-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, c7aTwkLAXbRHi66WioVkFUYTRPKj31GDRGK0XDY5LZ1Q/k/GDQ0P0sJRCeI313DR wyrb0ohLm9CBR47Pk0EcSw== 0000950123-94-001483.txt : 19940908 0000950123-94-001483.hdr.sgml : 19940908 ACCESSION NUMBER: 0000950123-94-001483 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19940907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH BASIC VALUE FUND INC CENTRAL INDEX KEY: 0000216557 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-58521 FILM NUMBER: 94548159 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02739 FILM NUMBER: 94548160 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 485APOS 1 MERRILL LYNCH BASIC VALUE FUND, INC. - FORM N-1A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1994 SECURITIES ACT FILE NO. 2-58521 INVESTMENT COMPANY ACT FILE NO. 811-2739 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Pre-Effective Amendment No. / / Post-Effective Amendment No. 22 /X/ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Amendment No. 19 /X/ (Check appropriate box or boxes) --------------------- MERRILL LYNCH BASIC VALUE FUND, INC. (Exact name of registrant as specified in charter) 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (609) 282-2800 ARTHUR ZEIKEL MERRILL LYNCH BASIC VALUE FUND, INC. 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (Name and address of agent for service) --------------------- COPIES TO: COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN MARK B. GOLDFUS, ESQ. BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT, FUND ASSET MANAGEMENT, L.P. ONE WORLD TRADE CENTER L.P. P.O. BOX 9011 NEW YORK, NEW YORK 10048 P.O. BOX 9011 PRINCETON, NEW JERSEY ATTENTION: THOMAS R. SMITH, JR. PRINCETON, NEW JERSEY 08543-9011 08543-9011
It is proposed that this filing will become effective (check appropriate box) / / immediately upon filing pursuant to paragraph (b), or / / on (date) pursuant to paragraph (b), or, /X/ 60 days after filing pursuant to paragraph (a), or / / on (date) pursuant to paragraph (a) of Rule 485 --------------------- The Registrant has registered an indefinite number of its shares under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The notice required by such rule for the Registrant's most recent fiscal year was filed August 24, 1994. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 MERRILL LYNCH BASIC VALUE FUND, INC. REGISTRATION STATEMENT ON FORM N-1A CROSS REFERENCE SHEET
N-1A ITEM NO. LOCATION - -------- ---------------------------------------- PART A Item 1. Cover Page.............................. Cover Page Item 2. Synopsis................................ Not Applicable Item 3. Condensed Financial Information......... Financial Highlights Item 4. General Description of Registrant....... Investment Objective and Policies; Additional Information Item 5. Management of the Fund.................. Fee Table; Management of the Fund; Portfolio Transactions and Brokerage; Inside Back Cover Page Item 5A. Management's Discussion of Fund Performance........................... Not Applicable Item 6. Capital Stock and Other Securities...... Cover Page; Additional Information Item 7. Purchase of Securities Being Offered.... Cover Page; Merrill Lynch Select PricingSM System; Fee Table; Purchase of Shares; Shareholder Services; Additional Information; Inside Back Cover Page Item 8. Redemption or Repurchase................ Merrill Lynch Select PricingSM System; Fee Table; Purchase of Shares; Redemption of Shares Item 9. Pending Legal Proceedings............... Not Applicable PART B Item 10. Cover Page.............................. Cover Page Item 11. Table of Contents....................... Back Cover Page Item 12. General Information and History......... Not Applicable Item 13. Investment Objective and Policies....... Investment Objective and Policies Item 14. Management of the Fund.................. Management of the Fund Item 15. Control Persons and Principal Holders of Securities............................ Management of the Fund Item 16. Investment Advisory and Other Services.............................. Management of the Fund; Purchase of Shares; General Information Item 17. Brokerage Allocation and Other Practices............................. Portfolio Transactions and Brokerage Item 18. Capital Stock and Other Securities...... General Information Item 19. Purchase, Redemption and Pricing of Securities Being Offered.............. Purchase of Shares; Redemption of Shares; Determination of Net Asset Value; Shareholder Services Item 20. Tax Status.............................. Dividends, Distributions and Taxes Item 21. Underwriters............................ Purchase of Shares Item 22. Calculation of Performance Data......... Performance Data Item 23. Financial Statements.................... Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. 3 PROSPECTUS , 1994 MERRILL LYNCH BASIC VALUE FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800 Merrill Lynch Basic Value Fund, Inc. (the "Fund") is a diversified, open-end investment company seeking capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Fund seeks special opportunities in securities that are selling at a discount either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price-earnings ratio. Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. The Select Pricing System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. See "Merrill Lynch Select PricingSM System" on page 3. Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-2800], or from securities dealers which have entered into dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum subsequent purchase is $50, except that for retirement plans the minimum initial purchase is $100 and the minimum subsequent purchase is $1. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ This Prospectus is a concise statement of information about the Fund that is relevant to making an investment in the Fund. This Prospectus should be retained for future reference. A statement containing additional information about the Fund, dated , 1994 (the "Statement of Additional Information"), has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling or by writing the Fund at the above telephone number or address. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ------------------------ FUND ASSET MANAGEMENT, L.P. -- INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR 4 FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C) ---------- ---------------------- ---------- ---------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a 5.25%(d) percentage of offering price)........................ None None 5.25%(d) Sales Charge Imposed on Dividend None Reinvestments........................................ None None None Deferred Sales Charge (as a percentage of original None(e) purchase price or redemption proceeds, whichever is lower)............................................... 4.0% during the first 1.0% for None(e) year, decreasing 1.0% one annually thereafter to year 0.0% after the fourth year Exchange Fee........................................... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)(F) Investment Advisory Fees(g)............................ 0.41% 0.41% 0.41% 0.41% 12b-1 Fees(h): Account Maintenance Fees............................. None 0.25% 0.25% 0.25% Distribution Fees.................................... None 0.75% 0.75% None (Class B shares convert to Class D shares automatically after approximately eight years and cease being subject to distribution fees) Other Expenses: Custodial Fees..................................... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i)..................... 0.09% 0.11% 0.11% 0.09% Other.............................................. 0.02% 0.02% 0.02% 0.02% Total Other Expenses........................... 0.12% 0.14% 0.14% 0.12% Total Fund Operating Expenses.......................... 0.53% 1.55% 1.55% 0.78%
- ------------------------ (a) Class A shares are sold to a limited group of investors including existing Class A shareholders, certain retirement plans and investment programs. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares" -- page 16. (b) Class B shares convert to Class D shares automatically approximately eight years after initial purchase. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" -- page 17. (c) Prior to the date of this Prospectus, the Fund has not offered its Class C or Class D shares to the public. (d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of $1,000,000 or more are not subject to an initial sales charge. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares" -- page 16. (e) Class A and Class D shares are not subject to a contingent deferred sales charge ("CDSC"), except that purchases of $1,000,000 or more which are not subject to an initial sales charge will instead be subject to a CDSC of 1.0% of amounts redeemed within the first year after purchase. (f) Information for Class A and Class B shares is stated for the fiscal year ended June 30, 1994. Information under "Other Expenses" for Class C and Class D shares is estimated for the fiscal year ending June 30, 1995. (g) See "Management of the Fund -- Management and Advisory Arrangements" -- page 12. (h) See "Purchase of Shares -- Distribution Plans" page 20. (i) See "Management of the Fund -- Transfer Agency Services" -- page 13. 2 5 EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ---------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ -------- -------- --------- An investor would pay the following expenses on a $1,000 investment including the maximum $52.50 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth above; (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A........................................................ $57.63 $68.60 $80.57 $115.50 Class B........................................................ $55.77 $68.95 $84.47 $164.35* Class C........................................................ $25.77 $48.95 $84.47 $184.55 Class D........................................................ $60.05 $76.11 $93.55 $144.03 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A........................................................ $57.63 $68.60 $80.57 $115.50 Class B........................................................ $15.77 $48.95 $84.47 $164.35* Class C........................................................ $15.77 $48.95 $84.47 $184.55 Class D........................................................ $60.05 $76.11 $93.55 $144.03
- --------------- * Assumes conversion to Class D shares approximately eight years after purchase. The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Securities and Exchange Commission ("Commission") regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and redemptions. Purchases and redemptions directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". MERRILL LYNCH SELECT PRICINGSM SYSTEM The Fund offers four classes of shares under the Merrill Lynch Select PricingSM System. The shares of each class may be purchased at a price equal to the next determined net asset value per share subject to the sales charges and ongoing fee arrangements described below. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. The Merrill Lynch Select Pricing System is used by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"). Funds advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds". 3 6 Each Class A, Class B, Class C or Class D share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges 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 the Class D shares, will be imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges will 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 will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services -- Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the deferred sales charges with respect to the Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. The following table sets forth a summary of the distribution arrangements for each class of shares under the Select Pricing System, followed by a more detailed description of each class and a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing System that the investor believes is most beneficial under his particular circumstances. More detailed information as to each class of shares is set forth under "Purchase of Shares". - -------------------------------------------------------------------------------- [CAPTION]
- ------------------------------------------------------------------------------------------------------------ ACCOUNT MAINTENANCE DISTRIBUTION CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE - ------------------------------------------------------------------------------------------------------------ A Maximum 5.25% initial sales No No No charge(2)(3) - ------------------------------------------------------------------------------------------------------------ B CDSC for periods of up to 4 0.25% 0.75% B shares convert to D Shares years, at a rate of 4.0% automatically after during the first year, approximately eight years(4) decreasing 1.0% annually to 0.0% - ------------------------------------------------------------------------------------------------------------ C 1.0% CDSC for one year 0.25% 0.75% No - ------------------------------------------------------------------------------------------------------------ D Maximum 5.25% initial sales 0.25% No No charge(3) - ------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. Contingent deferred sales charges ("CDSCs") are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (continued on next page) 4 7 (2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class A Investors". (3) Reduced for purchases of $25,000 or more. Class A and Class D share purchases of $1,000,000 or more will not be subject to an initial sales charge but instead will be subject to a 1.0% CDSC for one year. See "Class A" and "Class D" below. (4) The conversion period for dividend reinvestment shares and certain retirement plans is modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a ten year conversion period. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Class A. Class A shares incur an initial sales charge when they are purchased and bear no ongoing distribution or account maintenance fees. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors that currently own Class A shares in a shareholder account are entitled to purchase additional Class A shares in that account. Other eligible investors include certain retirement plans and participants in certain investment programs. In addition, Class A shares will be offered to directors and employees of Merrill Lynch & Co., Inc. and its subsidiaries and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is 5.25%, which is reduced for purchases of $25,000 and over. Purchases of $1,000,000 or more may not be subject to an initial sales charge but instead will be subject to a contingent deferred sales charge ("CDSC") of 1.0% if the shares are redeemed within one year after purchase. Sales charges also are reduced under a right of accumulation which takes into account the investor's holdings of all classes of all MLAM-advised mutual funds. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares". Class B. Class B shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25% and an ongoing distribution fee of 0.75% of the Fund's average net assets attributable to the Class B shares, and a CDSC if they are redeemed within four years of purchase. Approximately eight years after issuance, Class B shares will convert automatically into Class D shares of the Fund, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately ten years. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Automatic conversion of Class B shares into Class D shares will occur at least once a month on the basis of the relative net asset values of the shares of the two classes on the conversion date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. Shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The conversion period for dividend reinvestment shares and for certain retirement plans is modified as described under "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares". Class C. Class C shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25% and an ongoing distribution fee of 0.75% of the Fund's average net assets attributable to Class C shares. Class C shares are also subject to a CDSC if they are redeemed within one year of purchase. Although Class C shares are subject to a 1.0% CDSC for only one year (as compared to 5 8 four years for Class B), Class C shares have no conversion feature and, accordingly, an investor that purchases Class C shares will be subject to distribution fees that will be imposed on Class C shares for an indefinite period subject to annual approval by the Fund's Board of Directors and regulatory limitations. Class D. Class D shares incur an initial sales charge when they are purchased and are subject to an ongoing account maintenance fee of 0.25% of the Fund's average net assets attributable to Class D shares. Class D shares are not subject to an ongoing distribution fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales charge but instead may be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. The schedule of initial sales charges and reductions for the Class D shares is the same as the schedule for Class A shares. Class D shares also will be issued upon conversion of Class B shares as described above under "Class B". See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares". The following is a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing System that the investor believes is most beneficial under his particular circumstances. Initial Sales Charge Alternatives. Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because of the account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors that previously purchased Class A shares may no longer be eligible to purchase Class A shares of other MLAM-advised mutual funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for reduced initial sales charges on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares. Deferred Sales Charge Alternatives. Because no initial sales charges are deducted at the time of purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors who do not qualify for a reduction in initial sales charges. Both Class B and Class C shares are 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. 6 9 Certain investors may elect to purchase Class B shares if they determine it to be most advantageous to have all their funds invested initially and intend to hold their shares for an extended period of time. Investors in Class B shares should take into account whether they intend to redeem their shares within the CDSC period and, if not, whether they intend to remain invested until the end of the conversion period and thereby take advantage of the reduction in ongoing fees resulting from the conversion into Class D shares. Other investors, however, may elect to purchase Class C shares if they determine that it is advantageous to have all their assets invested initially and they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. Although Class C shareholders are subject to a shorter CDSC period at a lower rate, they forgo the Class B conversion feature, making their investment subject to account maintenance and distribution fees for an indefinite period of time. In addition, while both Class B and Class C distribution fees are subject to the limitations on asset-based sales charges imposed by the National Association of Securities Dealers, Inc., the Class B distribution fees are further limited under a voluntary waiver of asset-based sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred Sales Charges". 7 10 FINANCIAL HIGHLIGHTS The financial information in the table below has been audited in connection with the annual audits of the financial statements of the Fund by Deloitte & Touche LLP, independent auditors. Financial statements for the year ended June 30, 1994 and the independent auditors' report thereon are included in the Statement of Additional Information. The following per share data and ratios have been derived from information provided in the Fund's audited financial statements. Financial information is not presented for Class B shares for the period July 1, 1984 to October 20, 1988 since no shares of that class were publicly issued prior to October 20, 1988, and financial information is not presented for Class C or Class D shares, since no shares of those classes are publicly issued as of the date of this Prospectus. Further information about the performance of the Fund is contained in the Fund's most recent annual report to shareholders which may be obtained, without charge, by calling or by writing the Fund at the telephone number or address on the front cover of this Prospectus.
CLASS A ---------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, ---------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period:....................... $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60 $ 20.26 $ 18.07 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net........ .62 .71 .70 .87 .95 .85 .74 .65 Realized and unrealized gain (loss) on investments--net............ .67 3.03 2.02 (.02) (.56) 1.99 (.44) 3.04 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations.................... 1.29 3.74 2.72 .85 .39 2.84 .30 3.69 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net........ (.70) (.64) (.76) (.97) (.87) (.75) (.62) (.64) Realized gain on investments--net............ (.73) (.36) (.29) (.30) (.23) (.66) (1.34) (.86) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions................. (1.43) (1.00) (1.05) (1.27) (1.10) (1.41) (1.96) (1.50) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period........................ $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60 $ 20.26 ========= ========= ========= ========= ========= ========= ========= ========= TOTAL INVESTMENT RETURN:** Based on net asset value per share..................... 5.68% 19.03% 15.08% 5.39% 1.77% 16.29% 1.90% 22.37% ========= ========= ========= ========= ========= ========= ========= ========= RATIOS TO AVERAGE NET ASSETS: Expenses, excluding distribution fees............. .53% .54% .58% .59% .57% .58% .58% .59% ========= ========= ========= ========= ========= ========= ========= ========= Expenses....................... .53% .54% .58% .59% .57% .58% .58% .59% ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net......... 2.76% 3.48% 3.52% 4.76% 5.05% 4.82% 4.06% 3.82% ========= ========= ========= ========= ========= ========= ========= ========= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................... $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257 $1,373,408 $1,079,262 $1,158,997 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover............. 21.79% 20.85% 21.24% 20.11% 4.88% 13.44% 20.42% 23.34% ========= ========= ========= ========= ========= ========= ========= =========
CLASS A CLASS B ------------------ ---------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, ------------------ ---------------------------------------------------------------- 1986 1985 1994 1993 1992 1991 1990 1989+ -------- -------- ---------- ---------- ---------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period:....................... $ 15.65 $ 13.23 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 $ 18.78 -------- -------- ---------- ---------- ---------- -------- -------- -------- Investment income--net........ .62 .63 .42 .53 .50 .66 .78 .55 Realized and unrealized gain (loss) on investments--net............ 3.41 3.61 .62 2.96 2.00 .01 (.59) 1.30 -------- -------- ---------- ---------- ---------- -------- -------- -------- Total from investment operations.................... 4.03 4.24 1.04 3.49 2.50 .67 .19 1.85 -------- -------- ---------- ---------- ---------- -------- -------- -------- Less dividends and distributions: Investment income--net........ (.59) (.69) (.48) (.44) (.57) (.78) (.76) (.36) Realized gain on investments--net............ (1.02) (1.13) (.73) (.36) (.29) (.30) (.23) (.35) -------- -------- ---------- ---------- ---------- -------- -------- -------- Total dividends and distributions................. (1.61) (1.82) (1.21) (.80) (.86) (1.08) (.99) (.71) -------- -------- ---------- ---------- ---------- -------- -------- -------- Net asset value, end of period........................ $ 18.07 $ 15.65 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 ======== ======== ========= ========= ========= ======== ======== ======== TOTAL INVESTMENT RETURN:** Based on net asset value per share..................... 28.59% 35.35% 4.61% 17.81% 13.90% 4.33% .73% 10.27% ======== ======== ========= ========= ========= ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses, excluding distribution fees............. .61% .70% .55% .56% .60% .61% .60% .62%* ======== ======== ========= ========= ========= ======== ======== ======== Expenses....................... .61% .70% 1.55% 1.56% 1.60% 1.61% 1.60% 1.62%* ======== ======== ========= ========= ========= ======== ======== ======== Investment income--net......... 4.39% 4.87% 1.75% 2.47% 2.50% 3.73% 4.03% 4.43%* ======== ======== ========= ========= ========= ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).................... $823,664 $421,166 $1,744,704 $1,383,935 $1,064,354 $874,318 $922,126 $468,537 ======== ======== ========= ========= ========= ======== ======== ======== Portfolio turnover............. 23.28% 28.62% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44% ======== ======== ========= ========= ========= ======== ======== ========
