Fund is required to redeem for cash all shares of the Fund
upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the
initial receipt of proper notice of redemption. Except for any
CDSC that may be applicable, there will be no charge for
redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends reinvested through the
date of redemption.
The right to redeem shares or to receive payment with respect to
any such redemption may be suspended for more than seven days
only for any period during which trading on the New York Stock
Exchange (the “NYSE”) is restricted as determined by
the Commission or the NYSE is closed (other than customary
weekend and holiday closings), for any period during which an
emergency exists as defined by the Commission as a result of
which disposal of portfolio securities or determination of the
net asset value of the Fund is not reasonably practicable, and
for such other periods as the Commission may by order permit for
the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or
less than the shareholder’s cost, depending in part on the
market value of the securities held by the Fund at such time.
The Trust has entered into a joint committed line of credit with
other investment companies advised by the Investment Adviser and
its affiliates and a syndicate of banks that is intended to
provide the Trust and the Fund with a temporary source of cash
to be used to meet redemption requests from Fund shareholders in
extraordinary or emergency circumstances.
Redemption
A shareholder wishing to redeem shares held with the Transfer
Agent may do so without charge by tendering the shares directly
to the Fund’s Transfer Agent at Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be
sent to the Trust or the Fund. A redemption request in either
event requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent’s register. The
signature(s) on the redemption request may require a guarantee
by an “eligible guarantor institution” as defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, the
existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. In the event a
signature guarantee is required, notarized signatures are not
sufficient. In general, signature guarantees are waived on
redemptions of less than $50,000 as long as the following
requirements are met: (i) all requests require the
signature(s) of all persons whose name(s) shares are recorded on
the Transfer Agent’s register; (ii) all checks must be
mailed to the stencil address of record on the Transfer
Agent’s register and (iii) the stencil address must
not have changed within 30 days. Certain rules may apply
regarding certain account types such as but not limited to
UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship,
contra broker transactions, and institutional accounts. In
certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or
certificates of corporate authority.
32
A shareholder may also redeem shares held with the Transfer
Agent by telephone request. To request a redemption from your
account, call the Transfer Agent at 1-800-MER-FUND. The request
must be made by the shareholder of record and be for an amount
less than $50,000. Before telephone requests will be honored,
signature approval from all shareholders of record on the
account must be obtained. The shares being redeemed must have
been held for at least 15 days. Telephone redemption requests
will not be honored in the following situations: the
accountholder is deceased, the proceeds are to be sent to
someone other than the shareholder of record, funds are to be
wired to the client’s bank account, a systematic withdrawal
plan is in effect, the request is by an individual other than
the accountholder of record, the account is held by joint
tenants who are divorced or the address on the account has
changed within the last 30 days.
Since this account feature involves a risk of loss from
unauthorized or fraudulent transactions, the Transfer Agent will
take certain precautions to protect your account from fraud.
Telephone redemption may be refused if the caller is unable to
provide: the account number, the name and address registered on
the account and the social security number registered on the
account. The Fund or the Transfer Agent may temporarily suspend
telephone transactions at any time.
For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper
notice of redemption. At various times the Fund may be requested
to redeem shares for which it has not yet received good payment
(
e.g.
, cash, Federal funds or certified check drawn on a
U.S. bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured
itself that good payment (
e.g.
, cash, Federal funds or
certified check drawn on a U.S. bank) has been collected for the
purchase of such Fund shares, which will not usually exceed
10 days. In the event that a shareholder account held
directly with the Transfer Agent contains a fractional share
balance, such fractional share balance will be automatically
redeemed by the Fund.
Repurchase
The Fund also will repurchase Fund shares through a selected
securities dealer or other financial intermediary. The Fund
normally will accept orders to repurchase Fund shares by wire or
telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be
priced at the net asset value calculated on the day the request
is received, provided that the request for repurchase is
submitted to the selected securities dealer or other financial
intermediary prior to the regular close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) and
such request is received by the Fund from such selected
securities dealer or other financial intermediary not later than
30 minutes after the close of business on the NYSE on the
same day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE, in order to obtain that
day’s closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than
any applicable CDSC). Securities firms that do not have selected
dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch, another
selected securities dealer or other financial intermediary may
charge its customers a processing fee (presently $5.35) to
confirm a repurchase of shares to such customers. The fees
charged by other securities dealers or financial intermediaries
may be higher or lower. Repurchases made directly through the
Transfer Agent on accounts held at the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem Fund shares as set
forth above.
Reinstatement Privilege — Class A and
Class D Shares
Shareholders who have redeemed their Class A or
Class D shares of the Fund have a privilege to reinstate
their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value
without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by
33
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to “Your Account—How Shares are
Priced” in the Prospectus.
The net asset value of the shares of all classes of the Fund is
determined once daily Monday through Friday as of the close of
business on the NYSE on each day the NYSE is open for trading
based on prices at the time of closing. The NYSE generally
closes at 4:00 p.m., Eastern time. Any assets or
liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The NYSE is not open for
trading on New Year’s Day, Martin Luther King, Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The principal asset of the Fund will normally be its interest in
the underlying Trust. The value of that interest is based on the
net assets of the Trust, which are comprised of the value of the
securities held by the Trust plus any cash or other assets
(including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses of the Trust).
Expenses of the Trust, including the investment advisory fees,
are accrued daily. Net asset value is computed by dividing the
value of the Fund’s proportionate interest in the net
assets of the Trust 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 of the Fund outstanding at such time, rounded to the
nearest cent. Expenses of the Fund, including the fees payable
to the Distributor, are accrued daily.
The per share net asset value of Class B, Class C and
Class D shares generally will be lower than the per share
net asset value of Class A shares, reflecting the daily
expense accruals of the account maintenance, distribution and
higher transfer agency fees applicable with respect to
Class B and Class C shares, and the daily expense
accruals of the account maintenance fees applicable with respect
to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares of the Fund
generally will be lower than the per share net asset value of
Class D shares of the Fund reflecting the daily expense
accruals of the distribution fees and higher transfer agency
fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share
net asset value of the four classes of the 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.
Portfolio securities that are traded on stock exchanges are
valued at the last sale price on the exchange on which such
securities are traded as of the close of business on the day the
securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last
available ask price for short positions. In cases where
securities are traded on more than one exchange, the securities
are valued on the exchange designated by or under the authority
of the Board of Trustees of the Trust as the primary market.
Long positions in securities traded in the over-the-counter
(“OTC”) market are valued at the last available bid
price in the OTC market prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at
the last available ask price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the
broadest and most representative market. When the Trust writes
an option, the amount of the premium received is recorded on the
books of the Trust as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last
34
Generally, trading in non-U.S. securities, as well as U.S.
Government securities and money market instruments, is
substantially completed each day at various times prior to the
close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund’s shares
are determined as of such times. Foreign currency exchange rates
are also generally determined prior to the close of business on
the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times
at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the
Fund’s net asset value.
Each investor in the Trust may add to or reduce its investment
in the Trust on each day the NYSE is open for trading. The value
of each investor’s (including the Fund’s) interest in
the Trust will be determined as of the close of business on the
NYSE by multiplying the net asset value of the Trust by the
percentage, effective for that day, that represents that
investor’s share of the aggregate interests in the Trust.