- --------------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Class B Shares commenced operations on October 21, 1988. 8 11 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price-earnings ratio. There can be no assurance that the objective of the Fund will be realized. The investment policy of the Fund is based on the belief that the pricing mechanism of the securities market lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and depress prices of securities in unfavorable climates. Based on this premise, management believes that favorable changes in market prices are more likely to begin when securities are out of favor, earnings are depressed, price-earnings ratios are relatively low, investment expectations are limited, and there is no real general interest in the particular security or industry involved. On the other hand, management believes that negative developments are more likely to occur when investment expectations are generally high, stock prices are advancing or have advanced rapidly, price-earnings ratios have been inflated, and the industry or issue continues to gain new investment acceptance on an accelerated basis. In other words, management believes that market prices of securities with relative high price-earnings ratios are more susceptible to unexpected adverse developments while securities with relatively low price-earnings ratios are more favorably positioned to benefit from favorable, but generally unanticipated events. This investment policy departs from traditional philosophy. Management of the Fund believes that the market risk involved in this policy is moderated somewhat by an emphasis on securities with above-average dividend returns. The current institutionally-dominated market tends to ignore, to some extent, the numerous secondary issues whose market capitalizations are below those of the relatively few larger size growth companies. It is expected that the Fund's portfolio generally will have significant representation in this secondary segment of the market. The Investment Adviser is responsible for the management of the Fund's portfolio and makes portfolio decisions based on its own research information supplemented by research information provided by other sources. The basic orientation of the Fund's investment policies is such that at times a large portion of its common stock holdings may carry less than favorable research ratings from research analysts. The Investment Adviser makes extensive use of investment research information provided by unaffiliated brokers and dealers and of the securities research, economic research and computer applications facilities provided by Merrill Lynch, as described below: Securities Research. Merrill Lynch's securities research division, the largest in the industry, employs approximately 100 professionals responsible for fundamental and technical securities analysis. The fundamental research staff consists of approximately 90 professionals who follow approximately 1,400 companies. The types of securities in which the Fund will invest often receive limited research coverage and therefore the Fund will benefit from its access to Merrill Lynch's extensive research resources. Merrill Lynch continually analyzes the changing patterns of market forces and trends in the overall market, groups of securities and individual securities and carefully monitors indicators of investor psychology. 9 12 Economic Research. The economic research facilities of Merrill Lynch conduct detailed analyses of overall economic conditions, both nationally and internationally. Merrill Lynch economists work closely with analysts of the Investment Adviser in the continuous analysis of factors affecting the securities markets, industry performance and short-term and long-term market risks. Computer Applications. The computer applications facilities of Merrill Lynch provide, among other things, proprietary computer screening programs used to identify securities on the basis of various characteristics, which may include dividend return, price-earnings ratios, price trends and other factors deemed significant in analyzing a particular segment of the securities markets. Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stocks. The Fund also may invest in preferred stocks and non-convertible debt securities and utilize covered call options with respect to portfolio securities as described below and in the Statement of Additional Information. It reserves the right as a defensive measure to hold other types of securities, including Government and money market securities, repurchase agreements or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. The Fund may invest up to 10% of its total assets, taken at market value at the time of acquisition, in the securities of foreign issuers. Investments in securities of foreign issuers involve certain risks, including fluctuations in foreign exchange rates, future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws or restrictions. In addition, foreign companies are not subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays or problems with settlement could affect the liquidity of the Fund's portfolio and adversely affect the Fund's performance. To the extent such investments are subject to withholding or other taxes or to regulations relating to repatriation of assets, the Fund's distributable income will be reduced. The prices of securities in different countries may be subject to different economic, financial, political and social factors. The Fund may purchase securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended (the "Securities Act"), but can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act. However, the Fund will not invest more than 5% of its net assets in illiquid investments, which includes securities for which there is no readily available market, securities subject to contractual restrictions on resale, certain investments in asset-backed and receivable-backed securities and restricted securities, unless the Fund's Board of Directors continuously determines, based on the trading markets for the specific restricted security, that it is liquid. The Board of Directors may adopt guidelines and delegate to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Board of Directors, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will develop, the Board of Directors will monitor carefully the Fund's investments in these securities, focusing on such factors, among others, as valuation, liquidity and availability of information. 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 restricted securities. 10 13 The investment policies of the Fund described in the preceding paragraphs are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). Lending of Portfolio Securities. The Fund may from time to time lend securities (but not in excess of 20% of its total assets) from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States Government which will be maintained at all times in amounts equal to at least 100% of the current market value of the loaned securities. Such cash collateral will be invested in short-term securities, which will increase the current income of the Fund. Writing of Covered Call Options. The Fund may from time to time write, i.e., sell, covered call options on its portfolio securities and enter into closing purchase transactions with respect to certain of such options. A call option is considered covered where the writer of the option owns the underlying securities. In return for the premium income realized from the sale of covered call options, the Fund will give up the opportunity to profit from a price increase in the underlying security above the option exercise price and it will not be able to sell the underlying security until the option expires or is exercised or the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. If an option expires unexercised, the writer realizes a gain in the amount of the premium. Such a gain, of course, may be offset by a decline in the market price of the underlying security during the option period. The Fund may not write options on underlying securities exceeding 15% of its total assets, taken at market value. Investment Restrictions. The Fund has adopted a number of restrictions and other policies relating to the investment of its assets and its activities which are fundamental policies and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act. Among the more significant restrictions, the Fund may not: -- Invest in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 5% of the total assets of the Fund, taken at market value, would be invested in the securities of such issuer, or more than 10% of the outstanding securities, or more than 10% of the outstanding voting securities, of such issuer would be owned by the Fund. -- Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry. The Board of Directors of the Fund, at a meeting held on August 4, 1994, approved certain changes to the fundamental and non-fundamental investment restrictions of the Fund. These changes were proposed in connection with the creation of a set of standard fundamental and non-fundamental investment restrictions that would be adopted, subject to shareholder approval, by all of the non-money market mutual funds advised by MLAM or FAM. The proposed uniform investment restrictions are designed to provide each of these funds, including the Fund, with as much investment flexibility as possible under the Investment Company Act and applicable state securities regulations, help promote operational efficiencies and facilitate monitoring of compliance. The investment objectives and policies of the Fund will be unaffected by the adoption of the proposed investment restrictions. 11 14 The full text of the proposed investment restrictions is set forth under "Investment Objective and Policies -- Proposed Uniform Investment Restrictions" in the Statement of Additional Information. Shareholders of the Fund are currently considering whether to approve the proposed revised investment restrictions. If such shareholder approval is obtained, the Fund's current investment restrictions will be replaced by the proposed restrictions, and the Fund's Prospectus and Statement of Additional Information will be supplemented to reflect such change. MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Board of Directors of the Fund consists of six individuals, five of whom are not "interested persons" of the Fund as defined in the Investment Company Act. The Directors of the Fund are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act. The Directors of the Fund are: ARTHUR ZEIKEL*--President and Chief Investment Officer of the Investment Adviser and MLAM; President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") and Merrill Lynch; Director of the Distributor. DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment partnership). M. COLYER CRUM--James R. Williston Professor of Investment Management, Harvard Business School. EDWARD H. MEYER--Chairman of the Board of Directors, President and Chief Executive Officer of Grey Advertising Inc. JACK B. SUNDERLAND--President and Director of American Independent Oil Company, Inc. (an energy company). J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company (a private investment partnership). - --------------- *Interested person, as defined in the Investment Company Act, of the Fund. MANAGEMENT AND ADVISORY ARRANGEMENTS The Investment Adviser, which is owned and controlled by ML & Co., a financial services holding company, acts as the investment adviser to the Fund and provides the Fund with management and investment advisory services. The Investment Adviser or MLAM acts as the investment adviser to more than 100 registered investment companies. MLAM also provides investment advisory services to individual and institutional accounts. As of June 30, 1994, the Investment Adviser and MLAM had a total of approximately $161.4 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of MLAM. 12 15 The investment advisory agreement with the Investment Adviser (the "Investment Advisory Agreement") provides that, subject to the direction of the Board of Directors of the Fund, the Investment Adviser is responsible for the actual management of the Fund's portfolio and for the review of the Fund's holdings in light of its own research analysis and analyses from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser, subject to review by the Board of Directors. The Investment Adviser supplies the portfolio managers for the Fund, who consider analyses from various sources, make the necessary investment decisions, and place transactions accordingly. The Investment Adviser also is obligated to perform certain administrative and management services for the Fund and is required to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Investment Advisory Agreement. The Investment Adviser has access to the total securities research, economic research and computer applications facilities of Merrill Lynch and makes extensive use of those facilities as described under "Investment Objective and Policies". The Fund pays the Investment Adviser a monthly fee based on the average daily value of the Fund's net assets: 0.60% of that portion of average daily net assets not exceeding $100 million; 0.50% of that portion of average daily net assets exceeding $100 million, but not exceeding $200 million; and 0.40% of that portion of average daily net assets exceeding $200 million. For the fiscal year ended June 30, 1994, the Investment Adviser earned a fee of $15,452,148 (based on average net assets of approximately $3.8 billion) and the effective rate was approximately 0.41%. The Investment Advisory Agreement obligates the Fund to pay certain expenses incurred in its operations including, among other things, the investment advisory fee, legal and audit fees, unaffiliated Directors' fees and expenses, custodian and transfer agency fees, accounting costs, the costs of issuing and redeeming shares and certain of the costs of printing proxies, shareholder reports, prospectuses and statements of additional information. Accounting services are provided for the Fund by the Investment Adviser and the Fund reimburses the Investment Adviser for its costs in connection with such services. For the fiscal year ended June 30, 1994, the Fund paid the Investment Adviser $185,215 for such accounting services. For the year ended June 30, 1994, the ratio of total expenses to average net assets was 0.53% for the Class A shares and 1.55% for the Class B shares; no Class C shares or Class D shares had been issued during that year. Paul M. Hoffmann is a Vice President and Portfolio Manager for the Fund. Mr. Hoffmann has been a Portfolio Manager and a Vice President of MLAM since 1976. TRANSFER AGENCY SERVICES Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency and shareholder servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer Agent a fee of $11.00 per Class A or Class D shareholder account and $14.00 per Class B or Class C shareholder account and the Transfer Agent is entitled to reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. For the fiscal year ended June 30, 1994, the total fee paid by the Fund to the Transfer Agent pursuant to the Transfer Agency 13 16 Agreement was $3,815,082. At July 31, 1994, the Fund had 211,899 Class A shareholder accounts, 163,646 Class B shareholder accounts, no Class C shareholder accounts and no Class D shareholder accounts. At this level of accounts, the annual fee payable to the Transfer Agent would aggregate approximately $4,621,933 plus out-of-pocket expenses. PURCHASE OF SHARES Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of both the Investment Adviser and Merrill Lynch, acts as the Distributor of the shares of the Fund. Shares of the Fund are offered continuously for sale by the Distributor and other eligible securities dealers (including Merrill Lynch). Shares of the Fund may be purchased from securities dealers or by mailing a purchase order directly to the Transfer Agent. The minimum initial purchase is $1,000, and the minimum subsequent purchase is $50, except for retirement plans, the minimum initial purchase is $100, and the minimum subsequent purchase is $1. The Fund is offering its shares in four classes at a public offering price equal to the next determined net asset value per share plus sales charges imposed either at the time of purchase or on a deferred basis depending upon the class of shares selected by the investor under the Merrill Lynch Select Pricing System, as described below. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase orders by the Distributor. As to purchase orders received by securities dealers prior to 4:15 p.m., New York time, which includes orders received after the determination of the net asset value on the previous day, the applicable offering price will be based on the net asset value as of 4:15 p.m., New York time, on the day the orders are placed with the Distributor, provided the orders are received by the Distributor prior to 4:30 p.m., New York time, on that day. If the purchase orders are not received prior to 4:30 p.m., New York time, such orders shall be deemed received on the next business day. The Fund or the Distributor may suspend the continuous offering of the Fund's shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Distributor or the Fund. Neither the Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a sale of shares to such customers. Purchases directly through the Transfer Agent are not subject to the processing fee. The Fund issues four classes of shares under the Merrill Lynch Select Pricing System, which permits each investor to choose the method of purchasing shares that he 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. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Investors should determine whether under their particular circumstances it is more advantageous to incur an initial sales charge or to have the entire initial purchase price invested in the Fund with the investment thereafter being subject to a contingent deferred sales charge and ongoing distribution fees. A discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing System is set forth under "Merrill Lynch Select Pricing System" on page 3. Each Class A, Class B, Class C and Class D share of the Fund represents identical interests in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses 14 17 of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The deferred sales charges 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, will be imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges will 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 will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid. See "Distribution Plans" below. Each class has different exchange privileges. See "Shareholder Services -- Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to Class A and Class D shares are the same as those of the deferred sales charges with respect to Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. Investors are advised that only Class A and Class D shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. The following table sets forth a summary of the distribution arrangements for each class of shares under the Select Pricing System, followed by a more detailed description of each class. - -------------------------------------------------------------------------------- [CAPTION]
- ------------------------------------------------------------------------------------------------------------ ACCOUNT MAINTENANCE DISTRIBUTION CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE - ------------------------------------------------------------------------------------------------------------ A Maximum 5.25% initial sales No No No charge(2)(3) - ------------------------------------------------------------------------------------------------------------ B CDSC for periods of up to 4 0.25% 0.75% B shares convert to D shares years, at a rate of 4.0% automatically after during the first year, approximately eight years(4) decreasing 1.0% annually to 0.0% - ------------------------------------------------------------------------------------------------------------ C 1.0% CDSC for one year 0.25% 0.75% No - ------------------------------------------------------------------------------------------------------------ D Maximum 5.25% initial sales 0.25% No No charge(3) - ------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs may be imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Initial Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class A Investors". (3) Reduced for purchases of $25,000 or more. Class A and Class D share purchases of $1,000,000 or more will not be subject to an initial sales charge but instead will be subject to a 1.0% CDSC for one year. (continued on next page) 15 18 (4) The conversion period for dividend reinvestment shares and certain retirement plans is modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have a ten year conversion period. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES Investors choosing the initial sales charge alternatives who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. The public offering price of Class A and Class D shares for purchasers choosing the initial sales charge alternatives is the next determined net asset value plus varying sales charges (i.e., sales loads), as set forth below.
SALES LOAD AS SALES LOAD AS DISCOUNT TO PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS OFFERING THE NET AMOUNT AS PERCENTAGE OF AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE - ----------------------------------------------------- ------------- -------------- ------------------ Less than $25,000.................................... 5.25% 5.54% 5.00% $25,000 but less than $50,000........................ 4.75 4.99 4.50 $50,000 but less than $100,000....................... 4.00 4.17 3.75 $100,000 but less than $250,000...................... 3.00 3.09 2.75 $250,000 but less than $1,000,000.................... 2.00 2.04 1.80 $1,000,000 and over**................................ 0.00 0.00 0.00
- --------------- * Rounded to the nearest one-hundredth percent. ** Purchases of $1,000,000 or more will be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. 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. The Distributor may reallow discounts to selected dealers and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act. During the fiscal year ended June 30, 1994, the Fund sold 22,051,928 Class A shares for aggregate net proceeds of $518,481,972. The gross sales charges for the sale of Class A shares of the Fund for that year were $3,755,602, of which $216,022 and $3,539,580 were received by the Distributor and Merrill Lynch, respectively. For the fiscal year ended June 30, 1994, the Distributor received CDSCs of $ , all of which were paid to Merrill Lynch, with respect to redemption within one year after purchase of Class A shares purchased subject to front-end sales charge waivers. Eligible Class A Investors. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors that currently own Class A shares in a shareholder account are entitled to purchase additional Class A shares 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 MLAM or any of its affiliates. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMASM Managed Trusts to which 16 19 Merrill Lynch Trust Company provides discretionary trustee services and certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares will be offered at net asset value to ML & Co. and its subsidiaries and their directors and employees and to members of the Boards of MLAM-advised investment companies, including the Fund. Certain persons who acquired shares of certain MLAM-advised closed-end funds who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions set forth in the Statement of Additional Information are met. For example, Class A shares of the Fund and certain other MLAM-advised mutual funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds. Reduced Initial Sales Charges. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Class A and Class D sales charges also may be reduced under a Right of Accumulation and a Letter of Intention. Class A shares are offered at net asset value to certain eligible Class A investors as set forth above under "Eligible Class A Investors". Class D shares are offered at net asset value to Directors, officers and employees of the Fund and to Directors and employees of ML & Co. and its subsidiaries. Class D shares are also offered at net asset value to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase if certain conditions set forth in the Statement of Additional Information are met. Class D shares may be offered at net asset value in connection with the acquisition of assets of other investment companies. Class D shares also are offered at net asset value, without charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated, if the following conditions are satisfied: first, the investor must purchase Class D shares with proceeds from a redemption of shares of such other mutual fund, and such fund imposed a sales charge either at the time of purchase or on a deferred basis; second, such purchase of Class D shares must be made within 90 days after such notice of termination. Class D shares are offered with reduced sales charges and, in certain circumstances, at net asset value, to participants in the Merrill Lynch BlueprintSM Program. Additional information concerning these reduced initial sales charges is set forth in the Statement of Additional Information. DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. As discussed below, Class B shares are subject to a four year CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On the other hand, approximately eight years after Class B shares are issued, such Class B shares, together with shares issued upon dividend reinvestment with respect to those 17 20 shares, are automatically converted into Class D shares of the Fund and thereafter will be subject to lower continuing fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B and Class C shares are subject to an account maintenance fee of 0.25% of net assets and a distribution fee of 0.75% of net assets as discussed below under "Distribution Plans". Class B and Class C shares are sold without an initial sales charge so that the Fund will receive the full amount of the investor's purchase payment. Merrill Lynch compensates its financial consultants for selling Class B and Class C shares at the time of purchase from its own funds. See "Distribution Plans" below. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares, from its own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. Approximately eight years after issuance, Class B shares will convert automatically into Class D shares of the Fund, which are subject to an account maintenance fee but no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately ten years. If Class B shares of the Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the NASD asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. The proceeds from the ongoing account maintenance fee are used to compensate Merrill Lynch for providing continuing account maintenance activities. Class B shareholders of the Fund exercising the exchange privilege described under "Shareholder Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Contingent Deferred Sales Charges -- Class B Shares. Class B shares which are redeemed within four years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. The following table sets forth the rates of the Class B CDSC:
CLASS B CDSC AS A PERCENTAGE OF DOLLAR AMOUNT YEAR SINCE PURCHASE SUBJECT TO PAYMENT MADE CHARGE ------------------------------------------------------------- ---------------- 0-1.......................................................... 4.00% 1-2.......................................................... 3.00 2-3.......................................................... 2.00 3-4.......................................................... 1.00 4 and thereafter............................................. 0.00
18 21 For the fiscal year ended June 30, 1994, the Distributor received CDSCs of $1,189,344 with respect to redemptions of Class B shares, all of which were paid to Merrill Lynch. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the four-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. To provide an example, assume an investor purchases 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares through dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the CDSC because of dividend reinvestment. With respect to the remaining 40 shares, the CDSC is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the applicable rate in the third year after purchase). The Class B CDSC is waived on redemptions of shares in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability (as defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The Class B CDSC also is waived on redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and in connection with certain group plans placing orders through the Merrill Lynch BlueprintSM Program. The CDSC also is waived for any Class B shares which are purchased by eligible 401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The Class B CDSC also is waived for any Class B shares which are purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio Group, and held in such account at the time of redemption. Additional information concerning the waiver of the Class B CDSC is set forth in the Statement of Additional Information. Contingent Deferred Sales Charges--Class C Shares. Class C shares which are redeemed within one year after purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the one-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another will be assumed to be made in the same order as a 19 22 redemption. That is, a transfer of shares will be treated as a redemption of shares and may be subject to a CDSC under the same circumstances as any other redemption as explained above. The Class C CDSC is waived on redemptions of shares under the same circumstances as is the case for Class B shares described above. Additional information concerning the waiver of the Class C CDSC is set forth in the Statement of Additional Information. Conversion of Class B Shares to Class D Shares. After approximately eight years (the "Conversion Period"), Class B shares will be converted automatically into Class D shares of the Fund. Class D shares are subject to an ongoing account maintenance fee of 0.25% of net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once a month (on the "Conversion Date") on the basis of the relative net asset values of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. In general, Class B shares of equity MLAM-advised mutual funds will convert approximately eight years after initial purchase, and Class B shares of taxable and tax-exempt fixed income MLAM-advised mutual funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. The Conversion Period is modified for shareholders who purchased Class B shares through certain retirement plans which qualified for a waiver of the CDSC normally imposed on purchases of Class B shares ("Class B Retirement Plans"). When the first share of any MLAM-advised mutual fund purchased by a Class B Retirement Plan has been held for ten years (i.e., ten years from the date the relationship between MLAM-advised mutual funds and the Class B Retirement Plan was established), all Class B shares of all MLAM-advised mutual funds held in that Class B Retirement Plan will be converted into Class D shares of the appropriate Funds. Subsequent to such conversion, that Class B Retirement Plan will be sold Class D shares of the appropriate funds. DISTRIBUTION PLANS The Fund has adopted separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. The Class B and Class C Distribution Plans provide for the payment of account maintenance fees and distribution fees, and the Class D Distribution Plan provides for the payment of account maintenance fees. 20 23 The Distribution Plans for Class B, Class C and Class D shares each provide that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with account maintenance activities. The Distribution Plans for Class B and Class C shares each provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial consultants for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through dealers without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B and Class C shares. In this regard, the purpose and function of the ongoing distribution fees and the CDSC are the same as those of the initial sales charge with respect to the Class A and Class D shares of the Fund in that the deferred sales charges provide for the financing of the distribution of the Fund's Class B and Class C shares. Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution fee, accrued daily and paid monthly, at the annual rate of 1.0% of average daily net assets of the Class B shares of the Fund under a distribution plan previously adopted by the Fund (the "Prior Plan") to compensate the Distributor and Merrill Lynch for providing account maintenance and distribution-related activities and services to Class B shareholders. The fee rate payable and the services provided under the Prior Plan are identical to the aggregate fee rate payable and the services provided under the Class B Distribution Plan, the difference being that the account maintenance and distribution services have been unbundled. For the year ended June 30, 1994, the Fund paid the Distributor account maintenance fees of $3,981,491 and distribution fees of $11,944,473 under the Class B Distribution Plan. The Fund did not begin to offer shares of Class C or Class D publicly until the date of this Prospectus. Accordingly, no payments have been made pursuant to the Class C or Class D Distribution Plans prior to the date of this Prospectus. The payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred, and accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans. This information is presented annually as of December 31 of each year on a "fully allocated accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On the fully allocated accrual basis, revenues consist of the account maintenance fees, distribution fees, the CDSCs and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and CDSCs, and the expenses consist of financial consultant compensation. As of June 30, 1994, direct cash revenues for the period since commencement of the offering of Class B shares exceeded direct cash expenses by $35,192,273 (2.0% of Class B net assets at that date). At December 31, 21 24 1993, the fully allocated accrual expenses incurred by the Distributor and Merrill Lynch with respect to Class B shares for the period October 21, 1988, through December 31, 1993 exceeded fully allocated accrual revenues for such period by approximately $8,198,000 (0.52% of Class B net assets at that date). LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the NASD imposes a limitation on certain asset-based sales charges such as the 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 Fund has no obligation with respect to distribution and/or account maintenance-related expenses incurred by the Distributor and Merrill Lynch in connection with Class B, Class C and Class D shares, and there is no assurance that the Directors of the Fund will approve the continuance of the Distribution Plans from year to year. However, the Distributor intends to seek annual continuation of the Distribution Plans. In their review of the Distribution Plans, the Directors will be asked to take into consideration expenses incurred in connection with the account maintenance and/or distribution of each class of shares separately. The initial sales charges, the account maintenance fee, the distribution fee and/or the CDSCs received with respect to one class will not be used to subsidize the sale of shares of another class. Payments of the distribution fee on Class B shares will terminate upon conversion of those Class B shares into Class D shares as set forth under "Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares". REDEMPTION OF SHARES The Fund is required to redeem for cash all full shares of the Fund on receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC which may be applicable, there will be no charge for 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 value of 22 25 shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by the Fund at such time. REDEMPTION A shareholder wishing to redeem shares may do so without charge by tendering the shares directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency Operations Department, P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., Transfer Agency Operations Department, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. The notice in either event requires the signatures of all persons in whose names the shares are registered, signed exactly as their names appear on the Transfer Agent's register or on the certificate, as the case may be. The signature(s) on the redemption request must be guaranteed by an "eligible guarantor institution" as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. In certain instances, the Transfer Agent may require additional documents, such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. For shareholders redeeming directly with the Transfer Agent, payment will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment. The Fund may delay or cause to be delayed the mailing of a redemption check until such time as good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares, which will not exceed 10 days. REPURCHASE The Fund also will repurchase shares through a shareholder's listed securities dealer. The Fund normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after receipt of the order by the dealer, provided that the request for repurchase is received by the dealer prior to the close of business on the New York Stock Exchange on the day received, and such request is received by the Fund from such dealer not later than 4:30 P.M., New York time, on the same day. Dealers have the responsibility to submit such repurchase requests to the Fund not later than 4:30 P.M., New York time, in order to obtain that day's closing price. The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms which do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch charges its customers a processing fee (presently $4.85) to confirm a repurchase of shares to such customers. Redemptions directly through the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the 23 26 repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem shares as set forth above. REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES Shareholders who have redeemed their Class A or Class D shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. The reinstatement privilege is a one-time privilege and may be exercised by the Class A or Class D shareholder only the first time such shareholder makes a redemption. SHAREHOLDER SERVICES The Fund offers a number of shareholder services and investment plans designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans described below and instructions as to how to participate in the various services or plans, or how to change options with respect thereto, can be obtained from the Fund by calling the telephone number on the cover page hereof or from the Distributor or Merrill Lynch. INVESTMENT ACCOUNT Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements monthly from the Transfer Agent showing any reinvestments of dividends and capital gains distributions and any other activity in the account since the preceding statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than reinvestments of dividends and capital gains distributions. A shareholder may make additions to his Investment Account at any time by mailing a check directly to the Transfer Agent. Shareholders also may maintain their accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an Investment Account in the transferring shareholder's name may be opened at the Transfer Agent. Shareholders considering transferring their Class A or Class D shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A or Class D shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he be issued certificates for his shares, and then must turn the certificates over to the new firm for re- registration as described in the preceding sentence. Shareholders considering transferring a tax-deferred retirement account such as an individual retirement account from Merrill Lynch to another brokerage firm or 24 27 financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares (paying any applicable CDSC) so that the 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 Shareholders of each class of shares of the Fund have an exchange privilege with certain other MLAM-advised mutual funds. There is currently no limitation on the number of times a shareholder may exercise the exchange privilege. The exchange privilege may be modified or terminated in accordance with the rules of the Commission. Under the Select Pricing System, Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the second fund in his account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the second fund in his account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Exchanges of Class A and Class D shares are made on the basis of the relative net asset values per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the Class A or Class D shares being exchanged and the sales charge payable at the time of the exchange on the shares being acquired. Class B, Class C and Class D shares will be exchangeable with shares of the same class of other MLAM-advised mutual funds. Shares of the Fund which are subject to a CDSC will be exchangeable on the basis of relative net asset value per share without the payment of any CDSC that might otherwise be due upon redemption of the shares of the Fund. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is "tacked" to the holding period of the newly acquired shares of the other Fund. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class D shares. The period of time that Class A, Class B, Class C or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the 25 28 Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the MLAM-advised mutual fund from which the exchange has been made. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes. For further information, see "Shareholder Services -- Exchange Privilege" in the Statement of Additional Information. The Fund's exchange privilege is modified with respect to purchases of Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("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 MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other MLAM advised mutual fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA program. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All dividends and capital gains distributions are reinvested automatically in full and fractional shares of the Fund, without sales charge, at the net asset value per share next determined on the ex-dividend date of such dividend or distribution. A shareholder may at any time, by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent dividends or both dividends and capital gains distributions paid in cash rather than reinvested, in which event payment will be mailed on or about the payment date. No CDSC will be imposed on redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. SYSTEMATIC WITHDRAWAL AND AUTOMATIC INVESTMENT PLANS A Class A or Class D shareholder may elect to receive systematic withdrawal payments from his Investment Account in the form of payments by check or through automatic payment by direct deposit to his bank account on either a monthly or quarterly basis. A Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic Redemption Program, subject to certain conditions. Regular additions of shares may be made to an investor's Investment Account by pre-arranged charges of $50 or more to his regular bank account. Investors who maintain CMA accounts may arrange to have periodic investments made in the Fund in their CMA accounts or in certain related accounts in amounts of $100 or more through the CMA Automatic Investment Program. The Automatic Investment Program is not available to shareholders whose shares are held in a brokerage account with Merrill Lynch, other than a CMA account, or to shareholders participating in retirement plans. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to policies established by the Board of Directors of the Fund, the Investment Adviser is responsible for the Fund's portfolio decisions and the placing of the Fund's portfolio transactions. With respect to such transactions, the Investment Adviser seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of 26 29 securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund will not necessarily be paying the lowest commission or spread available. The Fund has no obligation to deal with any broker or dealer in the execution of its portfolio transactions. The Fund pays brokerage fees to Merrill Lynch in connection with portfolio transactions executed by Merrill Lynch. Brokers and dealers, including Merrill Lynch, who provide supplemental investment research to the Investment Adviser may receive orders for transactions by the Fund. Information so received is 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. Supplemental investment research received by the Investment Adviser also may be used in connection with other investment advisory accounts of the Investment Adviser and its affiliates. Whether or not a particular broker-dealer sells shares of the Fund neither qualifies nor disqualifies such broker-dealer to execute transactions for the Fund. PERFORMANCE DATA From time to time the Fund may include its average annual total return for various specified time periods in advertisements or information furnished to present or prospective shareholders. Average annual total return is computed separately for Class A, Class B, Class C and Class D shares in accordance with a formula specified by the Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including any CDSC that would be applicable to a complete redemption of the investment at the end of the specified period such as in the case of Class B and Class C shares and the maximum sales charge in the case of Class A and Class D shares. Dividends paid by the Fund with respect to all shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that account maintenance fees and distribution charges and any incremental transfer agency costs relating to each class of shares will be borne exclusively by that class. The Fund will include performance data for all classes of shares of the Fund in any advertisement or information including performance data of the Fund. The Fund also may quote total return and aggregate total return performance data for various specified time periods. Such data will be calculated substantially as described above, except that (1) the rates of return calculated will not be average annual rates, but rather, actual annual, annualized or aggregate rates of return and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average total return data since the average annual rates of return reflect compounding; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. In advertisements directed to investors whose purchases are subject to waiver of the CDSC in the case of Class B and Class C shares (such as investors in certain 27 30 retirement plans) or to reduced sales charges in the case of Class A and Class D shares, performance data may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charges or waiver of the CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares". The Fund's total return may be expressed either as a percentage or as a dollar amount in order to illustrate the effect of such total return on a hypothetical $1,000 investment in the Fund at the beginning of each specified period. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. On occasion, the Fund may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine. As with other performance data, performance comparisons should not be considered representative of the Fund's relative performance for any future period. ADDITIONAL INFORMATION DIVIDENDS AND DISTRIBUTIONS It is the Fund's intention to distribute all of its net investment income, if any. Dividends from such net investment income are paid semi-annually. All net realized long or short-term capital gains, if any, are distributed to the Fund's shareholders at least annually. Premiums from expired call options written by the Fund and net gains from closing purchase transactions are treated as short-term capital gains for Federal income tax purposes. The per share dividends and distributions on each class of shares will be reduced as a result of any account maintenance, distribution and transfer agency fees applicable to that class. See "Additional Information -- Determination of Net Asset Value". Dividends and distributions may be reinvested automatically in shares of the Fund, at net asset value without sales charge. Shareholders may elect in writing to receive any such dividends or distributions, or both, in cash. Dividends and distributions are taxable to shareholders as described below whether they are reinvested in shares of the Fund or received in cash. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of the Fund is determined once daily as of 4:15 P.M., New York time, on each day during which the New York Stock Exchange is open for trading and, under certain circumstances, on other days. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The net asset value per share is computed by dividing the sum of the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to the Investment 28 31 Adviser and any account maintenance and/or distribution fees payable to the Distributor, are accrued daily. The per share net asset value of Class A shares will generally be higher than the per share net asset value of shares of the other classes, reflecting the daily expense accruals of the account maintenance and transfer agency fees applicable with respect to the Class B, Class C and Class D shares; moreover, the per share net asset value of the Class D shares generally will be higher than the per share net asset value of the Class B and Class C shares, reflecting the daily expense accruals of the distribution fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the classes will tend to converge immediately after the payment of dividends or distributions which will differ by approximately the amount of the expense accrual differentials between the classes. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued, or, lacking any sales, at the mean between closing bid and asked prices. Securities traded in the over-the-counter market are valued at the most recent bid prices as obtained from one or more dealers that make markets in the securities. Securities traded in the NASDAQ National Market System are valued at the last sale price on the day the securities are being valued, or lacking any sales, at the closing bid price. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. When the Fund sells an option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a deferred credit. The amount of such liability subsequently will be marked-to-market to reflect the current market value of the option written. If current market value exceeds the premium received there is an unrealized loss; conversely, if the premium exceeds current market value there is an unrealized gain. The current market value of a traded option is the last sale price or, in the absence of a sale, the last offering price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchase transaction, the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option will be extinguished. If an option is exercised, the Fund will realize a gain or loss from the sale of the underlying security and the proceeds of sales are increased by the premium originally received. TAXES The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). The Fund intends to distribute substantially all of such income. Dividends paid by the Fund from its ordinary income and distributions of the Fund's net realized short-term capital gains (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from the Fund's net realized long-term capital gains (including long-term gains from certain transactions in options) ("capital gain dividends") are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Fund shares. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after 29 32 such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. If the Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. Ordinary income dividends paid by the Fund to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period for the converted Class B shares. If a shareholder exercises an exchange privilege within 90 days of acquiring such shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent the sales charge paid to the Fund reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. 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 30 33 pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative or administrative action either prospectively or retroactively. Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. ORGANIZATION OF THE FUND The Fund was incorporated under Maryland law on March 22, 1977. It 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, each of which 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 are identical in all respects except that Class B, Class C and Class D shares bear certain expenses related to the account maintenance associated with such shares, and Class B and Class C shares bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to account maintenance and distribution expenditures, as applicable. See "Purchase of Shares". The Fund has received an order from the Commission permitting the issuance and sale of multiple classes of Common Stock. The Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act on any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Shares have the conversion rights described in this Prospectus. Each share of Common Stock is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities except, as noted above, the Class B, Class C and Class D shares bear certain additional expenses. SHAREHOLDER REPORTS Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to 31 34 receive separate copies of each report and communication for each of the shareholder's related accounts the shareholder should notify in writing: Financial Data Services, Inc. Attn: TAMFO P.O. Box 45289 Jacksonville, FL 32232-5289 The written notification should include the shareholder's name, address, tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or mutual fund account numbers. If you have any questions regarding this please call your Merrill Lynch financial consultant or Financial Data Services, Inc. at 800-637-3863. SHAREHOLDER INQUIRIES Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Prospectus. 32 35 MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM - -------------------------------------------------------------------------------- NOTE: THIS FORM MAY NOT BE USED FOR PURCHASE THROUGH THE MERRILL LYNCH BLUEPRINT PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM APPLICATION BY CALLING (800) 637-3766. - -------------------------------------------------------------------------------- 1. SHARE PURCHASE APPLICATION I, being of legal age, wish to purchase .................... shares of / / Class A, / / Class B, / / Class C or / / Class D (choose one) of Merrill Lynch Basic Value Fund, Inc. and establish an Investment Account as described in the Prospectus. Basis for establishing an Investment Account: A. I enclose a check for $.......... payable to Financial Data Services, Inc. as an initial investment (minimum $1,000) (subsequent investments $50 or more). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the Right of Accumulation as outlined in the Statement of Additional Information: 1. .......................................................... 4. .......................................................... 2. .......................................................... 5. .......................................................... 3. .......................................................... 6. .......................................................... (Please list all Funds. Use a separate sheet of paper if necessary.) Until you are notified by me in writing, the following options with respect to dividends and distributions are elected: ------------------------------------------ ------------------------------------------ Distribution ELECT / / reinvest dividends ELECT / / reinvest capital gains Options ONE / / pay dividends in cash ONE / / pay capital gains in cash ------------------------------------------ ------------------------------------------
Distribution Options
If no election is made, dividends and capital gains will be reinvested automatically at net asset value without a sales charge. (PLEASE PRINT) -------------------------------- Name................................................................................ -------------------------------- Social Security No. First Name Initial Last Name or Taxpayer Identification No. Name of Co-Owner (if any)........................................................... First Name Initial Last Name Address............................................................................. .................................................................................... ......................, 19 . . (Zip Code) Date Occupation ......................................... Name and Address of Employer................... ........................... ...........................
Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security No. or Taxpayer Identification No. and (2) that I am not subject to backup withholding (as discussed under "Additional Information--Taxes" in the Prospectus) either because I have not been notified that I am subject thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING, AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS. Signature of Owner ......................................... Signature of Co-Owner (if any)............................................................... In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified. - -------------------------------------------------------------------------------- 2. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) ......................, 19 . . Gentlemen: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Basic Value Fund, Inc. or any other investment company with an initial sales charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13-month period which will equal or exceed: / / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000 Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Fund's Prospectus. I agree to the terms and conditions of this Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Basic Value Fund, Inc. held as security. By:.............................................................. ............................................................... Signature of Owner Signature (If registered in joint names, both must sign)
In making purchases under this letter, the following are the related accounts on which reduced offering prices are to apply: (1) Name ...................................................... (2) Name ...................................................... A-1 36 MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM - -------------------------------------------------------------------------------- 3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly, of shares in Merrill Lynch Basic Value Fund, Inc. at cost or current offering price. Begin systematic withdrawal on ................., 19... Withdrawals to be made either (check one) / / Monthly / / Quarterly* (Date) *Quarterly withdrawals are made on the 24th day of March, June, September and December. Specify withdrawal amount (check one): / / $..... or / / .....% of the current value of Class A or Class D shares in the account. Specify withdrawal method: / / check or / / direct deposit to bank account (check one and complete part (a) or (b) below): - -------------------------------------------------------------------------------- (A) I HEREBY AUTHORIZE PAYMENT BY CHECK Draw checks payable (check one) / / as indicated in Item 1. / / to the order of.......................................................... Mail to (check one) / / the address indicated in Item 1. / / Name (Please Print)...................................................... Address......................................................................... Signature of Owner.............................................................. (B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND (IF NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY ACCOUNT Specify type of account (check one): / / checking / / savings I agree that this authorization will remain in effect until I provide written notification to Financial Data Services, Inc. amending or terminating this service. Name of your Account............................................................ Bank............................................................................ Bank # .................... Account #........................................... Bank Address.................................................................... Signature of Depositor .................... Date................................ Signature of Depositor (if joint account)....................................... NOTE: IF AUTOMATIC DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION. - -------------------------------------------------------------------------------- 4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Financial Data Services, Inc. draw a check or an automated clearing house ("ACH") debit on my checking account described below each month to purchase .... shares of / / Class A, / / Class B, / / Class C or / / Class D (choose one) of Merrill Lynch Basic Value Fund, Inc., subject to the terms set forth below. FINANCIAL DATA SERVICES, INC. You are hereby authorized to draw checks or an ACH debit each month on my bank account for investment in Merrill Lynch Basic Value Fund, Inc., as indicated below: Amount of each check or ACH debit $.......................................... Account No................................................................... Please date and invest checks or draw ACH debits on the 20th of each month beginning....................................................................... (Month) or as soon thereafter as possible. I agree that you are preparing these checks or drawing these debits voluntarily at my request and that you shall not be liable for any loss arising from any delay in preparing or failure to prepare any such check or debit. If I change banks or desire to terminate or suspend this program I agree to notify you promptly in writing. I further agree that if a check or debit is not honored upon presentation, Financial Data Services, Inc. is authorized to discontinue immediately the Automatic Investment Plan and to liquidate sufficient shares held in my account to offset the purchase made with the returned check or dishonored debit. ............. ....................................... Date Signature of Depositor ....................................... Signature of Depositor (If joint account, both must sign) AUTHORIZATION TO HONOR CHECKS OR ACH DEBITS DRAWN BY FINANCIAL DATA SERVICES, INC. To..........................................................................Bank (Investor's Bank) Bank Address.................................................................... City .......... State .......... Zip............................................ As a convenience to me, I hereby request and authorize you to pay and charge to my account checks or ACH debits drawn on my account by and payable to Financial Data Services, Inc. I agree that your rights in respect to each such check or debit shall be the same as if it were a check drawn on you and signed personally by me. This authority is to remain in effect until revoked by me in writing. Until you receive such notice, you shall be fully protected in honoring any such check or debit. I further agree that if any such check or debit be dishonored, whether with or without cause and whether intentionally or inadvertently, you shall be under no liability. ............. ....................................... Date Signature of Depositor ............. ....................................... Bank Account Signature of Depositor Number (If joint account, both must sign) NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION. - -------------------------------------------------------------------------------- 5. FOR DEALER ONLY Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in connection with transactions under this authorization form and agree to notify the Distributor of any purchases made under a Letter of Intention or Systematic Withdrawal Plan. We guarantee the Shareholder's signature. ............................................................... Dealer Name and Address By ............................................................ Authorized Signature of Dealer - ----------- --------- Branch-Code F/C No. ................. F/C Last Name - ----------- --------- Dealer's Customer A/C No. A-3 This form when completed should be mailed to: Merrill Lynch Basic Value Fund, Inc. c/o Financial Data Services, Inc. Transfer Agency Operations Department P.O. Box 45289 Jacksonville, Florida 32232-5289 A-2 37 INVESTMENT ADVISER Fund Asset Management, L.P. Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey Mailing Address: P.O. Box 9011 Princeton, New Jersey 08543-9011 DISTRIBUTOR Merrill Lynch Funds Distributor, Inc. Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey Mailing Address: P.O. Box 9011 Princeton, New Jersey 08543-9011 CUSTODIAN National Westminster Bank NJ One Exchange Place Jersey City, New Jersey 07303 TRANSFER AGENT Financial Data Services, Inc. Administrative Offices: Transfer Agency Operations Department 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 Mailing Address: P.O. Box 45289 Jacksonville, Florida 32232-5289 INDEPENDENT AUDITORS Deloitte & Touche LLP 117 CAMPUS DRIVE PRINCETON, NEW JERSEY 08540 COUNSEL Brown & Wood One World Trade Center New York, New York 10048-0557 38 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. ------------------------- TABLE OF CONTENTS
PAGE ---- Fee Table....................................... 2 Merrill Lynch Select PricingSM System........... 3 Financial Highlights............................ 8 Investment Objective and Policies............... 9 Management of the Fund.......................... 12 Board of Directors............................ 12 Management and Advisory Arrangements................................ 12 Transfer Agency Services...................... 13 Purchase of Shares.............................. 14 Initial Sales Charge Alternatives -- Class A and Class D Shares.......................... 16 Deferred Sales Charge Alternatives -- Class B and Class C Shares.......................... 17 Distribution Plans............................ 20 Limitations on the Payment of Deferred Sales Charges..................................... 22 Redemption of Shares............................ 22 Redemption.................................... 23 Repurchase.................................... 23 Reinstatement Privilege -- Class A and Class D Shares...................................... 24 Shareholder Services............................ 24 Investment Account............................ 24 Exchange Privilege............................ 25 Automatic Reinvestment of Dividends and Capital Gains Distributions................. 26 Systematic Withdrawal and Automatic Investment Plans....................................... 26 Portfolio Transactions and Brokerage............ 26 Performance Data................................ 27 Additional Information.......................... 28 Dividends and Distributions................... 28 Determination of Net Asset Value.............. 28 Taxes......................................... 29 Organization of the Fund...................... 31 Shareholder Reports........................... 31 Shareholder Inquiries......................... 32 Authorization Form.............................. A-1 Code #10042-1094
- ------------------------------------------------------ MERRILL LYNCH BASIC VALUE FUND, INC. [ART] Prospectus , 1994 Distributor: Merrill Lynch Funds Distributor, Inc. This Prospectus should be retained for future reference. 39 STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH BASIC VALUE FUND, INC. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800 Merrill Lynch Basic Value Fund, Inc. (the "Fund") is a diversified, open-end investment company seeking capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. The Fund seeks special opportunities in securities that are selling at a discount, either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out of favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price-earnings ratio. ------------------------- Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four classes of shares each with a different combination of sales charges, ongoing fees and other features. The Select Pricing System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. ------------------------- This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the prospectus of the Fund, dated , 1994 (the "Prospectus"), which has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling or by writing the Fund at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. ------------------------- INVESTMENT ADVISER: FUND ASSET MANAGEMENT, L.P. DISTRIBUTOR: MERRILL LYNCH FUNDS DISTRIBUTOR, INC. ------------------------- The date of this Statement of Additional Information is , 1994. 40 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is capital appreciation and, secondarily, income by investing in securities, primarily equities, that management of the Fund believes are undervalued and therefore represent basic investment value. Reference is made to "Investment Objective and Policies" in the Prospectus for a discussion of the investment objective and policies of the Fund. Writing of Covered Call Options. The Fund may from time to time write, i.e., sell, covered call options on its portfolio securities and enter into closing purchase transactions with respect to certain of such options. A call option is considered covered where the writer of the option owns the underlying securities. By writing a covered call option, the Fund, in return for the premium income realized from the sale of the option may give up the opportunity to profit from a price increase in the underlying security above the option exercise price. In addition, the Fund will not be able to sell the underlying security until the option expires, is exercised or the Fund effects a closing purchase transaction as described below. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. If the option expires unexercised, the Fund realizes a gain in the amount of the premium received for the option which may be offset by a decline in the market price of the underlying security during the option period. The use of covered call options is not a primary investment technique of the Fund and such options normally will be written on underlying securities as to which management does not anticipate significant short-term capital appreciation. In its use of options, the Fund's investment adviser has access to personnel of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with extensive experience in options research and strategy. The Fund may not write covered options on underlying securities exceeding 15% of its total assets. All options referred to herein and in the Fund's Prospectus are options issued by The Options Clearing Corporation (the "Clearing Corporation") which are currently traded on the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock Exchange. An option gives the purchaser of the option the right to buy, and obligates the writer (seller) to sell the underlying security at the exercise price during the option period. The option period normally ranges from three to nine months from the date the option is written. For writing an option, the Fund receives a premium, which is the price of such option on the exchange on which it is traded. The exercise price of the option may be below, equal to, or above the current market value of the underlying security at the time the option is written. The writer may terminate his obligation prior to the expiration date of the option by executing a closing purchase transaction which is effected by purchasing on an exchange an option of the same series (i.e., same underlying security, exercise price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing purchase transaction ordinarily will be effected to realize a profit on an outstanding call option, to prevent an underlying security from being called, to permit the sale of the underlying security or to permit the writing of a new call option containing different terms on such underlying security. The cost of such a liquidation purchase plus transaction costs may be greater than the premium received upon the original option, in which event the Fund will have incurred a loss in the transaction. An option may be closed out only on an exchange which provides a secondary market for an option of the same series and there is no assurance that a liquid secondary market on an exchange will exist for any particular option. A covered option writer unable to effect a closing purchase transaction will not be able to sell the underlying security until the option expires or the underlying security is delivered upon exercise, 2 41 with the result that the writer will be subject to the risk of market decline in the underlying security during such period. The Fund will write an option on a particular security only if management believes that a liquid secondary market will exist on an exchange for options of the same series which will permit the Fund to make a closing purchase transaction in order to close out its position. Due to the relatively short time that exchanges have been dealing with options, options involve risks of possible unforeseen events which can be disruptive to the option markets or could result in the institution of certain procedures, including restriction of certain types of orders. Portfolio Turnover. The rate of portfolio turnover is not a limiting factor and, given the Fund's investment policies, it is anticipated that there may be periods when high portfolio turnover will exist. The use of covered call options at times when the underlying securities are appreciating in value may result in higher portfolio turnover. The Fund pays brokerage commissions in connection with writing call options and effecting closing purchase transactions, as well as in connection with purchases and sales of portfolio securities. Although the Fund anticipates that its annual portfolio turnover rates should not exceed 100%, the turnover rate may vary greatly from year to year or during periods within a year. A high rate of portfolio turnover results in correspondingly greater brokerage commission expenses. The portfolio turnover rate is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of all securities with maturities at the time of acquisition of one year or less) by the monthly average value of the securities in the portfolio during the year. The rates of portfolio turnover for the years ended June 30, 1993 and 1994 were 20.85% and 21.79%, respectively. Current Investment Restrictions. In addition to the investment restrictions set forth in the Prospectus, the Fund has adopted the following restrictions and policies relating to the investment of its assets and its activities, which are fundamental policies and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose means the lesser of (a) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (b) more than 50% of the outstanding shares). The Fund may not: 1. Make investments for the purpose of exercising control or management. 2. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. 3. Purchase or sell real estate; provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 4. Purchase or sell commodities or commodity contracts. 5. Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, or make short sales of securities or maintain a short position. 6. Make loans to other persons (except as provided in (7) below); provided that for purposes of this restriction the acquisition of a portion of an issue of bonds, debentures, or other corporate debt securities 3 42 and investment in United States Government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed to be the making of a loan (the acquisition of bonds, debentures or other corporate debt securities which are not publicly distributed is considered to be the making of a loan under the Investment Company Act of 1940 (the "Investment Company Act")). 7. Lend its portfolio securities in excess of 20% of its total assets, taken at market value; provided that such loans shall be made in accordance with the guidelines set forth below. 8. 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 emergency purposes. 9. Mortgage, pledge, hypothecate or in any manner transfer (except as provided in (7) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (8) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value. (The deposit in escrow of underlying securities in connection with the writing of call options is not deemed to be a pledge.) [In order to comply with certain state statutes, the Fund will not, as a matter of operating policy, mortgage, pledge or hypothecate its portfolio securities to the extent that at any time the value of pledged securities plus the maximum sales charge will exceed 10% of the Fund's shares at the maximum offering price.] 10. Invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists or in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if, regarding all such securities, more than 5% of its total assets, taken at market value, would be invested in such securities. 11. Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 12. Write, purchase or sell puts, calls or combinations thereof, except that the Fund may write covered call options with respect to its portfolio securities, and enter into closing purchase transactions with respect to such options, if at the time of the writing of such options not more than 15% of its total assets, taken at market value, would be subject to being purchased upon the exercise of an option. 13. Invest in securities of foreign issuers if at the time of acquisition more than 10% of its total assets, taken at market value, would be invested in such securities. 14. Purchase or sell interests in oil, gas or other mineral exploration or development programs. 15. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. Additional investment restrictions adopted by the Fund, which may be changed by the Board of Directors, provide that the Fund may not: 1. Write call options with respect to underlying securities which are not traded on a national securities exchange. 4 43 2. Invest in warrants if at the time of acquisition more than 2% of its total assets, taken at market value, would be invested in warrants. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. 3. Invest in oil, gas or other mineral leases or in real estate limited partnerships. Lending of Portfolio Securities. Subject to investment restriction (7) above, the Fund may from time to time lend securities from its portfolio to brokers, dealers and financial institutions and receive collateral in cash or securities issued or guaranteed by the United States Government which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Such cash collateral will be invested in short-term securities, which will increase the current income of the Fund. Such loans will be terminable at any time. The Fund will have the right to regain record ownership of loaned securities to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. The Fund may pay reasonable fees to persons unaffiliated with the Fund for services in arranging such loans. Investment in Foreign Issuers. The Fund may invest up to 10% of its total assets, taken at market value, in securities of foreign issuers. Foreign companies may not be subject to uniform accounting and auditing and financial reporting standards or to practices and requirements comparable to those applicable to domestic issuers. Securities of foreign issuers may be less liquid and more volatile than securities of United States issuers. Investment in foreign securities also involves certain risks, including fluctuations in foreign exchange rates, political and economic developments and the possible imposition of exchange controls. Proposed Uniform Investment Restrictions. As discussed in the Prospectus under "Investment Objective and Policies -- Investment Restrictions", the Board of Directors of the Fund has approved the replacement of the Fund's existing investment restrictions with the fundamental and non-fundamental investment restrictions set forth below. These uniform investment restrictions have been proposed for adoption by all of the non-money market mutual funds advised by Fund Asset Management, L.P. (the "Investment Adviser") or its affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The investment objective and policies of the Fund will be unaffected by the adoption of the proposed investment restrictions. Shareholders of the Fund are currently considering whether to approve the proposed revised investment restrictions. If such shareholder approval is obtained, the Fund's current investment restrictions will be replaced by the proposed restrictions, and the Fund's Prospectus and Statement of Additional Information will be supplemented to reflect such change. Under the proposed fundamental investment restrictions, the Fund may not: 1. Make any investment inconsistent with the Fund's classification as a diversified company under the Investment Company Act. 2. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). 5 44 3. Make investments for the purpose of exercising control or management. 4. Purchase or sell real estate, except that the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. 6. Issue senior securities to the extent such issuance would violate applicable law. 7. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in its Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 8. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act of 1933 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. Under the proposed non-fundamental investment restrictions, the Fund may not: a. Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors of the Fund has otherwise determined to be liquid pursuant to applicable law. 6 45 d. Invest in warrants if, at the time of acquisition, its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Fund's total assets; included within such limitation, but not to exceed 2% of the Fund's total assets, are warrants which are not listed on the New York Stock Exchange or American Stock Exchange or a major foreign exchange. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. e. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of the Fund's total assets would be invested in such securities. This restriction shall not apply to mortgage-backed securities, asset-backed securities or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. f. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, the officers and general partner of the Investment Adviser, the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one percent of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. g. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or development programs, except that the Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. h. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. --------------------- Because of the affiliation of Merrill Lynch with the Fund, the Fund is prohibited from engaging in certain transactions involving Merrill Lynch except pursuant to a permissive order or otherwise in compliance with the provisions of the Investment Company Act and the rules and regulations thereunder. Included among such restricted transactions are purchases from or sales to Merrill Lynch of securities in transactions in which it acts as principal and purchases of securities from underwriting syndicates of which Merrill Lynch is a member. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS The Directors and executive officers of the Fund and their principal occupations for at least the last five years are set forth below. Unless otherwise noted, the address of each executive officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011. ARTHUR ZEIKEL -- President and Director(1)(2) -- President and Chief Investment Officer of the Investment Adviser since 1977; President of MLAM since 1977 and Chief Investment Officer since 1976; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Executive Vice President of Merrill Lynch since 1990 and Senior Vice President thereof from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor"). 7 46 DONALD CECIL -- Director(2) -- 1114 Avenue of the Americas, New York, New York 10036. Special Limited Partner of Cumberland Partners (an investment partnership) since 1982; General Partner of Cumberland Associates (an asset management company) from 1970 to 1982; Member of Institute of Chartered Financial Analysts; Member and Chairman of Westchester County (N.Y.) Board of Transportation. M. COLYER CRUM -- Director(2) -- Soldiers Field Road, Boston, Massachusetts 02163. James R Williston Professor of Investment Management, Harvard Business School, since 1971; Director of Cambridge Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada. EDWARD H. MEYER -- Director(2) -- 777 Third Avenue, New York, New York 10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer since 1970 and Chairman of the Board of Directors since 1972; Director of The May Department Stores Company, Bowne & Co., Inc., Harman International Industries, Inc. and Ethan Allen Interiors, Inc. JACK B. SUNDERLAND -- Director(2) -- P.O. Box 1177, Scarsdale, New York 10583. President and Director of American Independent Oil Company, Inc. (an energy company) since 1987; Chairman of Murexco Petroleum, Inc. (an energy company) from 1981 to 1988; Member of Council on Foreign Relations since 1971; President, Director and Chief Executive Officer of Coroil, Inc. (an energy company) from 1979 to 1985. J. THOMAS TOUCHTON -- Director(2) -- Suite 3405, One Tampa City Center, Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and its predecessor The Witt Co. (a private investment partnership) since 1972; Trustee Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an electric utility holding company). TERRY K. GLENN -- Executive Vice President(1)(2) -- Executive Vice President of the Investment Adviser and MLAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President and Director of the Distributor since 1986. NORMAN R. HARVEY -- Senior Vice President(1)(2) -- Senior Vice President of the Investment Adviser and MLAM since 1982; Senior Vice President of Princeton Services since 1993. PAUL M. HOFFMANN -- Vice President(1) -- Vice President of MLAM since 1976. DONALD C. BURKE -- Vice President(1)(2) -- Vice President and Director of Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche LLP from 1981 to 1990. GERALD M. RICHARD -- Treasurer(1)(2) -- Senior Vice President and Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of the Distributor since 1984 and Vice President of the Distributor since 1981. MARK B. GOLDFUS -- Secretary(1)(2) -- Vice President of MLAM and the Investment Adviser since 1985. - --------------- (1) Interested person, as defined in the Investment Company Act, of the Fund. (2) Such Director or officer is a director or officer of certain other investment companies for which the Investment Adviser or MLAM acts as investment adviser. 