The close of business on the NYSE is generally 4:00 p.m.,
Eastern Time. Any additions or withdrawals to be effected on
that day will then be effected. The investor’s percentage
of the aggregate beneficial interests in the Trust will then be
recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor’s
investment in the Trust 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 investor’s investment
in the Trust effected on such day, and (ii) the denominator
of which is the aggregate net asset value of the Trust 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 Trust by all investors in the Trust. The
percentage so determined will then be applied to determine the
value of the investor’s interest in the Trust after the
close of business on the NYSE on the next determination of net
asset value of the Trust.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for
Class A, Class B, Class C and Class D shares
of the Fund based on the value of the Fund’s net assets and
number of shares outstanding on March 31, 2001 is set forth
below:
35
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is primarily responsible for the
execution of the Fund’s portfolio transactions and the
allocation of brokerage. The Investment Adviser 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
firm’s risk and skill in positioning blocks of securities.
While the Investment Adviser generally seeks reasonably
competitive commission trade execution costs, the Fund does not
necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, the Investment Adviser
may select a broker based partly upon brokerage or research
services provided to the Investment Adviser and its clients,
including the Fund. In return for such services the Investment
Adviser may pay a higher commission than other brokers would
charge if the Investment Adviser determines in good faith that
the commission is reasonable in relation to the services
provided.
Section 28(e) of the Securities Exchange Act of 1934
(“Section 28(e)”) permits an investment adviser,
such as the Investment Adviser, under certain circumstances, to
cause an account to pay a broker or dealer a commission for
effecting a transaction that exceeds the amount of commission
another broker would have charged for effecting the same
transaction in recognition of the value of brokerage and
research services provided by the broker. 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
Investment Adviser believes that access to independent
investment research is beneficial to its investment
decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting
brokers, such services may be in written form or through direct
contact with individuals and may include information as to
particular companies and securities as well as market, economic,
or institutional areas and information which assists in the
valuation of investments. Examples of research-oriented services
for which the Investment Adviser might 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. On
the other hand, the Fund may be the primary beneficiary of the
supplemental research services received as a result of portfolio
transactions effected for other accounts or investment
companies. In some cases, research information received from
brokers by mutual fund management personnel or personnel
principally responsible for the Investment Adviser’s
individually managed portfolios is not necessarily shared by and
between such personnel. Any investment advisory or other fees
paid by the Fund to the Investment Adviser are not reduced as a
result of the Investment Adviser’s receipt of research
services.
In some cases, the Investment Adviser may receive a service from
a broker that has both a “research” and a
“non-research” use. When this occurs, the Investment
Adviser makes a good faith allocation, under all the
circumstances, between the research and non-research uses of the
service. The percentage of the service that is used for research
purposes may be paid for with client commissions, while the
Investment Adviser will use its own funds to pay for the
percentage of the service that is used for non-research
purposes. In making this good faith allocation, the Investment
Adviser faces a potential conflict of interest, but the
Investment Adviser believes that its allocation procedures are
reasonably designed to ensure that it appropriately allocates
the anticipated use of such services to their research and
non-research uses.
36
From time to time, the Fund may purchase new issues of
securities for clients in a fixed price offering. In these
situations, the seller may be a member of the selling group that
will, in addition to selling securities, provide the Investment
Adviser with research services. The NASD has adopted rules
expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research
“credits” in these situations at a rate that is higher
than that which is available for typical secondary market
transactions. These arrangements may not fall within the safe
harbor of Section 28(e).
In addition, consistent with the Conduct Rules of the NASD and
policies established by the Board of Directors of the Fund and
subject to best execution, the Investment Adviser may consider
sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the
Fund; however, whether or not a particular broker or dealer
sells shares of the Fund neither qualifies nor disqualifies such
broker or dealer to execute transactions for the Fund.
Subject to obtaining the best net results, brokers who provide
supplemental investment research to the Investment Adviser may
receive orders for transactions by the Trust. Such supplemental
research services ordinarily consist of assessments and analyses
of the business or prospects of a company, industry or economic
sector. Information so received will be in addition to and not
in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement and
the expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the
Trust will benefit form supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting
the same transactions. Certain supplemental research services
may primarily benefit one or more other investment companies or
other accounts for which the Investment Adviser exercises
investment discretion. Conversely, the Trust may be the primary
beneficiary of the supplemental research services received as a
result of portfolio transactions effected for such other
accounts or investment companies.
The Trust anticipates that its brokerage transactions involving
securities of issuers domiciled in countries other than the
United States generally will be conducted primarily on the
principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock
exchange transactions generally are higher than in the United
States, although the Trust will endeavor to achieve the best net
results in effecting its portfolio transactions. There generally
is less government supervision and regulation of foreign stock
exchanges and brokers than in the United States. The
Trust’s ability and decisions to purchase or sell portfolio
securities of foreign issuers may be affected by laws or
regulations relating to the convertibility and repatriation of
assets.
Foreign equity securities may be held by the Trust in the form
of ADRs, EDRs, GDRs or other securities convertible into foreign
equity securities. ADRs, EDRs and GDRs may be listed on stock
exchanges, or traded in over-the-counter markets in the United
States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to
negotiated commission rates. Because the shares of the Fund are
redeemable on a daily basis in U.S. dollars, the Trust intends
to manage the 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 the Trust’s portfolio strategies.
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:
37
For the fiscal year ended March 31, 2001, the brokerage
commissions paid to Merrill Lynch represented 10.96% of the
aggregate brokerage commissions paid and involved 8.92% of the
dollar amount of transactions involving payment of commissions
during the year.
The Trust may invest in certain securities traded in the OTC
market and intends to deal directly with the dealers who make a
market in securities involved, except in those circumstances in
which better prices and execution are available elsewhere. Under
the Investment Company Act, persons affiliated with the Trust
and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Trust 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 Trust will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with
such transactions. However, an affiliated person of the Trust
may serve as its broker in OTC transactions conducted on an
agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and
fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable
transactions. In addition, the Trust may not purchase securities
during the existence of any underwriting syndicate for such
securities of which Merrill Lynch or an affiliate is a member or
in a private placement in which Merrill Lynch or an affiliate
serves as placement agent except pursuant to procedures approved
by the Board of Trustees of the Trust that either comply with
rules adopted by the Commission or with interpretations of the
Commission staff. See “Investment Objective and
Policies — Investment Restrictions.”
Section 11(a) of the Exchange Act generally prohibits
members of the United States national securities exchanges from
executing exchange transactions for their affiliates and
institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually
furnishes the account with the aggregate compensation received
by the member in effecting such transactions, and
(iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii).
To the extent Section 11(a) would apply to Merrill Lynch or
its affiliate acting as a broker for the Trust in any of its
portfolio transactions executed on any such securities exchange
of which it is a member, appropriate consents have been obtained
from the Trust and annual statements as to aggregate
compensation will be provided to the Trust. Securities may be
held by, or be appropriate investments for, the Trust as well as
other funds or investment advisory clients of the Investment
Adviser or its affiliates.
The Board of Trustees of the Trust has considered the
possibility of seeking to recapture for the benefit of the Trust
brokerage commissions and other expenses of possible portfolio
transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fee
paid by the Trust to the Investment Adviser. After considering
all factors deemed relevant, the Board of Trustees made a
determination not to seek such recapture. The Trustees will
reconsider this matter from time to time.
Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Investment
Adviser or its affiliates when one or more clients of the
Investment Adviser or an affiliate are selling the same
security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the
Trust or other clients or funds for which the Investment Adviser
or an affiliate acts as investment adviser, transactions in such
securities will be made, insofar as feasible, for the respective
funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of
the Investment Adviser or an affiliate during the same period
may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect
on price.
As a non-fundamental restriction, the Trust will not purchase or
retain the securities of any issuer, if those individual
officers and Trustees of the Trust or those individual officers
and Directors of the Fund, the officers and general partner of
the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities
of such issuer own in the aggregate more than five percent of
the securities of such issuer.
38
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment
plans described below that are designed to facilitate investment
in shares of the Fund. Full details as to each of such services,
copies of the various plans and instructions as to how to
participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from
the Distributor, Merrill Lynch, selected securities dealer or
other financial intermediary. Certain of these services are
available only to U.S. investors and certain of those
services are not available to investors who place orders for the
Fund’s shares through the Merrill Lynch
Blueprint
SM
Program.
Investment Account
Each shareholder whose account is maintained at the Transfer
Agent has an Investment Account and will receive statements, at
least quarterly, from the Transfer Agent. These statements will
serve as transaction confirmations for automatic investment
purchases and the reinvestment of dividends. The statements will
also show any other activity in the account since the preceding
statement. Shareholders will also receive separate confirmations
for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. A
shareholder with an account held at the Transfer Agent may make
additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. A shareholder
may also maintain an account through Merrill Lynch, another
selected securities dealer or other financial intermediary. Upon
the transfer of shares out of a Merrill Lynch, another selected
securities dealer or other financial intermediary brokerage
account, an Investment Account in the transferring
shareholder’s name may be opened automatically at the
Transfer Agent.
Share certificates are issued only for full shares and only upon
the specific request of a shareholder who has an Investment
Account. Issuance of certificates representing all or only part
of the full shares in an Investment Account may be requested by
a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch,
another selected securities dealer or other financial
intermediary to another securities dealer or other financial
intermediary that has entered into an agreement with the
Distributor. Certain shareholder services may not be available
for the transferred shares. After the transfer, the shareholder
may purchase additional shares of funds owned before the
transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer
his or her shares to a securities dealer or other financial
intermediary that has not entered into a selected dealer
agreement with the Distributor, the shareholder must either
(i) redeem his or her shares, paying any applicable CDSC or
(ii) continue to maintain an Investment Account at the
Transfer Agent for those shares. The shareholder may also
request the new securities dealer or financial intermediary to
maintain the shares in an account at the Transfer Agent
registered in the name of the securities dealer or financial
intermediary for the benefit of the shareholder whether the
securities dealer or financial intermediary has entered into a
selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement
account, such as an individual retirement account, from Merrill
Lynch to another securities dealer or other financial
intermediary should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the
shares, paying any applicable CDSC, so that the cash proceeds
can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an
exchange privilege with certain other Select Pricing Funds and
Summit, which is a Merrill Lynch-sponsored money market fund
specifically designated for exchange by holders of Class A,
Class B, Class C and Class D shares of Select
Pricing Funds. Shares with a net asset value of at least $100
are required to qualify for the exchange privilege and any
shares utilized in an exchange must have been held by the
shareholder for at least 15 days. Before effecting an
exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made.
39
Exchanges of Class A and Class D Shares.
Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second
fund in the account in which the exchange is made at the time of
the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the
second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A
shares of a second Select Pricing Fund at any time as long as,
at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange
is made or is otherwise eligible to purchase Class A shares
of the second fund. Class D shares are exchangeable with
shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding
(“outstanding Class A or Class D shares”)
for Class A or Class D shares of other Select Pricing
Funds or for Class A shares of Summit (“new
Class A or Class D shares”) are transacted on the
basis of relative net asset value per Class A or
Class D share, respectively, plus an amount equal to the
difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new
Class A or Class D shares. With respect to outstanding
Class A or Class D shares as to which previous
exchanges have taken place, the “sales charge previously
paid” shall include the aggregate of the sales charges paid
with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are
sold on a no-load basis in each of the funds offering
Class A or Class D shares. For purposes of the
exchange privilege, Class A or Class D shares acquired
through dividend reinvestment shall be deemed to have been sold
with a sales charge equal to the sales charge previously paid on
the Class A or Class D shares on which the dividend
was paid. Based on this formula, Class A and Class D
shares generally may be exchanged into the Class A or
Class D shares, respectively, of the other funds with a
reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares.
Certain Select Pricing Funds with Class B or Class C
shares outstanding (“outstanding Class B or
Class C shares”) offer to exchange their Class B
or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for
Class B shares of Summit (“new Class B or
Class C shares”) on the basis of relative net asset
value per Class B or Class C share, without the
payment of any CDSC that might otherwise be due on redemption of
the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to
the Fund’s CDSC schedule if such schedule is higher than
the CDSC schedule relating to the new Class B shares
acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund’s CDSC
schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the CDSC that
may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding
Class B or Class C shares is “tacked” to the
holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Natural Resources Trust after
having held the Fund’s 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 the
investor may decide to redeem the Class B shares of Merrill
Lynch Natural Resources Trust and receive cash. There will be no
CDSC due on this redemption, since by “tacking” the
two-and-a-half-year holding period of Fund Class B shares
to the four-year holding period for the Merrill Lynch Natural
Resources Trust Class B shares, the investor will be deemed
to have held the new Merrill Lynch Natural Resources Trust
Class B shares for more than six years.
Exchanges for Shares of a Money Market Fund.
Class A
and Class D shares are exchangeable for Class A shares
of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A
shares of Summit have an exchange privilege back into
Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back
into Class B or Class C shares of Select
40
Prior to October 12, 1998, exchanges from Select Pricing
Funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit.
Shareholders who exchanged Select Pricing Fund shares for shares
of such other money market funds and subsequently wish to
exchange those money market fund shares for shares of the Fund
will be subject to the CDSC schedule applicable to such Fund
shares, if any. The holding period for the money market fund
shares will not count toward satisfaction of the holding period
requirement for reduction of the CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period. However, the holding
period for Class B or Class C shares of the Fund
received in exchange for such money market fund shares will be
aggregated with the holding period for the fund shares
originally exchanged for such money market fund shares for
purposes of reducing the CDSC or satisfying the Conversion
Period.
Exchanges by Participants in the MFA Program.
The
exchange privilege is modified with respect to certain
retirement plans which participate in the MFA Program. Such
retirement plans may exchange Class B, Class C or
Class D shares that have been held for at least one year
for Class A shares of the same fund on the basis of
relative net asset values in connection with the commencement of
participation in the MFA Program,
i.e.,
no CDSC will
apply. The one year holding period does not apply to shares
acquired through reinvestment of dividends. Upon termination of
participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon
redemption of Class B or Class C shares so reacquired,
or the Conversion Period for Class B shares so reacquired,
the holding period for the Class A shares will be
“tacked” to the holding period for the Class B or
Class C shares originally held. The Fund’s exchange
privilege is also modified with respect to purchases of
Class A and Class D shares by non-retirement plan
investors under the MFA Program. First, the initial allocation
of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D
shares of a Select Pricing Fund for Class A or Class D
shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged.
Therefore, there will not be a charge for any difference between
the sales charge previously paid on the shares of the other
Select Pricing Fund and the sales charge payable on the shares
of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege.
To exercise the
exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Advisor, who will advise the Fund of the
exchange. Shareholders of the Fund, and shareholders of the
other Select Pricing Funds with shares for which certificates
have not been issued, may exercise the exchange privilege by
wire through their securities dealer or other financial
intermediary. The Fund reserves the right to require a properly
completed Exchange Application.
Telephone exchange requests are also available in accounts held
with the Transfer Agent for amounts up to $50,000. To request an
exchange from your account, call the Transfer Agent at
1-800-MER-FUND. The request must be from the shareholder of
record. Before telephone requests will be honored, signature
approval from all shareholders of record must be obtained. The
shares being exchanged must have been held for at least
15 days. Telephone requests for an exchange will not be
honored in the following situations: the accountholder is
deceased, the request is by an individual other than the
accountholder of record, the account is held by joint tenants
who are divorced or the address on the account has changed
within the last 30 days. Telephone exchanges may be refused
if the caller is unable to provide: the account number, the name
and address registered on the account and the social security
number registered on the account. The Fund or the Transfer Agent
may temporarily suspend telephone transactions at any time.