8 47 At July 31, 1994, the Directors and officers of the Fund as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of the Fund. At that date, Mr. Zeikel, a Director of the Fund, and the officers of the Fund owned less than 1% of the outstanding Common Stock of ML & Co. Pursuant to the terms of the Fund's investment advisory agreement with the Investment Adviser (the "Investment Advisory Agreement"), the Investment Adviser pays all compensation of officers and employees of the Fund as well as the fees of all Directors of the Fund who are affiliated persons of ML & Co. or its subsidiaries. Each unaffiliated Director is paid an annual fee for serving as a Director plus a fee for each meeting of the Board attended. The Fund also pays each member of the Audit and Nominating Committee, which consists of the unaffiliated Directors, an annual fee. The Fund reimburses each Director for his out-of-pocket expenses relating to attendance at Board and Committee meetings. In addition, the Chairman of the Committee receives an annual fee for serving as Chairman of the Committee. Fees and expenses paid to the unaffiliated Directors aggregated $41,369 for the year ended June 30, 1994. MANAGEMENT AND ADVISORY ARRANGEMENTS Reference is made to "Management of the Fund -- Management and Advisory Arrangements" in the Prospectus for certain information concerning the management and advisory arrangements of the Fund. The Investment Advisory Agreement provides that, subject to the direction of the Board of Directors of the Fund, the Investment Adviser is responsible for the actual management of the Fund's portfolio and for the review of the Fund's holdings in light of its own research analysis and analyses from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser, subject to review by the Board of Directors. The Investment Adviser supplies the portfolio managers for the Fund who consider analyses from various sources, make the necessary investment decisions and place transactions accordingly. The Investment Adviser also is obligated to perform certain administrative and management services for the Fund and is required to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Investment Advisory Agreement. Securities held by the Fund also may be held by or be appropriate investments for other funds for which the Investment Adviser or MLAM acts as an adviser or by investment advisory clients of MLAM. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other funds for which the Investment Adviser or MLAM acts as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or MLAM 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 compensation for its services to the Fund the Investment Adviser receives from the Fund at the end of each month a fee based on the average daily value of the Fund's net assets at the annual rates of: 0.60% of the portion of average net assets not exceeding $100 million; 0.50% of the portion of average net assets exceeding $100 million but not exceeding $200 million; and 0.40% of the portion of average net assets exceeding $200 million. The State of California imposes limitations on the expenses of the Fund. At the date of this Statement of Additional Information, these annual expense limitations require that the Investment Adviser 9 48 reimburse the Fund in any amount necessary to prevent the Fund's aggregate ordinary operating expenses (excluding interest, taxes, brokerage fees and commissions, distribution fees and extraordinary charges such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of the remaining average daily net assets. The Investment Adviser's obligation to reimburse the Fund is limited to the amount of the investment advisory fee. No payment will be made to the Investment Adviser during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation at the time of such payment. For the years ended June 30, 1992, 1993 and 1994 the total advisory fees paid by the Fund to the Investment Adviser aggregated $10,456,562, $12,004,310 and $15,452,148, respectively. For such years, the Investment Adviser was not required to reimburse the Fund pursuant to the applicable expense limitation provisions. The Investment Advisory Agreement obligates the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including, among other things, taxes; expenses for legal and auditing services; costs of printing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information (except to the extent paid by the Distributor); charges of the custodian and the transfer agent; expenses of redemption of shares; Securities and Exchange Commission fees; expenses of registering the shares under Federal and state securities laws; fees and expenses of unaffiliated Directors; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Accounting services are provided for the Fund by the Investment Adviser and the Fund reimburses the Investment Adviser for its costs in connection with such services. As required by the Distribution Agreements, the Distributor will pay certain of the expenses of the Fund incurred in connection with the offering of its shares, including the expenses of printing the prospectuses and statements of additional information used in connection with the continuous offering of shares by the Fund. See "Purchase of Shares -- Distribution Plans". The Investment Adviser is a limited partnership, the partners of which are ML & Co., Fund Asset Management, Inc. and Princeton Services. Duration and Termination. Unless earlier terminated as described herein, the Investment Advisory Agreement will remain in effect from year to year if approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract is not assignable and may be terminated without penalty on 60 days' written notice at the option of either party or by the vote of the shareholders of the Fund. PURCHASE OF SHARES Reference is made to "Purchase of Shares" in the Prospectus for certain information as to the purchase of Fund shares. The Fund issues four classes of shares under the Merrill Lynch Select Pricing System: shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B and 10 49 Class C are sold to investors choosing the deferred sales charge alternatives. Each Class A, Class B, Class C and Class D share of the Fund represents identical interests in the investment portfolio of the Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid. Each class has different exchange privileges. See "Shareholder Services -- Exchange Privilege". The Merrill Lynch Select Pricing System is used by more than 50 mutual funds advised by MLAM or its affiliate, the Investment Adviser. Funds advised by MLAM or the Investment Adviser are referred to herein as "MLAM-advised mutual funds". The Fund has entered into separate distribution agreements with the Distributor in connection with the continuous offering of each class of shares of the Fund (the "Distribution Agreements"). The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreements are subject to the same renewal requirements and termination provisions as the Investment Advisory Agreement described above. INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES The gross sales charges for the sale of Class A shares for the year ended June 30, 1992 were $3,154,165, of which the Distributor received $168,989 and Merrill Lynch received $2,985,176. The gross sales charges for the sale of Class A shares for the year ended June 30, 1993 were $2,799,895, of which the Distributor received $149,552 and Merrill Lynch received $2,650,343. The gross sales charges for the sale of Class A shares for the year ended June 30, 1994 were $3,755,602, of which the Distributor received $216,022 and Merrill Lynch received $3,539,580. The term "purchase", as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual, or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his spouse and their children under the age of 21 years purchasing shares for his or their own 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 a "company", as that term is defined in the Investment Company Act, but does not include purchases by any such company which has not been in existence for at least six months or which has no 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. Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-advised mutual funds (the "Eligible Class A Shares") are offered at net asset value to shareholders of certain closed-end 11 50 funds advised by MLAM or the Investment Adviser who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in Eligible Class A Shares, if the conditions set forth below are satisfied. First, the sale of the closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A Shares. Second, the closed-end fund shares must have been either acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Class A shares of the Fund are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale of certain of their shares of common stock of Senior Floating Rate Fund in shares of the Fund. In order to exercise this investment option, Senior Floating Rate Fund shareholders must sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a tender offer conducted by the Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund. This investment option is available only with respect to the proceeds of Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing to exercise this investment option will be accepted only on the day that the related Senior Floating Rate Fund tender offer terminates and will be effected at the net asset value of the Fund at such day. REDUCED INITIAL SALES CHARGES Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of shares of the Fund and of other MLAM-advised mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intention. Reduced sales charges are applicable to purchases aggregating $25,000 or more of Class A or Class D shares of the Fund or any other MLAM-advised mutual funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intention in the form provided in the Prospectus. The Letter of Intention is available only to investors whose accounts are maintained at the Fund's transfer agent. The Letter of Intention is not available to employee benefit plans for which Merrill Lynch provides plan participant record-keeping services. The Letter of Intention is not a binding obligation to purchase any amount of Class A or Class D shares, however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent Letter of Intention executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Fund and of other MLAM-advised mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intention, may be included as a 12 51 credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intention (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to five percent of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right for accumulation, the purchaser will be entitled on that purchase and subsequent purchases to that further reduced percentage sales charge but there will be no retroactive reduction of the sales charges on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intention will be deducted from the total purchases made under such Letter. An exchange from Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Treasury Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch Institutional Tax-Exempt Fund or Merrill Lynch U.S.A. Government Reserves into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intention from the Fund. Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). The Blueprint program is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions, trade associations and benefit plans. Investors placing orders to purchase Class D shares of the Fund through Blueprint will acquire the 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 %, from $300.01 to $5,000 at % and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class D shares of the Fund are being offered at net asset value plus a sales charge of 1/2 of 1% for corporate or group IRA programs placing orders to purchase their Class D shares through Blueprint. Services, including the exchange privilege, available to Class D investors through Blueprint, however, may differ from those available to other investors in Class D shares. Class D shares are offered at net asset value, with a waiver of the front-end sales charge, to Blueprint participants through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian rollover assets from Eligible Retirement Plans (as defined below) whose Trustee and/or Plan Sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service Agreement. Eligible Retirement Plans include (a) plans qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), with a salary reduction feature offering a menu of investments to plan participants, provided such plan initially has 1,000 or more employees eligible to participate in the plan (employees eligible to participate in retirement plans of the same sponsoring employer or its affiliates may be aggregated); or (b) tax qualified retirement plans within the meaning of Section 401(a) of the Code or deferred compensation plans, within the meaning of Section 403(b) or Section 457 of the Code, provided the plan (i) initially invested $5 million or more in existing plan assets in portfolios, mutual funds or trusts advised by the Investment Adviser or MLAM or (ii) has accumulated $5 million or more in existing plan assets invested in MLAM-advised mutual funds (assets of retirement plans with the same sponsor or an affiliated sponsor may be aggregated). 13 52 Orders for purchases and redemptions of Class D shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services at net asset value plus a reduced sales charge of 0.50% of the offering price, which is 0.50% of the net amount invested. Employer Sponsored Retirement and Savings Plans. Class A shares are offered at net asset value to employer sponsored retirement or savings plans, such as tax qualified retirement plans within the meaning of Section 401(a) of the Code, deferred compensation plans within the meaning of Section 403(b) and 457 of the Code, other deferred compensation arrangements, VEBA plans, and non-qualified After Tax Savings and Investment programs, maintained on the Merrill Lynch Group Employee Services system, herein referred to as "Employer Sponsored Retirement or Savings Plans", provided the plan has $5 million or more in existing plan assets initially invested in portfolios, mutual funds or trusts advised by the Investment Adviser either directly or through an affiliate. Class A shares are being offered at net asset value to Employer Sponsored Retirement or Savings Plans, provided the plan has accumulated $5 million or more in existing plan assets invested in MLAM-advised mutual funds. Assets of Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated. The Class A share reduced load breakpoints also apply to these aggregated assets. Class A shares may be offered at net asset value to multiple plans sponsored by the same sponsor or an affiliated sponsor provided that the addition of one or more of the multiple plans results in aggregate assets of $5 million or more invested in portfolios, mutual funds or trusts advised by the Investment Adviser either directly or through an affiliate. Employer Sponsored Retirement or Savings Plans are also offered Class A shares at net asset value, provided such plan initially has 1,000 or more employees eligible to participate in the plan. Employees eligible to participate in Employer Sponsored Retirement or Savings Plans of the same sponsoring employer or its affiliates may be aggregated. Tax qualified retirement plans within the meaning of Section 401(a) of the Code meeting any of the foregoing requirements and which are provided specialized services (e.g., plans whose participants may direct on a daily basis their plan allocations among a wide range of investments including individual corporate equities and other securities in addition to mutual fund shares) by Blueprint, are offered Class A shares at a price equal to net asset value per share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement or Savings Plan which does not meet the above described qualifications to purchase Class A shares at net asset value has the option of (i) purchasing Class A shares at the initial sales charge schedule disclosed in the Prospectus if it is otherwise eligible to purchase Class A shares, (ii) if the Employer Sponsored Retirement or Savings Plan is a qualified retirement plan and meets the specified requirements, then it may purchase Class B shares with a waiver of the CDSC upon redemption, or (iii) it may purchase Class C or Class D shares at the initial sales charge or CDSC schedule disclosed in the Prospectus. The minimum initial and subsequent purchase requirements are waived in connection with all the above referenced Employer Sponsored Retirement or Savings Plans. 14 53 Purchase Privilege of Certain Persons. Directors of the Fund, members of the Boards of other MLAM-advised investment companies, directors and employees of ML & Co. and its subsidiaries, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. Class D shares of the Fund will be offered at net asset value, without sales charge, to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied. First, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the financial consultant's previous firm and imposed a sales charge either at the time of purchase or on a deferred basis. Second, such redemption must have been made within 60 days prior to the investment in the Fund, and the proceeds from the redemption must have 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 sales charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("notice"), if the following conditions are satisfied: First, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and such fund imposed a sales charge either at the time of purchase or on a deferred basis. Second, such purchase of Class D shares must be made within 90 days after such notice. Acquisition of Certain Investment Companies. The public offering price of Class D shares may be reduced to the net asset value per Class D share in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. The value of the assets or company acquired in a tax-free transaction may be adjusted in appropriate cases to reduce possible adverse consequences to the Fund which might result from an acquisition of assets having net unrealized appreciation which is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of the Fund. 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. DISTRIBUTION PLANS Reference is made to "Purchase of Shares -- Distribution Plans" in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. Payments of the account maintenance fees and/or distribution fees are subject to the provisions of Rule 12b-1 under the Investment Company Act. Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance fees and/or distribution fees paid to the Distributor. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and its related class of shareholder. Each Distribution Plan further provides 15 54 that, so long as the Distribution Plan remains in effect, the selection and nomination of Directors who are not "interested persons" of the Fund, as defined in the Investment Company Act (the "Independent Directors"), shall be committed to the discretion of the Independent Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the Independent Directors concluded that there is a reasonable likelihood that such Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the Independent Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholder, and all material amendments are required to be approved by the vote of the Directors, including a majority of the Independent Directors who have no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of each Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place. LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("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. 16 55 The following table sets forth comparative information as of June 30, 1994 with respect to the Class B shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and the Distributor's voluntary maximum for the period October 21, 1988 (commencement of the public issuance of Class B shares) to June 30, 1994. Since Class C shares of the Fund had not been publicly issued prior to the date of this Statement of Additional Information, information concerning Class C shares is not yet provided below.
DATA CALCULATED AS OF JUNE 30, 1994 --------------------------------------------------------------------------------------------------------- ANNUAL DISTRIBUTION ALLOWABLE AMOUNTS FEE AT AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY PAID AGGREGATE CURRENT NET ELIGIBLE GROSS SALES UNPAID AMOUNT TO UNPAID ASSET SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) -------------- ------------ ----------- ------------ --------------- ----------- ------------ Under NASD Rule as Adopted............. $1,859,333,763 $116,208,360 $24,268,326 $140,476,686 $51,114,168 $89,362,518 $13,085,281 Under Distributor's Voluntary Waiver.... $1,859,333,763 $116,208,360 $ 9,296,669 $125,505,029 $51,114,168 $74,390,862 $13,085,281
- --------------- (1) Purchase price of all eligible Class B shares sold since October 21, 1988 (commencement of Class B operations) other than shares acquired through dividend reinvestment and the exchange privilege. (2) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0% as permitted under the NASD Rule. (3) Consists of CDSC payments, distribution fee payments and accruals. Of the distribution fee payments made prior to July 6, 1993 under a prior plan at the 1.0% rate, 0.75% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. See "Purchase of Shares-Distribution Plans" in the Prospectus. (4) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum or the NASD maximum. REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption and repurchase of Fund shares. The right to redeem shares or to receive payment with respect to any such redemption may be suspended only for any period during which trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Securities and Exchange 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 Securities and Exchange Commission may by order permit for the protection of shareholders of the Fund. 17 56 Shares are redeemable at the option of the Fund if, in the opinion of the Fund, ownership of the shares has or may become concentrated to an extent which would cause the Fund to be deemed a personal holding company within the meaning of the Code. DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES As discussed in the Prospectus under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed within four years of purchase or Class C shares redeemed within one year of purchase are subject to a CDSC under most circumstances, the charge is waived on redemptions of Class B or Class C shares in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability of a Class B or Class C shareholder. Redemptions for which the waiver applies are: (a) any partial or complete redemption in connection with a distribution following retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other retirement plan, or any redemption resulting from the tax-free return of an excess contribution to an IRA; or (b) any partial or complete redemption following the death or disability (as defined in the Code) of a Class B or Class C shareholder (including one who owns the Class B or Class C shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the fiscal years ended June 30, 1992, 1993 and 1994, the Distributor received CDSCs of $2,487,122, $1,529,410 and $1,189,344, respectively, all of which was paid to Merrill Lynch. Merrill Lynch BlueprintSM Program. Class B and Class C 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 and Class C 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 and Class C investors through Blueprint, however, may differ from those available to other Class B and Class C investors. Orders for purchases and redemptions of Class B and Class C shares of the Fund will be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of a Blueprint automatic investment plan. Additional information concerning these Blueprint programs, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. Retirement Plans. Any Retirement Plan which does not meet the qualifications to purchase Class A or Class D shares at net asset value has the option of purchasing Class A or Class D shares at the sales charge schedule disclosed in the Prospectus, or if the Retirement Plan meets the following requirements, then it may purchase Class B or Class C shares with a waiver of the CDSC upon redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B or Class C shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under Section 401(k) of the Code with a salary reduction feature offering a menu of investments to plan participants. The CDSC is also waived for redemptions from a 401(a) plan qualified under the Code, provided, however, that each such plan has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan purchasing Class B or Class C shares of MLAM-advised mutual funds ("Eligible 18 57 401(a) Plan"). The CDSC is waived for any Class B or Class C shares which are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and 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 and Class C CDSCs also are waived for any Class B or Class C shares which are purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in such account at the time of redemption. The minimum initial and subsequent purchase requirements are waived in connection with all the above-referenced Retirement Plans. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to policies established by the Board of Directors of the Fund, the Investment Adviser is responsible for the Fund's portfolio decisions and the placing of the Fund's portfolio transactions. With respect to such transactions, the Investment Adviser seeks to obtain the best net results for the Fund taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund will not necessarily be paying the lowest commission or spread available. Transactions with respect to the securities of small and emerging growth companies in which the Fund may invest may involve specialized services on the part of the broker or dealer and thereby entail higher commissions or spreads than would be the case with transactions involving more widely traded securities of more established companies. The Fund has no obligation to deal with any broker in the execution of transactions for its portfolio securities. In addition, consistent with the Rules of Fair Practice of the NASD and policies established by the Directors of the Fund, the Investment Adviser may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund. For the fiscal year ended June 30, 1992, the Fund paid total brokerage commissions of $1,890,396 of which $160,194 or 8.47% was paid to Merrill Lynch for effecting 9.50% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. For the fiscal year ended June 30, 1993, the Fund paid total brokerage commissions of $2,113,701 of which $71,016 or 3.36% was paid to Merrill Lynch for effecting 3.96% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. For the fiscal year ended June 30, 1994, the Fund paid total brokerage commissions of $2,617,266 of which $109,200 or 4.17% was paid to Merrill Lynch for effecting 4.42% of the aggregate dollar amount of transactions in which the Fund paid brokerage commissions. The Fund has been informed by Merrill Lynch that it will in no way, at any time, attempt to influence or control the placing by the Investment Adviser or by the Fund of orders for brokerage transactions. Brokers and dealers, including Merrill Lynch, who provide supplemental investment research (such as securities and economic research and market forecasts) to the Investment Adviser may receive orders for transactions by the Fund. Information so received is in addition to and not in lieu of the services required to be performed by the Investment Adviser under the Investment Advisory Agreement with the Fund, and the expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. Supplemental investment research received by the Investment Adviser may also be used in connection with other investment advisory accounts of the Investment Adviser and its affiliates. Whether or not a particular broker-dealer sells shares of the Fund neither qualifies nor disqualifies such broker-dealer to execute transactions for the Fund. 19 58 The Fund also may invest in securities traded in the over-the-counter market. Transactions in the over-the-counter market generally are principal transactions with dealers and the costs of such transactions involve dealer spreads rather than brokerage commissions. With respect to the over-the-counter transactions the Fund, where possible, will deal directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund are prohibited from dealing with the Fund as a principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Securities and Exchange Commission. Since transactions in the over-the-counter market usually involve transactions with dealers acting as principal for their own account, affiliated persons of the Fund, including Merrill Lynch, may not serve as the Fund's dealer in connection with such transactions. See "Investment Objective and Policies--Current Investment Restrictions". However, an affiliated person of the Fund may serve as its broker in the over-the-counter transactions conducted on an agency basis. The Board of Directors of the Fund has considered the possibilities of seeking to recapture for the benefit of the Fund brokerage commissions, dealer spreads and other expenses of possible portfolio transactions, such as underwriting commissions and tender offer solicitation fees, by conducting such portfolio transactions through affiliated entities, including Merrill Lynch. For example, brokerage commissions received by Merrill Lynch could be offset against the advisory fee payable by the Fund to the Investment Adviser. After considering all factors deemed relevant, the Board made a determination not to seek such recapture. The Board will reconsider this matter from time to time. The Investment Adviser has arranged for the Fund's custodian to receive any tender offer solicitation fees on behalf of the Fund payable with respect to portfolio securities of the Fund. Section 11(a) of the Securities Exchange Act of 1934, as amended, generally prohibits members of the U.S. national securities exchanges from executing exchange transactions for their affiliates and institutional accounts which they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with a statement setting forth the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Securities and Exchange Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Fund and annual statements as to aggregate compensation will be provided to the Fund. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of the Fund is determined once daily Monday through Friday as of 4:15 P.M., New York time, on each day during which the New York Stock Exchange is open for trading. The New York Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The Fund also will determine its net asset value on any day in which there is sufficient trading in its portfolio securities that the net asset value might be affected materially, but only if on any such day the Fund is required to sell or redeem shares. The net asset value per share is computed by dividing the sum of the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including 20 59 accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees and any account maintenance and/or distribution fees, are accrued daily. The per share net asset value of the Class B, Class C and Class D shares generally will be lower than the per share net asset value of the Class A shares reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares and the daily expense accruals of the account maintenance fees applicable with respect to the Class D shares. It is expected, however, that the per share net asset value of the four classes will tend to converge immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differential between the classes. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued, or, lacking any sales, at the mean between closing bid and asked prices. Securities traded in the over-the-counter market are valued at the most recent bid prices as obtained from one or more dealers that make markets in the securities. Securities traded in the NASDAQ National Market System are valued at the last sale price on the day the securities are being valued, or lacking any sales, at the closing bid price. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. Option Accounting Principles. When the Fund sells an option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a deferred credit. The amount of such liability will be subsequently marked-to-market to reflect the current market value of the option written. If current market value exceeds the premium received there is an unrealized loss; conversely, if the premium exceeds current market value there is an unrealized gain. The current market value of a traded option is the last sale price or, in the absence of a sale, the last offering price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchase transaction, the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option will be extinguished. If an option is exercised, the Fund will realize a gain or loss from the sale of the underlying security and the proceeds of sale are increased by the premium originally received. SHAREHOLDER SERVICES The Fund offers a number of shareholder services described below which are designed to facilitate investment in its shares. Full details as to each of such services can be obtained from the Fund, the Distributor or Merrill Lynch. INVESTMENT ACCOUNT Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive monthly statements from the Transfer Agent showing any reinvestments of dividends and capital gains distributions activity in the account since the previous statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than reinvestment of dividends and capital gains 21 60 distributions. A shareholder may make additions to his Investment Account at any time by mailing a check directly to the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of the 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. AUTOMATIC INVESTMENT PLAN 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 as described in the Prospectus) or Class B, Class C or Class D shares at the applicable public offering price either through the shareholder's securities dealer, or by mail directly to the transfer agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Automatic Investment Plan whereby the Fund is authorized through pre-authorized checks or automated clearing house debits of $50 or more to charge the regular bank account of the shareholder on a regular basis to provide systematic additions to the Investment Account of such shareholder. For investors who buy shares of the Fund through Blueprint no minimum charge to the investor's bank account is required. Investors who maintain CMA(R) accounts may arrange to have periodic investments made in the Fund in their CMA accounts or in certain related accounts in amounts of $100 or more through the CMA Automatic Investment Program. The Automatic Investment Program is not available to shareholders whose shares are held in a brokerage account with Merrill Lynch other than a CMA(R) account. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS Unless specific instructions are given as to the method of payment of dividends and capital gains distributions, dividends and distributions will be reinvested automatically in additional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund as of the close of business on the ex-dividend date of the dividend or distribution. Shareholders may elect in writing to receive either their dividends or capital gains distributions, or both, in cash, in which event payment will be mailed on or about the payment date. Shareholders may, at any time, notify the Transfer Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to have their dividends and/or capital gains distributions reinvested in shares of the Fund or vice versa and, commencing ten days after receipt by the Transfer Agent of such notice, those instructions will be effected. SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES A Class A or Class D shareholder may elect to make systematic withdrawals from an Investment Account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Class A or Class D shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with Class A or Class D shares with such a value of $10,000 or more. At the time of each withdrawal payment, sufficient Class A or Class D shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify either a dollar amount or a percentage of the value of his Class A or Class D shares. 22 61 Redemptions will be made at net asset value as determined at the close of business on the New York Stock Exchange (currently 4:00 P.M., New York City time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the New York Stock Exchange is not open for business on such date, the Class A or Class D shares will be redeemed at the close of business on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit of the withdrawal payment will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all Class A or Class D shares in the Investment Account are reinvested automatically in Class A or Class D shares of the Fund, respectively. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Fund's transfer agent or the Distributor. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional Class A or Class D shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for Class A or Class D shares of the Fund from investors who maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. A Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the Systematic Redemption Program. The minimum fixed dollar amount redeemable is $25. The proceeds of systematic redemptions will be posted to a shareholder's account five business days after the date the shares are redeemed. Monthly systematic redemptions will be made at net asset value on the first Monday of each month, bimonthly systematic redemptions will be made at net asset value on the first Monday of every other month, and quarterly, semiannual or annual redemptions are made at net asset value on the first Monday of months selected at the shareholder's option. If the first Monday of the month is a holiday, the redemption will be processed at net asset value on the next business day. The Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch financial consultant. RETIREMENT PLANS Self-directed individual retirement accounts and other retirement plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. Merrill Lynch charges an initial establishment fee and an annual custodial fee for each account. Information with respect to these plans is available on request from Merrill Lynch. The minimum initial purchase to establish any such plan is $100, and the minimum subsequent purchase is $1. Capital gains and income received in each of the plans referred to above are exempt from Federal taxation until distributed from the plan. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. 23 62 EXCHANGE PRIVILEGE Shareholders of each class of shares of the Fund have an exchange privilege with certain other MLAM-advised mutual funds listed below. Under the Select Pricing System, Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the second fund in his account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second MLAM-advised mutual fund, but does not hold Class A shares of the second fund in his account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class B, Class C and Class D shares will be exchangeable with shares of the same class of other MLAM-advised mutual funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is "tacked" to the holding period of the newly acquired shares of the other Fund as more fully described below. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated below as available for exchange by holders of Class A, Class B, Class C or Class D shares. 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 15 days. Certain funds into which exchanges may be made may impose a redemption fee (not in excess of 2.00% of the amount redeemed) on shares purchased through the exchange privilege when such shares are subsequently redeemed, including redemption through subsequent exchanges. Such redemption fee would be in addition to any CDSC otherwise applicable to a redemption of such shares. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. Exchanges of Class A or Class D shares outstanding ("outstanding Class A or Class D shares") for Class A or Class D shares of another MLAM-advised mutual fund ("new Class A or Class D shares") are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charge paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A and 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 of the Fund generally may be exchanged into the Class A or Class D shares of the other funds or into shares of the Class A and Class D money market funds with a reduced or without a sales charge. In addition, each of the funds with Class B and Class C shares outstanding offers to exchange its Class B or Class C shares ("new Class B or Class C shares") for Class B or Class C shares, respectively, ("outstanding Class B or Class C shares") of another MLAM-advised mutual fund on the basis of relative net 24 63 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 sales charge that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for two and a half years. The 2% sales charge that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of Special Value Fund and receive cash. There will be no CDSC due on this redemption, since by "tacking" the two and a half year holding period of Fund Class B shares to the three year holding period for the Special Value Fund Class B shares, the investor will be deemed to have held the new Class B shares for more than five years. Shareholders also may exchange shares of the Fund into shares of a money market fund advised by the Investment Adviser or its affiliates, but the period of time that Class B or Class C shares are held in a money market fund will not count towards satisfaction of the holding period requirement for purposes of reducing the CDSC or with respect to Class B shares, towards satisfaction of the conversion period. However, shares of a money market fund which were acquired as a result of an exchange for Class B or Class C shares of the Fund may, in turn, be exchanged back into Class B or Class C shares, respectively, of any fund offering such shares, in which event the holding period for Class B or Class C shares of the fund will be aggregated with previous holding periods for purposes of reducing the CDSC. Thus, for example, an investor may exchange Class B shares of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the Fund Class B shares for two and a half years and three years later decide to redeem the shares of Institutional Fund for cash. At the time of this redemption, the 2% CDSC that would have been due had the Class B shares of the Fund been redeemed for cash rather than exchanged for shares of Institutional Fund will be payable. If instead of such redemption the shareholder exchanged such shares for Class B shares of a fund which the shareholder continued to hold for an additional two and a half years, any subsequent redemption will not incur a CDSC. Set forth below is a description of the investment objectives of the other funds into which exchanges can be made: Funds issuing Class A, Class B, Class C and Class D Shares: MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. High current income, consistent with a policy of limiting the degree of fluctuation in net asset value of fund shares resulting from movements in interest rates, through investment primarily in a portfolio of adjustable rate securities. 25 64 MERRILL LYNCH AMERICAS INCOME FUND, INC. A high level of current income, consistent with prudent investment risk, by investing primarily in debt securities denominated in a currency of a country located in the Western Hemisphere (i.e., North and South America and the surrounding waters). MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management through investment in a portfolio primarily of intermediate-term investment grade Arizona Municipal Bonds. MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management. MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Arkansas income taxes as is consistent with prudent investment management. MERRILL LYNCH BALANCED FUND FOR INVESTMENT AND RETIREMENT As high a level of total investment return as is consistent with a relatively low level of risk through investment in common stock and other types of securities, including fixed income securities and convertible securities. MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND A portfolio of Merrill Lynch California Municipal Series Trust, a series fund, whose objective is to provide shareholders with as high a level of income exempt from Federal and California income taxes as is consistent with prudent investment management through investment in a portfolio primarily of insured California Municipal Bonds. MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide shareholders with as high a level of income exempt from Federal 26 65 and California income taxes as is consistent with prudent investment management through investment in a portfolio primarily of intermediate-term investment grade California Municipal Bonds. MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND A portfolio of Merrill Lynch California Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and California income taxes as is consistent with prudent investment management. MERRILL LYNCH CAPITAL FUND, INC. The highest total investment return consistent with prudent risk through a fully managed investment policy utilizing equity, debt and convertible securities. MERRILL LYNCH COLORADO MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Colorado income taxes as is consistent with prudent investment management. MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Connecticut income taxes as is consistent with prudent investment management. MERRILL LYNCH CORPORATE BOND FUND, INC. Current income from three separate diversified portfolios of fixed income securities. MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. Long-term appreciation through investment in securities, principally equities, of issuers in countries having smaller capital markets. MERRILL LYNCH DRAGON FUND, INC. Capital appreciation primarily through investment in equity and debt securities domiciled in developing countries located in Asia and the Pacific Basin. MERRILL LYNCH EUROFUND Capital appreciation primarily through investment in equity securities of corporations domiciled in Western Europe. MERRILL LYNCH FEDERAL SECURITIES TRUST High current return through investments in U.S. Government and Government agency securities, including GNMA mortgage- 27 66 backed certificates and other mortgage-backed Government securities. MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal income taxes as is consistent with prudent investment management while serving to offer shareholders the opportunity to own securities exempt from Florida intangible personal property taxes through investment in a portfolio primarily of intermediate-term investment grade Florida Municipal Bonds. MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal income taxes as is consistent with prudent investment management while seeking to offer shareholders the opportunity to own securities exempt from Florida intangible personal property taxes. MERRILL LYNCH FUND FOR TOMORROW, INC. Long-term growth through investment in a portfolio of good quality securities, primarily common stock, potentially positioned to benefit from demographic and cultural changes as they affect consumer markets. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. Long-term growth of capital through investment in a diversified portfolio of equity securities placing particular emphasis on companies that have exhibited an above-average growth rate in earnings. MERRILL LYNCH GLOBAL ALLOCATION FUND, INC. High total investment return, consistent with prudent risk, through a fully managed investment policy utilizing United States and foreign equity, debt and money market securities, the combination of which will be varied from time to time both with respect to types of securities and markets in response to changing market and economic trends. MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT High total investment return from investment in government and corporate bonds denominated in various currencies and multinational currency units. 28 67 MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. High total return from investment primarily in an internationally diversified portfolio of convertible debt securities, convertible preferred stock and "synthetic" convertible securities consisting of a combination of debt securities or preferred stock and warrants or options. MERRILL LYNCH GLOBAL HOLDINGS (residents of Arizona must meet investor suitability standards).................. The highest total investment return consistent with prudent risk through worldwide investment in an internationally diversified portfolio of securities. MERRILL LYNCH GLOBAL RESOURCES TRUST Long-term growth and protection of capital from investment in securities of foreign and domestic companies that possess substantial natural resource assets. MERRILL LYNCH GLOBAL SMALLCAP FUND, INC. Long-term growth of capital by investing primarily in equity securities of companies with relatively small market capitalizations located in various foreign countries and in the United States. MERRILL LYNCH GLOBAL UTILITY FUND, INC. Capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. MERRILL LYNCH GROWTH FUND FOR INVESTMENT AND RETIREMENT Growth of capital and, secondarily, income from investment in a diversified portfolio of equity securities placing a principal emphasis on those securities which management of the Fund believes to be undervalued. MERRILL LYNCH HEALTHCARE FUND, INC. (residents of Wisconsin must meet investor suitability standards)...... Capital appreciation through worldwide investment in equity securities of companies that derive or are expected to derive a substantial portion of their sales from products and services in healthcare (residents of Wisconsin must meet investor suitability standards). 29 68 MERRILL LYNCH INTERNATIONAL EQUITY FUND Capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. MERRILL LYNCH LATIN AMERICA FUND, INC. Capital appreciation by investing primarily in Latin American equity and debt securities. MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Maryland income taxes as is consistent with prudent investment management. MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Massachusetts income taxes as is consistent with prudent investment management through investment in a portfolio primarily of intermediate-term investment grade Massachusetts Municipal Bonds. MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Massachusetts income taxes as is consistent with prudent investment management. MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND, INC. A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Michigan income taxes as is consistent with prudent investment management through investment in a portfolio primarily of intermediate-term investment grade Michigan Municipal Bonds. MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Michigan income taxes as is consistent with prudent investment management. 30 69 MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Minnesota income taxes as is consistent with prudent investment management. MERRILL LYNCH MUNICIPAL BOND FUND, INC. Tax-exempt income from three separate diversified portfolios of municipal bonds. MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND Currently the only portfolio of Merrill Lynch Municipal Series Trust, a series fund, whose objective is to provide as high a level as possible of income exempt from Federal income taxes by investing in investment grade obligations with a dollar weighted average maturity of five to twelve years. MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and New Jersey income taxes as is consistent with prudent investment management through a portfolio primarily of intermediate-term investment grade New Jersey Municipal Bonds. MERRILL LYNCH NEW JERSEY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and New Jersey income taxes as is consistent with prudent investment management. MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and New Mexico income taxes as is consistent with prudent investment management. MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal, New York State and New York City income taxes as is consistent with prudent investment management through investment in a portfolio primarily of intermediate-term investment grade New York Municipal Bonds. 31 70 MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal, New York State and New York City income taxes as is consistent with prudent investment management. MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and North Carolina income taxes as is consistent with prudent investment management. MERRILL LYNCH OHIO MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Ohio income taxes as is consistent with prudent investment management. MERRILL LYNCH OREGON MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Oregon income taxes as is consistent with prudent investment management. MERRILL LYNCH PACIFIC FUND, INC. Capital appreciation by investing in equity securities of corporations domiciled in Far Eastern and Western Pacific countries, including Japan, Australia, Hong Kong, Singapore and the Philippines. MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Pennsylvania income taxes as is consistent with prudent investment management through investment in a portfolio of intermediate-term investment grade Pennsylvania Municipal Bonds. MERRILL LYNCH PENNSYLVANIA MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Pennsylvania income taxes as is consistent with prudent investment management. 32 71 MERRILL LYNCH PHOENIX FUND, INC. Long-term growth of capital by investing in equity and fixed income securities, including tax-exempt securities, including tax-exempt securities, of issues in weak financial condition or experiencing poor operating results believed to be undervalued relative to the current or prospective condition of such issuer. MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. As high a level of current income as is consistent with prudent investment management from a global portfolio of high quality debt securities denominated in various currencies and multinational currency units and having remaining maturities not exceeding three years. MERRILL LYNCH SPECIAL VALUE FUND, INC. Long-term growth of capital from investments in securities, primarily common stocks, of relatively small companies believed to have special investment value and emerging growth companies regardless of size. MERRILL LYNCH STRATEGIC DIVIDEND FUND Long-term total return from investment in dividend paying common stocks which yield more than Standard & Poor's 500 Composite Stock Price Index. MERRILL LYNCH TECHNOLOGY FUND, INC. Capital appreciation through worldwide investment in equity securities of companies that derive or are expected to derive a substantial portion of their sales from products and services in technology. MERRILL LYNCH TEXAS MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal income taxes as is consistent with prudent investment management by investing primarily in a portfolio of long-term, investment grade obligations issued by the State of Texas, its political subdivisions, agencies and instrumentalities. MERRILL LYNCH UTILITY INCOME FUND, INC. High current income through investment in equity and debt securities issued by companies which are primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. 33 72 MERRILL LYNCH WORLD INCOME FUND, INC. High current income by investing in a global portfolio of fixed income securities denominated in various currencies, including multinational currencies. Class A and Class D Share Money Market Funds: MERRILL LYNCH READY ASSETS TRUST Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives from the short-term money market securities in which the Trust invests. MERRILL LYNCH RETIREMENT RESERVES MONEY FUND (available only for exchanges within certain retirement plans)........... Currently the only portfolio of Merrill Lynch Retirement Series Trust, a series fund, whose objectives are current income, preservation of capital and liquidity available from investing in a diversified portfolio of short-term money market securities. MERRILL LYNCH U.S.A. GOVERNMENT RESERVES Preservation of capital, current income and liquidity available from investing in direct obligations of the U.S. Government and repurchase agreements relating to such securities. MERRILL LYNCH U.S. TREASURY MONEY FUND Preservation of capital, liquidity and current income through investment exclusively in a diversified portfolio of short-term marketable securities which are direct obligations of the U.S. Treasury. Class B and Class C Share Money Market Funds: MERRILL LYNCH GOVERNMENT FUND A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income consistent with liquidity and security of principal from investment in securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities and in repurchase agreements secured by such obligations. MERRILL LYNCH INSTITUTIONAL FUND A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide maximum current income consistent with liquidity and the maintenance of a high quality portfolio of money market securities. 34 73 MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT FUND A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income exempt from Federal income taxes, preservation of capital and liquidity available from investing in a diversified portfolio of short-term, high quality municipal bonds. MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds for Institutions Series, a series fund, whose objective is to provide current income consistent with liquidity and security of principal from investment in direct obligations of the U.S. Treasury and up to 10% of its total assets in repurchase agreements secured by such obligations. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. To exercise the exchange privilege, shareholders should contact their Merrill Lynch financial consultant who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other funds described above with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealers. The Fund reserves the right to require a properly completed Exchange Application. This exchange privilege may be modified or terminated in accordance with the rules of the Securities and Exchange Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares at any time and thereafter may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS It is the Fund's intention to distribute all of its net investment income, if any. Dividends from such investment income are paid semiannually. All net realized long-or short-term capital gains, if any, are distributed to the Fund's shareholders at least annually. Premiums from expired call options written by the Fund and net gains from closing purchase transactions are treated as short-term capital gains for Federal income tax purposes. See "Shareholder Services -- Reinvestment of Dividends and Capital Gains Distributions" for information concerning the manner in which dividends and distributions may be reinvested automatically in shares of the Fund. Shareholders may elect in writing to receive any such dividends or distributions, or both, in cash. Dividends and distributions are taxable to shareholders as described below whether they are invested in shares of the Fund or received in cash. The per share dividends and distributions on Class B and Class C shares will be lower than the per share dividends and distributions on Class A and Class D shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends and distributions on Class D shares will be lower than the per share dividends and distributions on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See "Determination of Net Asset Value". 35 74 TAXES The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). The Fund intends to distribute substantially all of such income. Dividends paid by the Fund from its ordinary income and distributions of the Fund's net realized short-term capital gains (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from the Fund's net realized long-term capital gains (including long-term gains from certain transactions in options) ("capital gain dividends") are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less, however, will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends. A portion of the Fund's ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. 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 Securities and Exchange Commission exemptive order 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. Ordinary income dividends paid by the Fund to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on ordinary income dividends, capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect 36 75 number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares to Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period of the converted Class B shares. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent the sales charge paid to the Fund reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. 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 avoid imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. TAX TREATMENT OF OPTIONS TRANSACTIONS The Fund may write covered options with respect to the securities that it holds in its portfolio. Options 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. The mark-to-market rules outlined above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of changes in price or interest rates with respect to its investments. Code Section 1092, which applies to certain "straddles", may affect the taxation of the Fund's transactions in options contracts. Under Section 1092, the Fund may be required to postpone recognition for tax purposes of losses incurred in certain closing transactions in options. One of the requirements for qualification as a RIC is that less than 30% of the Fund's gross income may be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Fund may be restricted in effecting closing transactions within three months after entering into an options contract. 37 76 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 or administrative action either prospectively or retroactively. Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. PERFORMANCE DATA From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A, Class B, Class C and Class D shares in accordance with a formula specified by the Securities and Exchange Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charges in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted, and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales 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 since the aggregate rates of return reflect compounding over a longer period of time. 38 77 Set forth below is total return information for the Class A and Class B shares of the Fund for the periods indicated. Since Class C and Class D shares have not been issued prior to the date of this Statement of Additional Information, performance information concerning Class C and Class D shares is not yet provided.