41
This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and
may thereafter resume such offering from time to time. The
exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the
Distributor.
Fee-Based Programs
Certain fee-based programs offered by Merrill Lynch and other
financial intermediaries, including pricing alternatives for
securities transactions (each referred to in this paragraph as a
“Program”), may permit the purchase of Class A
shares at net asset value. Under specified circumstances,
participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such
exchanges may be waived or modified, as may the Conversion
Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another
class at net asset value, which may be shares of a money market
fund. In addition, upon termination of participation in a
Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account
at Merrill Lynch, to another financial intermediary, to another
broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described
above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or
deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program
fees. Additional information regarding a specific Program
(including charges and limitations on transferability applicable
to shares that may be held in such Program) is available in such
Program’s client agreement and from the Transfer Agent at
1-800-MER-FUND (1-800-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement plans and
education savings plans are available from Merrill Lynch. Under
these plans, investments may be made in the Fund and certain of
the other mutual funds sponsored by Merrill Lynch as well as in
other securities. There may be fees associated with investing
through these plans and an annual fee for each account.
Information with respect to these plans is available on request
from Merrill Lynch.
Dividends received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans
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 thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any
time by purchasing Class A shares (if he or she is an
eligible Class A investor) or Class B, Class C or
Class D shares at the applicable public offering price.
These purchases may be made either through the
shareholder’s securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known
as the Fund’s Automatic Investment Plan. Under the
Automatic Investment Plan, the Fund would be authorized, on a
regular basis, to provide systematic additions to the Investment
Account of such shareholder through charges of $50 or more to
the regular bank account of the shareholder by either
pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA® or
CBA® Account may arrange to have periodic investments made
in the Fund in amounts of $100 ($1 or more for retirement
accounts) or more through the CMA® or CBA® Automated
Investment Program.
42
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of
payment, dividends will be automatically reinvested, without
sales charge, in additional full and fractional shares of the
Fund. Such reinvestment will be at the net asset value of shares
of the Fund determined as of the close of business on the NYSE
on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends.
Shareholders may, at any time, elect to have subsequent
dividends paid in cash, rather than reinvested in shares of the
Fund or vice versa (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in
cash and such payment will automatically be reinvested in
additional shares). If the shareholder’s account is
maintained with the Transfer Agent, he or she may contact the
Transfer Agent in writing or by telephone (1-800-MER-FUND). For
other accounts, the shareholder should contact his or her
Merrill Lynch Financial Advisor, selected securities dealer or
other financial intermediary. Commencing ten days after the
receipt by the Transfer Agent of such notice, those instructions
will be effected. The Fund is not responsible for any failure of
delivery to the shareholder’s address of record and no
interest will accrue on amounts represented by uncashed dividend
checks. Cash payments can also be directly deposited to the
shareholder’s bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from
his or her Investment Account by check or through automatic
payment by direct deposit to his or her bank account on either a
monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are
available for shareholders with shares having a value of $10,000
or more.
At the time of each withdrawal payment, sufficient shares are
redeemed from those on deposit in the shareholder’s account
to provide the withdrawal payment specified by the shareholder.
The shareholder may specify the dollar amount and the class of
shares to be redeemed. Redemptions will be made at net asset
value determined as of the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) on the
24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for
business on such date, the shares will be redeemed as of the
close of business on the NYSE on the following business day. The
check for the withdrawal payment will be mailed or the direct
deposit will be made on the next business day following
redemption. When a shareholder is making systematic withdrawals,
dividends on all shares in the Investment Account are reinvested
automatically in Fund shares. A shareholder’s Systematic
Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.
With respect to redemptions of Class B or Class C
shares pursuant to a systematic withdrawal plan, the maximum
number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the
election to join the systematic withdrawal plan was made. Any
CDSC that otherwise might be due on such redemption of
Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C
shares are otherwise redeemed. See “Purchase of
Shares — Deferred Sales Charge
Alternatives — Class B and Class C
Shares.” Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B
shares in an account to Class D shares, the Systematic
Withdrawal Plan will be applied thereafter to Class D
shares if the shareholder so elects. If an investor wishes to
change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her Merrill Lynch
Financial Advisor.
Withdrawal payments should not be considered as dividends. Each
withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder’s
original investment may be reduced correspondingly. Purchases of
additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase
orders for shares of the Fund from investors that maintain a
Systematic Withdrawal Plan unless such
43
Alternatively, a shareholder whose shares are held within a
CMA® or CBA® or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual
or annual basis through the CMA or CBA Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the
shareholder’s account three business days after the date
the shares are redeemed. All redemptions are made at net asset
value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each
month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly,
semiannual or annual redemptions, the shareholder may select the
month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third
or fourth Monday of the month. If the Monday selected is not a
business day, the redemption will be processed at net asset
value on the next business day. The CMA or CBA Systematic
Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automated
Investment Program. For more information on the CMA or CBA
Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Advisor.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net
investment income, if any. Dividends from such net investment
income are paid at least annually. All net realized capital
gains, if any, will be distributed to the Fund’s
shareholders at least annually. From time to time, the Fund may
declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements
that certain percentages of its ordinary income and capital
gains be distributed during the year. If in any fiscal year, the
Fund has net income from certain foreign currency transactions,
such income will be distributed at least annually.
For information concerning the manner in which dividends may be
reinvested automatically in shares of the Fund, see
“Shareholder Services — Automatic Dividend
Reinvestment Plan.” A shareholder whose account is
maintained at the Transfer Agent or whose account is maintained
through Merrill Lynch, selected securities dealer or other
financial intermediary 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 B and Class C shares will be lower than the per
share dividends on Class A and Class D shares as a
result of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B
and Class C shares; similarly, the per share dividends on
Class D shares will be lower than the per share dividends
on Class A shares as a result of the account maintenance
fees applicable with respect to the Class D shares. See
“Pricing of Shares — Determination of Net Asset
Value.”
Taxes
The Fund intends to continue to qualify for the special tax
treatment afforded regulated investment companies
(“RICs” ) under the Internal Revenue Code of 1986, as
amended (the “Code”). As long as it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net
realized capital gains that it distributes to Class A,
Class B, Class C and Class D shareholders
(together, the “shareholders”). The Fund intends to
distribute substantially all of such income.
The Code requires a RIC to pay a nondeductible 4% excise tax to
the extent the RIC does not distribute, during each calendar
year, 98% of its ordinary income, determined on a calendar year
basis, and 98% of its capital gains, determined, in general, on
an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to
distribute its income and capital gains in the manner necessary
to minimize imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund’s
44
Dividends paid by the Fund from its ordinary income or from an
excess of net short-term capital gains over net long-term
capital losses (together referred to hereafter as “ordinary
income dividends”) are taxable to shareholders as ordinary
income. Distributions made from an excess of net long-term
capital gains over net short-term capital losses (including
gains or losses from certain transactions in futures and
options) (“capital gain dividends”) are taxable to
shareholders as long-term capital gains, regardless of the
length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or
less will be treated as long-term capital loss to the extent of
any capital gain dividends received by the shareholder.
Distributions in excess of the Fund’s earnings and profits
will first reduce the adjusted tax basis of a holder’s
shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Certain categories of
capital gains are taxable at different rates. Generally not
later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice
designating the amount of any capital gain dividends as well as
any amount of capital gain dividends in the different categories
of capital gain referred to above.
Dividends are taxable to shareholders even though they are
reinvested in additional shares of the Fund. A portion of the
Fund’s ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the
Code, if certain requirements are met. For this purpose, the
Fund will allocate dividends eligible for the dividends received
deduction among the Class A, Class B, Class C and
Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on
the gross income allocable to Class A, Class B,
Class C and Class D shareholders during the taxable
year, or such other method as the Internal Revenue Service may
prescribe. If the Fund pays a dividend in January that was
declared in the previous October, November or December to
shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
No gain or loss will be recognized by Class B shareholders
on the conversion of their Class B shares into Class D
shares. A shareholder’s basis in the Class D shares
acquired will be the same as such shareholder’s basis in
the Class B shares converted, and the holding period of the
acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within
90 days of acquiring the shares, then the loss the
shareholder can recognize on the exchange will be reduced (or
the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares
in the absence of the exchange privilege. Instead, such sales
charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will
be disallowed if other Fund shares are acquired (whether through
the automatic reinvestment of dividends or otherwise) within a
61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Ordinary income dividends paid to shareholders who are
nonresident aliens or foreign entities will be subject to a 30%
U.S. withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of
the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be
subject to a withholding tax on ordinary income dividends,
capital gain dividends and redemption payments (“backup
withholding”). Generally, shareholders subject to backup
withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the
Fund’s knowledge, have furnished an incorrect number. When
45
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes.
The Fund may invest up to 10% of its total assets in securities
of other investment companies. If the Fund purchases shares of
an investment company (or similar investment entity) organized
under foreign law, the Fund will be treated as owning shares in
a passive foreign investment company (“PFIC”) for U.S.
Federal income tax purposes. The Fund may be subject to U.S.
Federal income tax, and an additional tax in the nature of
interest (the “interest charge”), on a portion of the
distributions from such a company and on gain from the
disposition of the shares of such a company (collectively
referred to as “excess distributions”), even if such
excess distributions are paid by the Fund as a dividend to its
shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular
year in excess of the distributions received from such PFICs.
Alternatively, the Fund could elect to “mark to
market” at the end of each taxable year all shares that it
holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such
shares over their adjusted basis and as ordinary loss any
decrease in such value to the extent it did not exceed prior
increases. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to excess
distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it
received from PFICs.
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions
The Fund may write, purchase or sell options, futures and
forward foreign exchange contracts. Options and futures
contracts that are “Section 1256 contracts” will
be “marked to market” for Federal income tax purposes
at the end of each taxable year,
i.e.,
each such option
or futures contract will be treated as sold for its fair market
value on the last day of the taxable year. Unless such contract
is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency
for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described
below), gain or loss from Section 1256 contracts will be
60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256
contract will be marked to market, as described above. However,
the character of gain or loss from such a contract will
generally be ordinary under Code Section 988. The Fund may,
nonetheless, elect to treat the gain or loss from certain
forward foreign exchange contracts as capital. In this case,
gain or loss realized in connection with a forward foreign
exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain
“straddles,” may affect the taxation of the
Fund’s sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under
Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales
of securities and certain closing transactions in options,
futures and forward foreign exchange contracts.
Special Rules for Certain Foreign Currency Transactions
In general, gains from “foreign currencies” and from
foreign currency options, foreign currency futures and forward
foreign exchange contracts relating to investments in stocks,
securities or foreign currencies will be qualifying income for
purposes of determining whether the Fund qualifies as a RIC. It
is currently unclear, however, who will be treated as the issuer
of a foreign currency instrument or how foreign currency options,
46
Under Code Section 988, special rules are provided for
certain transactions in a foreign currency other than the
taxpayer’s functional currency (
i.e.
, unless certain
special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures
contracts that are not “regulated futures contracts”
and from unlisted options will be treated as ordinary income or
loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such
transactions. Regulated futures contracts, as described above,
will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease
the amount of the Fund’s investment company taxable income
available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary income dividend
distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder’s Fund shares and
resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder’s basis in Fund
shares (assuming the shares were held as a capital asset). These
rules and the mark-to-market rules described above, however,
will not apply to certain transactions entered into by the Fund
solely to reduce the risk of currency fluctuations with respect
to its investments.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations
presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury
regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject
to state and local taxes.
Certain states exempt from state income taxation dividends paid
by RICs that are derived from interest on U.S. Government
obligations. State law varies as to whether dividend income
attributable to U.S. Government obligations is exempt from state
income tax.
Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, foreign, state or
local taxes. Foreign investors should consider applicable
foreign taxes in their evaluation of an investment in the Fund.
The Fund has received a private letter ruling from the IRS, to
the effect that, because the Trust is classified as a
partnership for tax purposes, the Fund is entitled to look to
the underlying assets of the Trust in which it has invested for
purposes of satisfying various requirements of the Code
applicable to RICs. If any of the facts upon which such ruling
is premised change in any material respect (
e.g.
, if the
Trust were required to register its interests under the
Securities Act) then the Board of Directors of the Fund will
determine, in its discretion, the appropriate course of action
for the Fund. One possible course of action would be to withdraw
the Fund’s investment from the Trust and to retain an
investment adviser to manage the Fund’s assets in
accordance with the investment policies applicable to the Fund.
See “Investment Objective and Policies.”
PERFORMANCE DATA
From time to time the Fund may include its average annual total
return and other total return data in advertisements or
information furnished to present or prospective shareholders.
Total return figures are based on the Fund’s historical
performance and are not intended to indicate future performance.
Average annual total return is determined separately for
Class A, Class B, Class C and Class D shares
in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods
are computed by finding the average annual compounded rates of
return (based on net investment income and any realized and
unrealized capital
47
The Fund also may quote annual, average annual and annualized
total return and aggregate total return performance data, both
as a percentage and as a dollar amount based on a hypothetical
$1,000 investment, for various periods other than those noted
below. Such data will be computed as described above, except
that (1) as required by the periods of the quotations,
actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (2) the maximum applicable
sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact
on the performance data calculations of including or excluding
the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than
average annual total return data since the average rates of
return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding
over a longer period of time.
Set forth below is total return information for the
Class A, Class B, Class C and Class D shares
of the Fund for the periods indicated, which includes certain
information prior to the Fund’s change to a
“master/feeder” structure.
Total return figures are based on the Fund’s historical
performance and are not intended to indicate future performance.
The Fund’s total return will vary depending on market
conditions, the securities comprising the Fund’s portfolio,
the Fund’s operating expenses and the amount of realized
and unrealized net capital gains or losses during the period.
The value of an investment in the Fund will fluctuate and an
investor’s shares, when redeemed, may be worth more or less
than their original cost.
In order to reflect the reduced sales charges in the case of
Class A or Class D shares, or the waiver of the CDSC
in the case of Class B or Class C shares applicable to
certain investors, as described under “Purchase of
Shares,” the total return data quoted by the Fund in
advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may not take
into account the CDSC, and therefore may reflect greater total
return since, due to the reduced sales charges or the waiver of
CDSCs, a lower amount of expenses may be deducted.
On occasion, the Fund may compare its performance to various
indices including the Russell 2000 Index, the Standard &
Poor’s 500 Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. (“Morningstar”), CDA
Investment Technology, Inc.,
Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune
Magazine
48
GENERAL INFORMATION
Description of Shares
The Fund is a “feeder” fund that invests in the Trust.
Investors in the Fund have an indirect interest in the Trust.
The Trust accepts investments from other feeder funds, and all
of the feeders of the Trust bear the Trust’s 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
400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A,
Class B, Class C and Class D Common Stock.