CLASS A SHARES CLASS B SHARES* ------------------------------------ ------------------------------------ REDEEMABLE VALUE REDEEMABLE VALUE OF A OF A HYPOTHETICAL HYPOTHETICAL EXPRESSED AS A $1,000 EXPRESSED AS A $1,000 PERCENTAGE BASED INVESTMENT PERCENTAGE BASED INVESTMENT ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD - ---------------------------------------- ----------------- ---------------- ----------------- ---------------- AVERAGE ANNUAL TOTAL RETURN (including maximum applicable sales charges) One Year Ended June 30, 1994............ 0.13% $ 1,001.30 0.64% $ 1,006.40 Five Years Ended June 30, 1994.......... 8.03% $ 1,471.20 8.08% $ 1,475.10 Ten Years Ended June 30, 1994........... 14.02% $ 3,712.70 October 21, 1988 to June 30, 1994....... 8.92% $ 1,626.60 ANNUAL TOTAL RETURN (excluding maximum applicable sales charges) YEAR ENDED JUNE 30, - ---------------------------------------- 1994.................................... 5.68% $ 1,056.80 4.61% $ 1,046.10 1993.................................... 19.03% $ 1,190.30 17.81% $ 1,178.10 1992.................................... 15.08% $ 1,150.80 13.90% $ 1,139.00 1991.................................... 5.39% $ 1,053.90 4.33% $ 1,043.30 1990.................................... 1.77% $ 1,017.70 0.73% $ 1,007.30 1989.................................... 16.29% $ 1,162.90 1988.................................... 1.90% $ 1,019.00 1987.................................... 22.37% $ 1,223.70 1986.................................... 28.59% $ 1,285.90 1985.................................... 35.35% $ 1,353.50 1984.................................... (0.18%) $ 998.20 1983.................................... 67.64% $ 1,676.40 1982.................................... (12.09%) $ 879.10 1981.................................... 29.28% $ 1,292.80 1980.................................... 15.98% $ 1,159.80 1979.................................... 15.62% $ 1,156.20 1978.................................... 10.48% $ 1,104.80 October 21, 1988 to June 30, 1989....... 10.27% $ 1,102.70
AGGREGATE TOTAL RETURN (including maximum applicable sales charges) Inception (July 1, 1977) to June 30, 1994..... 946.03% $ 10,460.30 October 21, 1988 to June 30, 1994............. 62.66% $1,626.60
- --------------- * Information as to Class B shares is presently only for the period October 21, 1988 to June 30, 1994. Prior to October 21, 1988, no Class B shares were publicly issued. 39 78 In order to reflect the reduced sales charges in the case of Class A or Class D shares or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under "Purchase of Shares" and "Redemption of Shares", respectively, the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charge or the waiver of sales charges, a lower amount of expenses may be deducted. GENERAL INFORMATION DESCRIPTION OF SHARES The Fund was incorporated under Maryland law on March 22, 1977. It 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 each of which consists of 100,000,000 shares. Class A, Class B, Class C and Class D Common Stock represent an interest in the same assets of the Fund and are identical in all respects except that the Class B, Class C and Class D shares bear certain expenses related to the account maintenance and/or distribution of such shares and have exclusive voting rights with respect to matters relating to such account maintenance and/or distribution expenditures. The Fund has received an order from the Securities and Exchange Commission (the "Commission") permitting the issuance and sale of multiple classes of Common Stock. The Board of Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act on any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Generally, under Maryland law, a meeting of shareholders may be called for any purpose on the written request of the holders of at least 25% of the outstanding shares of the Fund. 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 the meeting. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in the Prospectus. Each share is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities. Stock certificates are issued by the transfer agent only on specific request. Certificates for fractional shares are not issued in any case. 40 79 COMPUTATION OF OFFERING PRICE PER SHARE The offering price for Class A shares of the Fund, based on the value of the Fund's net assets as of June 30, 1994, is calculated as follows:
CLASS A -------------- Net Assets................................................................... $2,272,982,770 ============= Number of Shares Outstanding................................................. 98,095,819 ============= Net Asset Value Per Share (net assets divided by number of shares outstanding)............................................................... $ 23.17 Sales Charge................................................................. $ 1.61 Offering Price............................................................... $ 24.78
Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" in the Prospectus. As of June 30, 1994, no Class D shares of the Fund had been publicly offered. INDEPENDENT AUDITORS Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to ratification by the shareholders of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund. CUSTODIAN National Westminster Bank NJ, Exchange Place Centre, 10 Exchange Place, Jersey City, New Jersey 07302, acts as Custodian of the Fund's assets. 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 32246-4484, 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 "Management of the Fund -- Transfer Agency Services" in the Prospectus. LEGAL COUNSEL Brown & Wood, One World Trade Center, New York, New York 10048-0557, is counsel for the Fund. REPORTS TO SHAREHOLDERS The fiscal year of the Fund ends on June 30 of each year. The Fund will send to its shareholders at least semiannually 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 41 80 year, shareholders will receive Federal income tax information regarding dividends and capital gains distributions. ADDITIONAL INFORMATION The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Commission, Washington, D.C., under the Securities Act of 1933 and the Investment Company Act to which reference is hereby made. To the knowledge of the Fund, no person or entity owned beneficially 5% or more of the Fund's shares on July 31, 1994. 42 81 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, MERRILL LYNCH BASIC VALUE FUND, INC.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch Basic Value Fund, Inc. as of June 30, 1994, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at June 30, 1994 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Basic Value Fund, Inc. as of June 30, 1994, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Princeton, New Jersey July 29, 1994 43 82 SCHEDULE OF INVESTMENTS
Shares Value Percent of Industry Held Stocks Cost (Note 1a) Net Assets Discount from Book Value Metals/Non-Ferrous 1,400,000 ASARCO Inc. $ 35,255,430 $ 39,375,000 1.0% Insurance 800,000 Aetna Life & Casualty Co. 35,195,218 44,700,000 1.1 Savings & Loans 1,850,000 Ahmanson(H.F.) & Co. 32,200,305 34,918,750 0.9 Insurance 260,000 American National Insurance Co. 9,749,442 12,220,000 0.3 Insurance 600,000 CIGNA Corp. 31,341,428 43,875,000 1.1 Insurance 1,000,000 Continental Corp. 31,627,263 15,500,000 0.4 Information Processing 1,700,000 ++Data General Corp. 23,653,243 13,175,000 0.3 Information Processing 2,600,000 ++Digital Equipment Corp. 110,424,691 50,375,000 1.3 Utilities 1,000,000 Entergy Corp. 19,799,508 24,750,000 0.6 Retail 1,600,000 K mart Corp. 30,422,460 24,800,000 0.6 Retail 550,000 K mart Corp.(Pfd. P) 24,266,763 17,256,250 0.4 -------------- -------------- ------ 383,935,751 320,945,000 8.0 Below-Average Price/Earnings Ratio Insurance 600,000 Allstate Corp. 16,316,532 14,250,000 0.4 Insurance 2,000,000 American General Corp. 34,620,231 55,250,000 1.4 Steel 1,400,000 ++Bethlehem Steel Corp. 19,927,935 26,075,000 0.6 Banking 1,570,000 Chase Manhattan Corp. 35,345,175 60,052,500 1.5 Banking 2,200,000 Citicorp, Inc. 53,771,262 87,725,000 2.2 Financial Services 800,000 Dean Witter Discover & Co. 20,456,508 30,000,000 0.8 Farm & Construction Equipment 1,330,000 Deere & Co., Inc. 67,229,295 89,941,250 2.2 Retail 700,000 ++Federated Department Stores, Inc. 8,331,220 14,000,000 0.3 Banking 1,150,000 First Interstate Bancorp 53,035,168 88,550,000 2.2 Automotive 1,000,000 Ford Motor Co. 39,797,208 59,000,000 1.5 Automotive 1,200,000 General Motors Corp. 50,650,675 60,300,000 1.5 Conglomerates 1,500,000 ITT Corp. 73,820,738 122,437,500 3.0 Computers 1,350,000 International Business Machines Corp. 85,976,347 79,312,500 2.0 Aerospace & Defense 450,000 Lockheed Corp. 16,415,936 29,418,750 0.7 Pharmaceutical 1,800,000 Merck & Co., Inc. 57,548,710 53,550,000 1.3 Hospital Management 1,500,000 National Medical Enterprises, Inc. 15,860,263 23,437,500 0.6 Semiconductors 1,000,000 ++National Semiconductor Corp. 8,902,861 17,250,000 0.4 Banking 1,500,000 NationsBank Corp. 60,787,427 77,062,500 1.9 Banking 1,800,000 Norwest Corp. 20,939,972 47,025,000 1.2 Insurance 1,400,000 PartnerRe Holdings Ltd. 29,498,937 28,350,000 0.7 Electrical Equipment 2,800,000 Philips N.V. Corp. 50,735,011 80,500,000 2.0 Retail 3,100,000 Sears, Roebuck & Co. 114,099,842 148,800,000 3.7 Information Processing 2,200,000 Tandem Computers Inc. 26,902,529 24,750,000 0.6 Communications 1,280,000 Telefonica de Espana, S.A. (ADR)* 37,922,666 51,520,000 1.3 Insurance 1,400,000 Travelers Corp. 55,658,554 45,150,000 1.1 Steel 800,000 USX--US Steel Group, Inc. 21,961,346 27,100,000 0.7 Information Processing 3,300,000 ++Unisys Corp. 39,601,470 30,525,000 0.8 Aerospace & Defense 450,000 United Technologies Corp. 22,695,049 28,912,500 0.7 Savings & Loans 800,000 Washington Mutual Savings Bank 11,813,145 16,500,000 0.4 Chemicals 440,000 Zeneca Group PLC (ADR)* 12,980,000 14,685,000 0.4 -------------- -------------- ------ 1,163,602,012 1,531,430,000 38.1
44 83 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industry Held Stocks Cost (Note 1a) Net Assets Above-Average Yield Oil/Domestic 450,000 Atlantic Richfield Co. $ 44,540,126 $ 45,956,250 1.1% Real Estate Investment Trust 600,000 Avalon Properties, Inc. 12,413,018 12,750,000 0.3 Communications 800,000 Bell Atlantic Corp. 33,212,901 44,800,000 1.1 Pharmaceutical 1,100,000 Bristol-Myers Squibb Co. 62,776,156 58,987,500 1.5 Oil--International 1,100,000 Chevron Corp. 29,812,184 46,062,500 1.1 Banking 700,000 Citicorp, Inc.(Pfd. P) 10,325,000 13,737,500 0.3 Utilities 1,000,000 Consolidated Edison Co. of New York 21,723,966 26,500,000 0.7 Utilities 637,500 DPL Inc. 6,204,369 12,590,625 0.3 Oil--International 700,000 Exxon Corp. 32,536,013 39,637,500 1.0 Telecommunications 1,500,000 GTE Corp. 47,329,575 47,250,000 1.2 Chemicals 430,000 Imperial Chemical Industries PLC(ADR)* 27,795,155 20,425,000 0.5 Real Estate Investment Trust 400,000 Irvine Apartment Communities, Inc. 7,075,747 8,000,000 0.2 Insurance 700,000 ++Liberty Property Trust 14,155,230 14,000,000 0.4 Real Estate 500,000 Mills Corp. 11,734,125 11,250,000 0.3 Oil--International 1,500,000 Mobil Corp. 78,457,147 122,437,500 3.0 Utilities 850,000 NIPSCO Industries, Inc. 15,883,276 25,075,000 0.6 Oil-Domestic 2,250,000 Occidental Petroleum Corp. 47,641,346 42,468,750 1.1 Utilities 1,100,000 PECO Energy Co.(a) 26,348,540 29,012,500 0.7 Tobacco 1,500,000 Philip Morris Cos. Inc. 80,845,984 77,250,000 1.9 Utilities 850,000 Public Service Enterprise Group 22,490,010 22,100,000 0.6 Aluminum 250,000 Reynolds Metals Co.(Pfd. P) 11,937,200 12,468,750 0.3 Oil--International 1,150,000 Royal Dutch Petroleum Co. 70,562,758 120,318,750 3.0 Real Estate Investment Trust 1,130,000 Simon Property Group, Inc. 25,891,365 30,086,250 0.8 Real Estate Investment Trust 500,000 Summit Properties Inc. 9,602,500 10,000,000 0.3 Oil--International 1,000,000 Texaco Inc. 53,689,121 60,375,000 1.5 Utilities 400,000 Texas Utilities Corp. 13,696,291 12,550,000 0.3 Communications 800,000 U.S. West Inc. 22,413,677 33,500,000 0.8 -------------- -------------- ------ 841,092,780 999,589,375 24.9 Special Situations Oil--International 700,000 British Petroleum Co. PLC (ADR)* 32,946,715 50,225,000 1.3 Information Processing 1,000,000 ++Ceridian Corp. 16,072,735 24,625,000 0.6 Oil Services & Equipment 2,500,000 Dresser Industries, Inc. 49,131,722 51,250,000 1.3 Food Merchandising 770,800 ++Foodmaker Inc. 9,587,860 4,335,750 0.1 Foods 900,000 General Mills Inc. 49,335,984 49,162,500 1.2 Chemicals 500,000 Hercules, Inc. 19,235,727 53,500,000 1.3 Machinery 675,000 Ingersoll-Rand Co. 13,619,766 23,709,375 0.6 Forest & Paper Products 1,000,000 International Paper Co. 55,866,813 66,250,000 1.7 Aluminum 350,000 Reynolds Metals Co. 13,221,321 16,800,000 0.4 Chemicals 1,850,000 Union Carbide Corp. 29,886,191 49,487,500 1.2 -------------- -------------- ------ 288,904,834 389,345,125 9.7 Total Stocks 2,677,535,377 3,241,309,500 80.7
45 84 SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of Amount Issue Cost (Note 1a) Net Assets Short-Term Securities Commercial Paper** $50,000,000 ANZ(Delaware) Inc., 4.26% due 8/10/1994 $ 49,757,417 $ 49,757,417 1.2% 40,000,000 Bank One Diversified Services Corp., 4.25% due 7/11/1994 39,948,056 39,948,056 1.0 50,000,000 Ciesco L.P., 4.23% due 7/19/1994 49,888,375 49,888,375 1.3 40,000,000 du Pont(E.I.) de Nemours and Co., 4.22% due 7/13/1994 39,939,044 39,939,044 1.0 48,842,000 General Electric Capital Corp., 4.30% due 7/01/1994 48,836,166 48,836,166 1.2 55,000,000 Matterhorn Capital Corp., 4.23% due 7/18/1994 54,883,675 54,883,675 1.4 30,000,000 Miles Inc., 4.23% due 7/15/1994 29,947,125 29,947,125 0.8 National Australia Funding (Delaware), Inc.: 50,000,000 4.25% due 7/25/1994 49,852,431 49,852,431 1.2 50,000,000 4.20% due 7/29/1994 49,830,833 49,830,833 1.2 PHH Corp.: 50,000,000 4.23% due 7/14/1994 49,917,750 49,917,750 1.2 50,000,000 4.25% due 7/28/1994 49,834,722 49,834,722 1.2 50,000,000 Penney(J.C.) & Co., 4.21% due 7/11/1994 49,935,681 49,935,681 1.3 50,000,000 PepsiCo., Inc., 4.25% due 7/21/1994 49,876,625 49,876,625 1.2 50,000,000 Preferred Receivables Funding Corp., 4.25% due 7/20/1994 49,881,944 49,881,944 1.3 Siemens Corp.: 40,000,000 4.25% due 7/08/1994 39,962,222 39,962,222 1.0 50,000,000 4.26% due 8/08/1994 49,769,250 49,769,250 1.2 50,000,000 UBS Finance(Delaware), Inc., 4.23% due 7/21/1994 49,876,625 49,876,625 1.2 Total Short-Term Securities 801,937,941 801,937,941 19.9 Total Investments $3,479,473,318 4,043,247,441 100.6 ============== Liabilities in Excess of Other Assets (25,560,591) (0.6) -------------- ------ Net Assets $4,017,686,850 100.0% ============== ====== (a)Formerly Philadelphia Electric Co. ++Non-income producing security. *American Depositary Receipt(ADR). **Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. See Notes to Financial Statements.
46 85 FINANCIAL INFORMATION Statement of Assets and Liabilities as of June 30, 1994
Assets: Investments, at value (identified cost--$3,479,473,318)(Note 1a) $4,043,247,441 Receivables: Capital shares sold $ 13,609,181 Dividends 8,170,765 21,779,946 -------------- Prepaid registration fees and other assets(Note 1d) 73,525 -------------- Total assets 4,065,100,912 -------------- Liabilities: Payables: Securities purchased 31,274,427 Capital shares redeemed 11,811,167 Distributor(Note 2) 1,452,545 Investment adviser(Note 2) 1,367,061 45,905,200 -------------- Accrued expenses and other liabilities 1,508,862 -------------- Total liabilities 47,414,062 -------------- Net Assets: Net assets $4,017,686,850 ============== Net Assets Class A Common Stock, $0.10 par value, 200,000,000 shares authorized $ 9,809,582 Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 7,627,611 Paid-in capital in excess of par 3,269,539,318 Undistributed investment income--net 45,703,737 Undistributed realized capital gains on investments and foreign currency transactions--net 121,232,479 Unrealized appreciation on investments and foreign currency transactions--net 563,774,123 -------------- Net assets $4,017,686,850 ============== Net Asset Value: Class A--Based on net assets of $2,272,982,770 and 98,095,819 shares outstanding $ 23.17 ============== Class B--Based on net assets of $1,744,704,080 and 76,276,115 shares outstanding $ 22.87 ============== See Notes to Financial Statements.
47 86 FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended June 30, 1994
Investment Dividends (net of $1,615,127 foreign withholding tax) $ 98,527,728 Income Interest and discount earned 25,933,615 (Notes 1b & 1c): Other 232,965 -------------- Total income 124,694,308 -------------- Expenses: Distribution and account maintenance fees--Class B(Note 2) 15,925,964 Investment advisory fees(Note 2) 15,452,148 Transfer agent fees--Class A(Note 2) 2,044,053 Transfer agent fees--Class B(Note 2) 1,771,029 Registration fees(Note 1d) 307,224 Printing and shareholder reports 282,006 Accounting services(Note 2) 185,215 Custodian fees 146,718 Professional fees 76,833 Directors' fees and expenses 41,369 Amortization of organization expenses(Note 1d) 11,525 Other 27,131 -------------- Total expenses 36,271,215 -------------- Investment income--net 88,423,093 -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net $ 163,325,790 (Loss) on Foreign currency transactions--net (4,833) 163,320,957 Investments & -------------- Foreign Currency Change in unrealized appreciation on investments--net (76,944,519) Transactions--Net -------------- (Note 1c, 1e & 3): Net realized and unrealized gain on investments and foreign currency transactions 86,376,438 -------------- Net Increase in Net Assets Resulting from Operations $ 174,799,531 ============== See Notes to Financial Statements.
48 87 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended June 30, Increase (Decrease) in Net Assets: 1994 1993 Operations: Investment income--net $ 88,423,093 $ 90,239,186 Realized gain on investments and foreign currency transactions--net 163,320,957 81,147,456 Change in unrealized appreciation/depreciation on investments--net (76,944,519) 340,508,739 -------------- -------------- Net increase in net assets resulting from operations 174,799,531 511,895,381 -------------- -------------- Dividends & Investment income--net: Distributions Class A (62,663,619) (52,495,436) To Shareholders Class B (30,680,760) (23,460,921) (Note 1f): Realized gain on investments--net: Class A (64,558,638) (29,779,683) Class B (45,745,511) (19,244,373) -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (203,648,528) (124,980,413) -------------- -------------- Capital Share Net increase in net assets derived from capital share transactions 639,523,156 285,314,244 Transactions -------------- -------------- (Note 4): Net Assets: Total increase in net assets 610,674,159 672,229,212 Beginning of year 3,407,012,691 2,734,783,479 -------------- -------------- End of year* $4,017,686,850 $3,407,012,691 ============== ============== *Undistributed investment income--net $ 45,703,737 $ 50,625,023 ============== ============== See Notes to Financial Statements.
49 88 FINANCIAL INFORMATION (continued) Financial Highlights
The following per share data and ratios have been derived from information provided in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990 Per Share Net asset value, beginning of year $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .62 .71 .70 .87 .95 Realized and unrealized gain(loss) on investments--net .67 3.03 2.02 (.02) (.56) ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.29 3.74 2.72 .85 .39 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.70) (.64) (.76) (.97) (.87) Realized gain on investments--net (.73) (.36) (.29) (.30) (.23) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.43) (1.00) (1.05) (1.27) (1.10) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 5.68% 19.03% 15.08% 5.39% 1.77% Return:* ========== ========== ========== ========== ========== Ratios to Expenses .53% .54% .58% .59% .57% Average Net ========== ========== ========== ========== ========== Assets: Investment income--net 2.76% 3.48% 3.52% 4.76% 5.05% ========== ========== ========== ========== ========== Supplemental Net assets, end of year (in thousands) $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257 Data: ========== ========== ========== ========== ========== Portfolio turnover 21.79% 20.85% 21.24% 20.11% 4.88% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales loads. See Notes to Financial Statements.
50 89 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
The following per share data and ratios have been derived from information provided in the financial statements. Class B For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990 Per Share Net asset value, beginning of year $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .42 .53 .50 .66 .78 Realized and unrealized gain(loss) on investments--net .62 2.96 2.00 .01 (.59) ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.04 3.49 2.50 .67 .19 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.48) (.44) (.57) (.78) (.76) Realized gain on investments--net (.73) (.36) (.29) (.30) (.23) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.21) (.80) (.86) (1.08) (.99) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 4.61% 17.81% 13.90% 4.33% 0.73% Return:* ========== ========== ========== ========== ========== Ratios to Expenses, excluding distribution fees .55% .56% .60% .61% .60% Average Net ========== ========== ========== ========== ========== Assets: Expenses 1.55% 1.56% 1.60% 1.61% 1.60% ========== ========== ========== ========== ========== Investment income--net 1.75% 2.47% 2.50% 3.73% 4.03% ========== ========== ========== ========== ========== Supplemental Net assets, end of year(in thousands) $1,744,704 $1,383,935 $1,064,354 $ 874,318 $ 922,126 Data: ========== ========== ========== ========== ========== Portfolio turnover 21.79% 20.85% 21.24% 20.11% 4.88% ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales loads. See Notes to Financial Statements.