Class A, Class B, Class C and Class D each
consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock
represent interests in the same assets of the Fund and have
identical voting, dividend, liquidation and other rights and the
same terms and conditions except that the Class B,
Class C and Class D shares bear certain expenses
related to the account maintenance and/ or distribution of such
shares and have exclusive voting rights with respect to matters
relating to such account maintenance and/ or distribution
expenditures. The Board of Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held in the election
of Directors and any other matter submitted to a shareholder
vote. The Fund does not intend to hold meetings of shareholders
in any year in which the Investment Company Act does not require
shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an
investment advisory agreement; (iii) approval of a
distribution agreement; and (iv) ratification of selection
of independent auditors. Also, the by-laws of the Fund require
that a special meeting of shareholders be held upon the written
request of at least 25% of the outstanding shares of the Fund
entitled to vote at such meeting, if they comply with applicable
Maryland law. Also, the by-laws of the Fund require that a
special meeting of shareholders be held on the written request
of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and
have no preemptive rights. Each share of Class A,
Class B, Class C and Class D Common Stock is
entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon
49
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 Trust. 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 Fund’s assets directly.
There normally will be no meeting of shareholders for the
purpose of electing Directors unless and until such time as less
than a majority of the Directors holding office have been
elected by the shareholders, at which time the Directors then in
office will call a shareholders’ meeting for the election
of Directors. Shareholders may, in accordance with the terms of
the Articles of Incorporation, cause a meeting of shareholders
to be held for the purpose of voting on the removal of
Directors. Also, the Fund will be required to call a special
meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management
and advisory arrangements, of a material increase in account
maintenance or distribution fees or of a change in fundamental
policies, or its investment objective or restrictions. Except as
set forth above, the Directors of the Fund shall continue to
hold office and appoint successor Directors. Each issued and
outstanding share of the Fund is entitled to participate equally
with other shares of the Fund in dividends and distributions
declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except
for any expenses which may be attributable to only one class.
Shares that are issued will be fully-paid and non-assessable by
the Fund.
The Trust is organized as a Delaware business trust. Whenever
the Fund is requested to vote on any matter relating to the
Trust, the Fund will hold a meeting of the Fund’s
shareholders and will cast its vote as instructed by the
Fund’s shareholders.
Independent Auditors
Deloitte & Touche
LLP
, Two World Financial Center, New York, New York
10281-1008, has been selected as the independent auditors of the
Fund and the Trust. The independent auditors are responsible for
auditing the annual financial statements of the Fund and the
Trust.
Accounting Services Provider
State Street Bank and Trust Company, 500 College Road East,
Princeton, New Jersey 08540, provides certain accounting
services for the Fund.
Custodian
The Bank of New York, 100 Church Street, New York, New York
10286 acts as custodian of the Fund’s assets (the
“Custodian”). Under its contract with the Fund, the
Custodian is authorized, among other things, to establish
separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside
of the United States and with certain foreign banks and
securities depositories. The Custodian is responsible for
safeguarding and controlling the Fund’s cash and
securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund’s investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund’s
Transfer Agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See
“Your Account — How to Buy, Sell, Transfer and
Exchange Shares — Through the Transfer Agent” in
the Prospectus.
50
Legal Counsel
Sidley Austin Brown & Wood
LLP
, One World Trade Center, New York, New York 10048-0557,
is counsel for the Trust and the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on March 31 of each year.
The Fund sends to its shareholders at least semi-annually
reports showing the Fund’s portfolio and other information.
An Annual Report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After
the end of each year, shareholders will receive Federal income
tax information regarding dividends.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the
address or telephone number set forth on the cover page of this
Statement of Additional Information.
Additional Information
The Prospectus and this Statement of Additional Information do
not contain all the information set forth in the Registration
Statement and the exhibits relating thereto, which the Fund has
filed with the Securities and Exchange Commission, Washington,
D.C., under the Securities Act and the Investment Company Act,
to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the
Fund the right to use the “Merrill Lynch” name and has
reserved the right to withdraw its consent to the use of such
name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted
ML & Co. under certain conditions, the use of any
other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, the following entities owned
beneficially 5% or more of a class of the Fund’s shares as
of June 29, 2001:
51
FINANCIAL STATEMENTS
The audited financial statements of the Fund and the Trust are
incorporated in this Statement of Additional Information by
reference to the Fund’s March 31, 2001 annual report
to shareholders. You may request a copy of the annual report at
no charge by calling (800) 637-3863 between 8:00 a.m.
and 8:00 p.m., Eastern time on any business day.
52
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Code #10256-07-01
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(1) Make any investment inconsistent with the Fund’s
classification as a diversified company under the Investment
Company Act.
(2) Invest more than 25% of its assets, taken at market
value 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
Fund’s investment policies as set forth in the Prospectus
and this Statement of Additional Information, as they may be
amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
(8) Underwrite securities of other issuers, except insofar
as the Fund technically may be deemed an underwriter under the
Securities Act, in selling portfolio securities.
(9) Purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may do so in
accordance with applicable law and the Fund’s Prospectus
and Statement of Additional Information, as they may be amended
from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
(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 Fund’s total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the
Fund’s 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
Fund’s shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short
position, except to the extent permitted by applicable law.
(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.
(1)
Interested person, as defined in the Investment
Company Act, of the Trust and the Fund.
(2)
Such Director/Trustee or officer is a director,
trustee or officer of certain other investment companies for
which FAM or MLIM acts as investment adviser or manager.
(3)
Member of the Fund’s and the Trust’s
Audit and Nominating Committee, which is responsible for the
selection of the independent auditors and the selection and
nomination of non-interested Directors/Trustees.
Aggregate
Pension or
Compensation
Retirement
Estimated
from Fund/Trust
Compensation
Benefits Accrued
Annual Benefits
and Other
Position with
from Fund/
as Part of Fund
upon
MLIM/FAM
Name
Fund/Trust
Trust(1)
Expense
Retirement
Advised Funds(1)
Director/Trustee
$
6,950
None
None
$
170,142
Director/Trustee
$
6,200
None
None
$
156,892
Director/Trustee
$
4,333
None
None
$
289,483
Director/Trustee
$
6,200
None
None
$
168,350
Director/Trustee
$
6,200
None
None
$
156,892
(1)
The Directors/Trustees serve on the boards of
MLIM/FAM-advised funds as follows: Mr. Crum
(26 registered investment companies consisting of
51 portfolios); Ms. Hodrick (26 registered
investment companies consisting of 51 portfolios);
Mr. Swensrud (43 registered investment companies
consisting of 90 portfolios); Mr. Touchton
(26 registered investment companies consisting of 51
portfolios); and Mr. Weiss (26 registered investment
companies consisting of 51 portfolios).
Investment
Period
Advisory Fee
$
8,068,858
$
7,208,238
$
7,530,195
FUND
TRUST
Paid to the
Paid to the
Paid to
Investment
Paid to
Investment
Period
State Street
Adviser
State Street*
Adviser
N/A
$
100,179
N/A
N/A
N/A
$
119,537
N/A
N/A
$
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.
For the Fiscal
Gross Sales
Sales Charges
Sales Charges
CDSCs Received on
Year Ended
Charges
Retained by
Paid to
Redemption of
March 31,
Collected
Distributor
Merrill Lynch
Load-Waived Shares
2001
$
17,330
$
1,106
$
16,224
0
2000
$
10,865
$
658
$
10,207
0
1999
$
11,890
$
1,068
$
10,822
0
For the Fiscal
Gross Sales
Sales Charges
Sales Charges
CDSCs Received on
Year Ended
Charges
Retained by
Paid to
Redemption of
March 31,
Collected
Distributor
Merrill Lynch
Load-Waived Shares
2001
$
291,526
$
18,688
$
272,838
$
5,841
2000
$
130,398
$
8,400
$
121,998
$
240
1999
$
135,515
$
9,364
$
126,151
0
Years Since
CDSC as a Percentage
Purchase
of Dollar Amount
Payment Made
Subject to Charge
4.0%
4.0%
3.0%
3.0%
2.0%
1.0%
None
Class B Shares*
Fiscal Year
CDSCs Received
CDSCs Paid to
Ended March 31,
by Distributor
Merrill Lynch
$
359,556
$
359,556
$
681,686
$
681,686
$
969,353
$
969,353
*
Additional Class B CDSCs payable to the Distributor may
have been waived or converted to a contingent obligation in
connection with a shareholder’s participation in certain
fee-based programs.
Class C Shares
Fiscal Year
CDSCs Received
CDSCs Paid to
Ended March 31,
by Distributor
Merrill Lynch
$
23,719
$
23,719
$
16,359
$
16,359
$
43,738
$
43,738
Data Calculated as of March 31, 2001
(in thousands)
Annual
Distribution
Allowable
Amounts
Fee at
Eligible
Allowable
Interest on
Maximum
Previously
Aggregate
Current Net
Gross
Aggregate
Unpaid
Amount
Paid to
Unpaid
Asset
Sales(1)
Sales Charge(2)
Balance(3)
Payable
Distributor(4)
Balance
Level(5)
$
848,133
$
53,413
$
12,763
$
66,176
$
27,712
$
38,464
$
4,223
$
848,133
$
53,413
$
3,836
$
57,249
$
27,712
$
29,537
$
4,223
$
186,277
$
11,940
$
2,550
$
14,490
$
2,469
$
12,021
$
1,051
(1)
Purchase price of all eligible Class B or
Class C shares sold during the periods indicated other than
shares acquired through dividend reinvestment and the exchange
privilege.
(2)
Includes amounts attributable to exchanges from
Summit Cash Reserves Fund (“Summit”) which are not
reflected in Eligible Gross Sales. Shares of Summit can only be
purchased by exchange from another fund (the “redeemed
fund”). Upon such an exchange, the maximum allowable sales
charge payment to the redeemed fund is reduced in accordance
with the amount of the redemption. This amount is then added to
the maximum allowable sales charge payment with respect to
Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge
payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3)
Interest is computed on a monthly basis based
upon the prime rate, as reported in
The Wall Street
Journal
, plus 1.0%, as permitted under the NASD Rule.
(4)
Consists of CDSC payments, distribution fee
payments and accruals. See “Key Facts — Fees and
Expenses” in the Prospectus. This figure may include CDSCs
that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in
Class A shares in conjunction with the shareholder’s
participation in the Merrill Lynch Mutual Fund Advisor (Merrill
Lynch MFA
SM
) Program (the “MFA Program”). The CDSC
is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(footnotes continued)
(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).
Class A
Class B
Class C
Class D
$
648,806,040
$
563,316,156
$
140,609,854
$
198,094,104
32,749,492
30,543,081
7,754,059
10,041,842
$
19.81
$
18.44
$
18.13
$
19.73
$
1.10
**
**
$
1.09
$
20.91
$
18.44
$
18.13
$
20.82
*
Rounded to the nearest one-hundredth percent;
assumes maximum sales charge is applicable.
**
Class B and Class C shares are not
subject to an initial sales charge but may be subject to a CDSC
on redemption of shares. See “Purchase of
Shares — Deferred Sales Charge
Alternatives — Class B and Class C
Shares” herein.
Brokerage
Commissions Paid
Fiscal year ended March 31,
Commissions Paid
to Merrill Lynch
$
2,413,285
$
264,550
$
2,400,284
$
239,441
$
1,592,068
$
135,048
Class A Shares
Class B Shares
Class C Shares
Class D Shares
Expressed as a
Expressed as a
Expressed as a
Expressed as a
percentage based
percentage based
percentage based
percentage based
on a hypothetical
on a hypothetical
on a hypothetical
on a hypothetical
Period
$1,000 investment
$1,000 investment
$1,000 investment
$1,000 investment
Average Annual Total Return
(including maximum applicable sales charges)
.81
%
1.86
%
4.44
%
0.54
%
15.75
%
15.82
%
15.80
%
15.48
%
15.86
%
15.31
%
—
—
15.87
%
15.82
%
Name
Address
Percent of Class
Merrill Lynch Trust Company(1)
Trustee FBO The Southern Company Employee Savings Plan
PO Box 30532
New Brunswick, NJ 08989
8.2% of Class A
Merrill Lynch Trust Company(1)
Trustee FBO Chrysler Salaried Employees’ Savings Plan
PO Box 30532
New Brunswick, NJ 08989
5.9% of Class A
Merrill Lynch Trust Company(1)
Trustee FBO MLSIP
Investment Account
Attn: East Region
PO Box 30532
New Brunswick, NJ 08989
7.3% of Class A
Merrill Lynch Trust Company(1)
PO Box 30532
New Brunswick, NJ 08989
35.5% of Class A
Merrill Lynch Trust Company(1)
PO Box 30532
New Brunswick, NJ 08989
22.1% of Class D
(1)
Merrill Lynch Trust Company is the record holder
on behalf of certain employee retirement, personal trust or
savings plan accounts for which it acts as trustee.
PART C. OTHER INFORMATION
Item 23.
Exhibits.
C-1
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 Registrant’s
Articles of Incorporation, Article VI of the
Registrant’s 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 Registrant’s 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 person’s 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 Registrant’s 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
C-2
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.
Fund Asset Management, L.P. (“FAM” or the
“Investment Adviser”) acts as the investment adviser
for the following open-end registered investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund,
CMA Treasury Fund, Financial Institutions Series Trust,
Master Basic Value Trust, Master Focus Twenty Trust, Master
Internet Strategies Trust, Master Large Cap Series Trust,
Master Mid Cap Growth Trust, Master Premier Growth Trust, Master
Small Cap Value Trust, Master U.S. High Yield Trust, Mercury
Global Holdings, Inc., Mercury HW Funds, Merrill Lynch Bond
Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Focus Value Fund, Inc. Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch U.S. Government Mortgage Fund, Merrill Lynch World
Income Fund, Inc., The Asset Program, Inc., the Corporate Fund
Accumulation Program, Inc. and the Municipal Fund Accumulation
Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Master
Senior Floating Rate Trust, Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced
Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings
Fund II, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Insured Fund, Inc., MuniHoldings Insured
Fund II, Inc., MuniHoldings Michigan Insured
Fund II, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured
Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc.,
MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield
Pennsylvania Insured Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc. and Senior
High Income Portfolio, Inc.
Merrill Lynch Investment Managers, L.P. (“MLIM”), an
affiliate of the Investment Adviser, acts as the investment
adviser for the following open-end registered investment
companies: Global Financial Services Master Trust, Merrill Lynch
Balanced Capital Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Disciplined
Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch Emerging Markets Debt Fund, Inc., Merrill Lynch
Equity Income Fund, Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, 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 Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Index
Funds, Inc., Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
C-3
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 Fund’s transfer agent,
Financial Data Services, Inc. (“FDS”), is
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
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, 1999
for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of
all or substantially all of the investment companies described
in the first two paragraphs of this Item 26, and
Messrs. Doll and Giordano are officers of one or more of
such companies.
C-4
Item 27.
Principal Underwriters.
(a) FAMD acts as the principal underwriter for the
Registrant and for each of the open-end registered investment
companies referred to in the first two paragraphs of
Item 26 except CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
Global Financial Services Master Trust, Master Basic Value
Trust, Master Focus Twenty Trust, Master Internet Strategies
Trust, Master Large Cap Series Trust, Master Mid Cap Growth
Trust, Master Premier Growth Trust, Master Small Cap Value
Trust, Master U.S. High Yield Trust, The Corporate Fund
Accumulation Program, Inc. and The Municipal Fund Accumulation
Program, Inc. and for each of the following additional open-end
registered investment companies: Mercury Basic Value Fund, Inc.,
Mercury Focus Twenty Fund, Inc., Mercury Global Balanced Fund of
Mercury Funds, Inc., Mercury International Fund of Mercury
Funds, Inc., Mercury Large Cap Series Funds, Inc., Mercury
Mid Cap Growth Fund, Inc., Mercury Pan-European Growth Fund of
Mercury Funds, Inc., Mercury Premier Growth Fund, Inc., Mercury
Small Cap Value Fund, Inc., Mercury U.S. High Yield Fund, Inc.,
Summit Cash Reserves Fund of Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch Focus Twenty Fund, Inc., Merrill Lynch Global Financial
Services Fund, Inc., Merrill Lynch Internet Strategies Fund,
Inc., Merrill Lynch Large Cap Growth Focus Fund of Mercury V.I.
Funds, Inc., Merrill Lynch Large Cap Series Funds Inc.,
Merrill Lynch Mid Cap Growth Fund, Inc., Merrill Lynch Premier
C-5
(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, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center,
23rd Floor, Boston, Massachusetts 02111-2665.
(c) Not applicable.
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.
Item 30.
Undertakings.
Not applicable.
C-6
Exhibit
Number
Description
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.
2
—
By-Laws of the Registrant.(d)
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)
—
Form of Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between the
Registrant and Financial Data Services, Inc.(c)
(c)
—
Amended and Restated Credit Agreement between the
Registrant and a syndicate of banks.(g)
(d)
—
Form of Administrative Services Agreement between
the Registrant and State Street Bank and Trust Company. (l)
9
—
Opinion and Consent of Brown & Wood
LLP,
counsel to the Registrant.(h)
10
—
Consent of Deloitte & Touche
LLP,
independent
auditors for the Registrant and the Trust.
11
—
None.
12
—
None.
13(a)
—
Form of Amended and Restated Class B
Distribution Plan of the Registrant.(i)
(b)
—
Form of Amended and Restated Class C
Distribution Plan of the Registrant.(i)
(c)
—
Form of Amended and Restated Class D
Distribution Plan of the Registrant.(i)
14
—
Merrill Lynch Select Pricing
SM
System
Plan pursuant to Rule 18f-3.(j)
15
—
Code of Ethics.(k)
(a)
Previously filed with Post-Effective Amendment No. 21 to
the Registrant’s 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 Registrant’s Registration Statement on July 28,
2000.
(c)
Previously filed with Post-Effective Amendment No. 28 to
the Registrant’s Registration Statement on August 3,
2000.
(d)
Previously filed with Post-Effective Amendment No. 19 to
the Registrant’s 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 Registrant’s 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 Registrant’s By-Laws, previously filed as
Exhibit 2 to the Registrant’s Statement.
(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)
Incorporated by reference to Exhibit (b) to the Issuer
Tender Offer Statement on Schedule TO of Merrill Lynch Senior
Floating Rate Fund, Inc. (File No. 333-15973), filed on
December 14, 2000.
(h)
Previously filed with Post-Effective Amendment No. 25 to
the Registrant’s Registration Statement on May 26,
1999.
(i)
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.
(j)
Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 13 to the Registration Statement on
Form N-1A under the Securities Act of 1933, as amended,
filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund Series of Merrill Lynch
Multi-State Municipal Series Trust (File No. 2-99473).
(k)
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.
(l)
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.
Position(s) with the
Other Substantial Business,
Name
Investment Adviser
Profession, Vocation or Employment
Limited Partner
Financial Services Holding Company; Limited
Partner of MLIM
General Partner
General Partner of MLIM
President
President of MLIM; President and Director of
Princeton Services; Executive Vice President of ML & Co.
Executive Vice President
Executive Vice President of MLIM; Executive Vice
President and Director of Princeton Services; President and
Director of FAMD; Director of FDS; President of Princeton
Administrators
First Vice President and Treasurer
First Vice President, Treasurer and Director of
Taxation of MLIM; Senior Vice President and Treasurer of
Princeton Services; Vice President of FAMD
Position(s) with the
Other Substantial Business,
Name
Investment Adviser
Profession, Vocation or Employment
Co-Head (Americas Region) and Senior Vice President
Co-Head (Americas Region) and Senior Vice President of MLIM;
Senior Vice President of Princeton Services; Chief Investment
Officer of OppenheimerFunds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999
Senior Vice President
Senior Vice President of MLIM; Senior Vice President of
Princeton Services
First Vice President, Secretary and General Counsel (Americas
Region)
First Vice President and Secretary of MLIM; General Counsel of
MLIM (Americas Region); Senior Vice President of Princeton
Services
General Counsel
General Counsel of MLIM; Senior Vice President, General Counsel,
Director and Secretary of Princeton Services
Senior Vice President
Senior Vice President of MLIM; Senior Vice President of
Princeton Services; Vice President of FAMD
Senior Vice President
Executive Vice President of Princeton Administrators; Senior
Vice President of Princeton Services
Co-Head (Americas Region)
Co-Head (Americas Region) of MLIM; Senior Vice President of ML
& Co.
Position(s) and Office(s)
Position(s) and Office(s)
Name
with FAMD
with Registrant
President and Director
President and Director
Treasurer and Director
None
Director
None
Senior Vice President
None
Vice President
None
Vice President
None
Vice President
Vice President and Treasurer
Vice President
None
Vice President
None
Vice President
None
Secretary
None
SIGNATURES
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 12th day of July,
2001.
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.
C-7
SIGNATURES
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 12th day of July, 2001.
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.
C-8
MERRILL LYNCH SMALL CAP VALUE FUND, INC.
(Registrant)
By:
/S/ DONALD C. BURKE
Donald C. Burke,
Vice President and Treasurer
Signature
Title
Date
TERRY K. GLENN*
(Terry K. Glenn)
President and Director (Principal Executive
Officer)
DONALD C. BURKE*
(Donald C. Burke)
Vice President and Treasurer (Principal Financial
and Accounting Officer)
M. COLYER CRUM*
(M. Colyer Crum)
Director
LAURIE SIMON HODRICK*
(Laurie Simon Hodrick)
Director
STEPHEN B. SWENSRUD*
(Stephen B. Swensrud)
Director
J. THOMAS TOUCHTON*
(J. Thomas Touchton)
Director
FRED G. WEISS*
(Fred G. Weiss)
Director
*By: /S/ DONALD C. BURKE
(Donald C. Burke, Attorney-in-Fact)
July 12, 2001
MASTER SMALL CAP VALUE TRUST.
(Registrant)
By:
/S/ DONALD C. BURKE
Donald C. Burke,
Vice President and Treasurer
Signature
Title
Date
TERRY K. GLENN*
(Terry K. Glenn)
President and Trustee (Principal Executive
Officer)
DONALD C. BURKE*
(Donald C. Burke)
Vice President and Treasurer (Principal Financial
and Accounting Officer)
M. COLYER CRUM*
(M. Colyer Crum)
Trustee
LAURIE SIMON HODRICK*
(Laurie Simon Hodrick)
Trustee
STEPHEN B. SWENSRUD*
(Stephen B. Swensrud)
Trustee
J. THOMAS TOUCHTON*
(J. Thomas Touchton)
Trustee
FRED G. WEISS*
(Fred G. Weiss)
Trustee
*By: /S/ DONALD C. BURKE
(Donald C. Burke, Attorney-in-Fact)
July 12, 2001
EXHIBIT INDEX
Exhibit
Number
Description
1
(g)
Articles of Transfer from the Registrant to the
Trust.
10
Consent of Deloitte & Touche
LLP
,
independent auditors for the Registrant.