51 90 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Basic Value Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open- end management investment company. The shares of the Fund are divided into Class A Shares and Class B Shares. Class A Shares are sold with a front-end sales charge. Class B Shares may be subject to a contingent deferred sales charge. Both classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B Shares bear certain expenses related to the distribution of such shares and have exclusive voting rights with respect to matters relating to such distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued or, lacking any sales, at the mean between closing bid and asked prices. Securities traded in the over-the-counter market are valued at the last quoted bid prices at the close of trading on each day by brokers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Short-term securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Options written by the Fund are valued at the last sale price or, lacking any sales, the last offering price. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Fund's Board of Directors. Written and purchased options are non-income producing investments. (b) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be withheld on interest, dividends, and capital gains at various rates. (c) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Interest income (including amortization of discount) is recognized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (d) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (e) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Fund's records. However, the effect on operations is recorded from the date the Fund enters into such contracts. Premium or discount is amortized over the life of the contracts. (f) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994, the investment advisory business of FAM was reorganized from a corporation to a limited partnership. Both prior to and after the reorganization, ultimate control of FAM 52 91 was vested with Merrill Lynch and Co., Inc. ("ML & Co."). The general partner of FAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of ML & Co. The limited partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"), which is also an indirect wholly-owned subsidiary of ML & Co. The Fund has also entered into a Distribution Agreement and a Distribution Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Investment Management, Inc. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee based upon the average daily value of the Fund's daily net assets at the following annual rates: 0.60% of the Fund's average daily net assets not exceeding $100 million; 0.50% of average daily net assets exceeding $100 million but not exceeding $200 million; and 0.40% of average daily net assets in excess of $200 million. The Investment Advisory Agreement obligates FAM to reimburse the Fund to the extent the Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the Fund's next $70 million of average daily net assets, and 1.5% of the average daily net assets in excess thereof. No fee payment will be made to the Investment Adviser during any fiscal year which will cause such expenses to exceed the pro rata expense limitation at the time of such payment. The Fund has adopted a Plan of Distribution (the "Plan") in accordance with Rule 12b-1 under the Investment Company Act of 1940 pursuant to which the Fund pays the Distributor an ongoing account maintenance fee and distribution fee, which are accrued daily and paid monthly, at the annual rates of 0.25% and 0.75%, respectively, of the average daily net assets of the Class B Shares of the Fund. This fee is to compensate the Distributor for services it provides and the expense borne by the Distributor under the Distribution Agreement. As authorized by the Plan, the Distributor has entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") which provides for the compensation of MLPF&S for providing distribution-related services to the Fund. During the year ended June 30, 1994, MLFD earned underwriting discounts of $216,022, and MLPF&S earned dealer concessions of $3,539,580 on sales of the Fund's Class A Shares. MLPF&S also received contingent deferred sales charges of $1,189,344 relating to transactions in Class B Shares and $109,200 in commissions on the execution of portfolio security transactions for the Fund during the year. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAMI, FAM, MLPF&S, FDS, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended June 30, 1994 were $1,012,717,840 and $656,985,312, respectively. Net realized and unrealized gains (losses) as of June 30, 1994 were as follows: Realized Gain Unrealized (Losses) Gains Long-term investments $163,325,790 $563,774,123 Foreign currency transactions (4,833) -- ------------ ------------ Total $163,320,957 $563,774,123 ============ ============ As of June 30, 1994, net unrealized appreciation for Federal income tax purposes aggregated $561,183,340, of which $723,695,304 related to appreciated securities and $162,511,964 related to depreciated securities. At June 30, 1994, the aggregate cost of investments for Federal income tax purposes was $3,482,064,101. 53 92 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $639,523,156 and $285,314,244 for the years ended June 30, 1994 and June 30, 1993, respectively. Transactions in capital shares for Class A and Class B Shares were as follows: Class A Shares for the Year Ended June 30, 1994 Shares Dollar Amount Shares sold 22,051,928 $518,481,972 Shares issued to shareholders in reinvestment of dividends and distributions to shareholders 4,979,090 114,208,364 ------------ ------------ Total issued 27,031,018 632,690,336 Shares redeemed (15,739,255) (370,180,112) ------------ ------------ Net increase 11,291,763 $262,510,224 ============ ============ Class A Shares for the Year Ended June 30, 1993 Shares Dollar Amount Shares sold 15,789,908 $338,060,653 Shares issued to shareholders in reinvestment of dividends and distributions to shareholders. 3,634,557 73,353,178 ------------ ------------ Total issued 19,424,465 411,413,831 Shares redeemed (13,832,732) (293,122,519) ------------ ------------ Net increase 5,591,733 $118,291,312 ============ ============ Class B Shares for the Year Ended June 30, 1994 Shares Dollar Amount Shares sold 25,498,592 $594,651,037 Shares issued to shareholders in reinvestment of dividends and distributions to shareholders 2,969,021 67,552,341 ------------ ------------ Total issued 28,467,613 662,203,378 Shares redeemed (12,261,811) (285,190,446) ------------ ------------ Net increase 16,205,802 $377,012,932 ============ ============ Class B Shares for the Year Ended June 30, 1993 Shares Dollar Amount Shares sold 17,381,247 $368,588,150 Shares issued to shareholders in reinvestment of dividends and distributions to shareholders. 1,878,067 37,667,375 ------------ ------------ Total issued 19,259,314 406,255,525 Shares redeemed (11,495,277) (239,232,593) ------------ ------------ Net increase 7,764,037 $167,022,932 ============ ============ 54 93 TABLE OF CONTENTS
PAGE ---- Investment Objective and Policies..... 2 Management of the Fund................ 7 Directors and Officers.............. 7 Management and Advisory Arrangements... 9 Purchase of Shares.................... 10 Initial Sales Charge Alternatives -- Class A and Class D Shares....... 11 Reduced Initial Sales Charges....... 12 Distribution Plans.................. 15 Limitations on the Payment of Deferred Sales Charges........... 16 Redemption of Shares.................. 17 Deferred Sales Charges -- Class B and Class C Shares....... 18 Portfolio Transactions and Brokerage........................... 19 Determination of Net Asset Value...... 20 Shareholder Services.................. 21 Investment Account.................. 21 Automatic Investment Plan........... 22 Automatic Reinvestment of Dividends and Capital Gains Distributions.................... 22 Systematic Withdrawal Plans -- Class A and Class D Shares....... 22 Retirement Plans.................... 23 Exchange Privilege.................. 24 Dividends, Distributions and Taxes.... 35 Dividends and Distributions......... 35 Taxes............................... 36 Tax Treatment of Options Transactions..................... 37 Performance Data...................... 38 General Information................... 40 Description of Shares............... 40 Computation of Offering Price per Share........................ 41 Independent Auditors................ 41 Custodian........................... 41 Transfer Agent...................... 41 Legal Counsel....................... 41 Reports to Shareholders............. 41 Additional Information.............. 42 Independent Auditors' Report.......... 43 Financial Statements.................. 44 Code #10124-1094
- ------------------------------------------------------ MERRILL LYNCH BASIC VALUE FUND, INC. [ART] Statement of Additional Information , 1994 Distributor: Merrill Lynch Funds Distributor, Inc. 94 APPENDIX FOR GRAPHIC AND IMAGE MATERIAL Pursuant to Rule 304 of Regulation S-T, the following table presents fair and accurate narrative descriptions of graphic and image material omitted from this EDGAR Submission File due to ASCII-incompatibility and cross-references this material to the location of each occurrence in the text. DESCRIPTION OF OMITTED LOCATION OF GRAPHIC GRAPHIC OR IMAGE OR IMAGE IN TEXT - ---------------------- ------------------- Compass plate, circular Back cover of Prospectus and graph paper and Merrill Lynch back cover of Statement of logo including stylized market Additional Information bull 95 PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS Contained in Part A: Financial Highlights for each of the years in the ten-year period ended June 30, 1994. Contained in Part B: Schedule of Investments, June 30, 1994. Statement of Assets and Liabilities, June 30, 1994. Statement of Operations for the year ended June 30, 1994. Statements of Changes in Net Assets for the years ended June 30, 1994 and 1993. Financial Highlights for each of the years in the five-year period ended June 30, 1994. (B) EXHIBITS
EXHIBIT NUMBER - ----------- 1 (a) -- Articles of Incorporation of Registrant.(a) (b) -- Articles of Amendment to Articles of Incorporation of Registrant.(f)
2 -- By-Laws of Registrant. 3 -- None. 4 (a) -- Portions of the Articles of Incorporation and By-Laws of Registrant defining the rights of holders of shares of common stock of Registrant.(g) (b) -- Specimen certificate for shares of Class A common stock of Registrant.(f) (c) -- Specimen certificate for shares of Class B common stock of Registrant.(f) 5 (a) -- Investment Advisory Agreement between Registrant and Fund Asset Management.(b) (b) -- Supplement to Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. 6 (a) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(c) (b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(c) (c) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement). (d) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement). (e) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with respect to the Merrill Lynch Mutual Fund Adviser Program.(h) 7 -- None. 8 -- Custodian Agreement between Registrant and National Westminster Bank NJ.(d) 9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between Registrant and Financial Data Services, Inc.(e) 10 -- None 11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
C-1 96
EXHIBIT NUMBER - ----------- 12 -- None. 13 -- None. 14 -- None. 15 (a) -- Amended and Restated Class B Distribution Plan and Class B Distribution Plan Sub-Agreement of Registrant.(h) (b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of Registrant. (c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of Registrant. 16 (a) -- Schedule for computation of each performance quotation for Class A shares provided in the Registration Statement in response to Item 22.(f) (b) -- Schedule for computation of each performance quotation for Class B shares provided in the Registration Statement in response to Item 22.(i) 17 (a) -- Financial Data Schedule for Class A Shares (b) -- Financial Data Schedule for Class B Shares.
- --------------- (a) Filed as Exhibit 1 to Registrant's Registration Statement on Form S-5, filed March 29, 1977. (b) Filed as Exhibit 5 to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed May 27, 1977. (c) Filed as Exhibit 6 to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed May 27, 1977. (d) Filed as an exhibit to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed May 27, 1977. (e) Filed as an exhibit to Post-Effective Amendment No. 14 to Registrant's Registration Statement on Form N-1A, filed October 30, 1987. (f) Filed as an exhibit to Post-Effective Amendment No. 15 to Registrant's Registration Statement on Form N-1A, filed October 11, 1988. (g) Reference is made to Article III, Article V, Article VI (sections 2, 3, 4 and 5), Article VII, Article VIII, and Article X of the Registrant's Articles of Incorporation, previously filed as Exhibit (1), to the Registration Statement; and to Article II, Article III (sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XII, Article XIII, Article XIV and Article XV of the Registrant's By-Laws filed as Exhibit (2) to the Registration Statement. (h) Filed on October 28, 1993 as an Exhibit to Post-Effective Amendment No. 21 to Registrant's Registration Statement on Form N-1A (File No. 2-58521) under the Securities Act of 1933. (i) Filed as an exhibit to Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form N-1A, filed October 27, 1990. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. The Registrant is not controlled by or under common control with any other person. C-2 97 ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD HOLDERS TITLE OF CLASS AT JULY 31, 1994 - ------------------------------------------------------------------------------ ----------------- Class A Shares of Common Stock, par value $0.10 per share..................... 211,899 Class B Shares of Common Stock, par value $0.10 per share..................... 163,646 Class C Shares of Common Stock, par value $0.10 per share..................... 0 Class D Shares of Common Stock, par value $0.10 per share..................... 0
ITEM 27. INDEMNIFICATION. Reference is made to Article VI of Registrant's Articles of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C and Class D Distribution Agreements. Insofar as the conditional advancing of indemnification moneys for actions based on the Investment Company Act of 1940, as amended (the "1940 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 by 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 Class A, Class B, Class C and Class D Distribution Agreements relating to the securities being offered hereby, the Registrant agrees to indemnify the Distributor and each person, if any, who controls the Distributor within the meaning of the Securities Act of 1933 (the "Act"), against certain types of civil liabilities arising in connection with the Registration Statement or Prospectus and Statement of Additional Information. Insofar as indemnification for liabilities arising under the 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 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 Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER. Fund Asset Management, L.P. (the "Manager") acts as the investment adviser for the following investment companies: Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series Trust, Income Opportunities C-3 98 Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, 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 Insured Fund II, 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 New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager, acts as investment adviser for the following registered investment companies: Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. The address of each of these investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the Manager, MLAM, Princeton Services, Inc. ("Princeton Services"), Merrill Lynch Funds Distributor, Inc. ("MLFD") and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011. 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 10281. The address of Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. C-4 99 Set forth below is a list of each executive officer and partner of the Manager indicating each business, profession, vocation or employment of a substantial nature in which each such person or entity has been engaged since July 1, 1992, for his or its own account or in the capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially all of the investment companies described in the preceding paragraph, and Messrs. Durnin, Giordano, Harvey, Kirstein and Monagle are directors, trustees or officers of one or more of such companies.
OTHER SUBSTANTIAL BUSINESS, POSITION(S) WITH PROFESSION, VOCATION NAME THE MANAGER OR EMPLOYMENT - ------------------------------ ------------------------- ------------------------------------- ML & Co. ..................... Limited Partner Financial Services Holding Company Fund Asset Management, Inc. ....................... Limited Partner Investment Advisory Services Princeton Services............ General Partner General Partner of MLAM Arthur Zeikel................. President President of MLAM; President and Director of Princeton Services; Director of MLFD; Executive Vice President of ML & Co.; Executive Vice President of Merrill Lynch Terry K. Glenn................ Executive Vice President Executive Vice President of MLAM; Executive Vice President and Director of Princeton Services; President and Director of MLFD; President of Princeton Administrators, L.P. Bernard J. Durnin............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services Vincent R. Giordano........... Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services Elizabeth Griffin............. Senior Vice President Senior Vice President of MLAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services N. John Hewitt................ Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services Philip L. Kirstein............ Senior Vice President, Senior Vice President, General General Counsel and Counsel and Secretary of MLAM; Senior Secretary Vice President, General Counsel, Director and Secretary of Princeton Services; Director of MLFD Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller Controller of MLAM; Senior Vice President and Controller of Princeton Services Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer Treasurer of MLAM; Senior Vice President and Treasurer of Princeton Services; Vice President and Treasurer of MLFD Richard L. Rufener............ Senior Vice President Senior Vice President of MLAM; Vice President of MLFD; Senior Vice President of Princeton Services
C-5 100
OTHER SUBSTANTIAL BUSINESS, POSITION(S) WITH PROFESSION, VOCATION NAME THE MANAGER OR EMPLOYMENT - ------------------------------ ------------------------- ------------------------------------- Ronald L. Welburn............. Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services Anthony Wiseman............... Senior Vice President Senior Vice President of MLAM; Senior Vice President of Princeton Services
ITEM 29. PRINCIPAL UNDERWRITERS. (a) MLFD acts as the principal underwriter for the Registrant and for each of the investment companies referred to in the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, 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 New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc. (b) Set forth below is information concerning each director and officer of MLFD. The principal business address of each such person is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook, Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston, Massachusetts 02111-2646.
(3) (2) POSITIONS(S) AND (1) POSITIONS(S) AND OFFICE(S) OFFICE(S) NAME WITH MLFD WITH REGISTRANT ----------------------------- ------------------------- Terry K. Glenn.......................... President and Director Executive Vice President Arthur Zeikel........................... Director President and Director Philip L. Kirstein...................... Director None William E. Aldrich...................... Senior Vice President None Robert W. Crook......................... Senior Vice President None Michael J. Brady........................ Vice President None William M. Breen........................ Vice President None Sharon Creveling........................ Vice President and Assistant Treasurer None Mark A. DeSario......................... Vice President None James T. Fatseas........................ Vice President None Stanley Graczyk......................... Vice President None Michelle T. Lau......................... Vice President None Debra W. Landsman-Yaros................. Vice President None Gerald M. Richard....................... Vice President and Treasurer Treasurer Richard L. Rufener...................... Vice President None
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(3) (2) POSITIONS(S) AND (1) POSITIONS(S) AND OFFICE(S) OFFICE(S) NAME WITH MLFD WITH REGISTRANT - ---------------------------------------- ----------------------------- ------------------------- Salvatore Venezia....................... Vice President None William Wasel........................... Assistant Vice President None Robert Harris........................... Secretary None
(c) Not applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS. All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, 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 31. MANAGEMENT SERVICES. Other than as set forth under the caption "Management of the Fund -- Management and Advisory Arrangements" 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 32. UNDERTAKINGS. Not applicable. C-7 102 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Plainsboro, and the State of New Jersey, on the 6th day of September, 1994. MERRILL LYNCH BASIC VALUE FUND, INC. (Registrant) By: /s/ ARTHUR ZEIKEL ------------------------------------ (Arthur Zeikel, President) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date(s) indicated.
SIGNATURES TITLE DATE(S) - ----------------------------------- --------------------------------- -------------------- /s/ ARTHUR ZEIKEL President and Director September 6, 1994 - ----------------------------------- (Principal Executive Officer) (Arthur Zeikel) /s/ GERALD M. RICHARD Treasurer (Principal Financial September 6, 1994 - ----------------------------------- and Accounting Officer) (Gerald M. Richard) DONALD CECIL* Director - ----------------------------------- (Donald Cecil) M. COLYER CRUM* Director - ----------------------------------- (M. Colyer Crum) EDWARD H. MEYER* Director - ----------------------------------- (Edward H. Meyer) JACK B. SUNDERLAND* Director - ----------------------------------- (Jack B. Sunderland) J. THOMAS TOUCHTON* Director - ----------------------------------- (J. Thomas Touchton) *By: /s/ ARTHUR ZEIKEL September 6, 1994 ------------------------------ (Arthur Zeikel, Attorney-in-Fact)
C-8 103 EXHIBIT INDEX
EXHIBIT PAGE NUMBER NUMBER - ------ ------ 2 -- By-Laws of Registrant 5(b) -- Supplement to Investment Advisory Agreement between Registrant and Fund Asset Management, L.P. 6(c) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement) 6(d) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement) 11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant 15(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement 15(c) -- Form of Class D Distribution Plan and Class C Distribution Plan Sub-Agreement 17(a) -- Financial Data Schedule for Class A Shares 17(b) -- Financial Data Schedule for Class B Shares
EX-99.2 2 BY-LAWS OF REGISTRANT 1 EXHIBIT 2 2 Adopted May 5, 1994 BY-LAWS OF MERRILL LYNCH BASIC VALUE FUND, INC. ARTICLE I Offices Section 1. Principal Office. The principal office of the the Corporation shall be in the City of Baltimore, State of Maryland. Section 2. Principal Executive Office. The principal executive office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. Section 3. Other Offices. The Corporation may have such other offices in such places as the Board of Directors may from time to time determine. ARTICLE II Meetings of Stockholders Section 1. Annual Meeting. The Corporation shall not be required to hold an annual meeting of its stockholders in any year in which the election of directors is not required to be acted upon under the Investment Company Act of 1940. In the event that the Corporation shall be required to hold an annual meeting of stockholders to elect directors by the Investment 3 Company Act of 1940, as amended, such meeting shall be held no later than 120 days after the occurrence of the event requiring the meeting. Any stockholders' meeting held in accordance with this Section shall for all purposes constitute the annual meeting of stockholders for the year in which the meeting is held. Section 2. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law, may be called for any purpose or purposes by a majority of the Board of Directors, the President, or on the written request of the holders of at least 10% of the outstanding shares of capital stock of the Corporation entitled to vote at such meeting if they comply with Section 2- 502(b) or (c) of the Maryland General Corporation Law. Section 3. Place of Meetings. Meetings of the stockholders shall be held at such place within the United States as the Board of Directors may from time to time determine. Section 4. Notice of Meetings; Waiver of Notice. Notice of the place, date and time of the holding of each stockholders' meeting and, if the meeting is a special meeting, the purpose or purposes of the special meeting, shall be given personally or by mail, not less than ten nor more than ninety days before the date of such meeting, to each stockholder entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. Notice by mail shall be deemed to be duly given when deposited in the United States mail addressed to the stockholder 2 4 at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice of any meeting of stockholders shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, or who shall, either before or after the meeting, submit a signed waiver of notice which is filed with the records of the meeting. When a meeting is adjourned to another time and place, unless the Board of Directors, after the adjournment, shall fix a new record date for an adjourned meeting, or the adjournment is for more than one hundred and twenty days after the original record date, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. Section 5. Quorum. At all meetings of the stockholders, the holders of shares of stock of the Corporation entitled to cast a majority of the votes entitled to be cast, present in person or by proxy, shall constitute a quorum for the transaction of any business, except with respect to any matter which requires approval by a separate vote of one or more classes of stock, in which case the presence in person or by proxy of the holders of shares entitled to cast a majority of the votes entitled to be cast by each class entitled to vote as a separate class shall constitute a quorum. In the absence of a quorum no business may be transacted, except that the holders of a majority of the shares of stock present in person or by proxy and entitled to 3 5 vote may adjourn the meeting from time to time, without notice other than announcement thereat except as otherwise required by these By-Laws, until the holders of the requisite amount of shares of stock shall be so present. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting, in person or by proxy, of holders of the number of shares of stock of the Corporation in excess of a majority thereof which may be required by the laws of the State of Maryland, the Investment Company Act of 1940, as amended, or other applicable statute, the Articles of Incorporation, or these By-Laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat, in person or by proxy, holders of the number of shares of stock of the Corporation required for action in respect of such other matter or matters. Section 6. Organization. At each meeting of the stockholders, the Chairman of the Board (if one has been designated by the Board), or in his absence or inability to act, the President, or in the absence or inability to act of the Chairman of the Board and the President, a Vice President, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. 4 6 Section 7. Order of Business. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in his name on the record of stockholders of the Corporation as of the record date determined pursuant to Section 9 of this Article or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where such proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. Except as otherwise provided by statute, the Articles of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders (other than the election of directors, which shall be by plurality vote) 5 7 shall be authorized by a majority of the total votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 9. Fixing of Record Date. The Board of Directors may set a record date for the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date, which may not be prior to the close of business on the day the record date is fixed, shall be not more than ninety nor less than ten days before the date of the meeting of the stockholders. All persons who were holders of record of shares at such time, and not others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any 6 8 stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, may be required to take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors may be empowered to determine the number of shares outstanding and the voting powers of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Except as otherwise provided by statute or the Articles of Incorporation, any action required to be taken at any meeting of stockholders, or any action which may be taken at any meeting of such stockholders, may be taken without a meeting, without prior 7 9 notice and without a vote, if the following are filed with the records of stockholders meetings: (i) a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and (ii) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE III Board of Directors Section 1. General Powers. Except as otherwise provided in the Articles of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the stockholders by law or by the Articles of Incorporation or these By-Laws. Section 2. Number of Directors. The number of directors shall be fixed from time to time by resolution of the Board of Directors adopted by a majority of the entire Board of Directors; provided, however, that the number of directors shall in no event be less than three nor more than fifteen. Any vacancy created by an increase in Directors may be filled in accordance with Section 6 of this Article III. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term unless such director is specifi- 8 10 cally removed pursuant to Section 5 of this Article III at the time of such decrease. Directors need not be stockholders. Section 3. Election and Term of Directors. Directors shall be elected annually by written ballot at a meeting of stockholders held for that purpose; provided, however, that if no meeting of the stockholders of the Corporation is required to be held in a particular year pursuant to Section 1 of Article II of these By-Laws, directors shall be elected at the next meeting held. The term of office of each director shall be from the time of his election and qualification until the election of directors next succeeding his election and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned, or until December 31 of the year in which he shall have reached seventy-two years of age, or until he shall have been removed as hereinafter provided in these By-Laws, or as otherwise provided by statute or the Articles of Incorporation. Section 4. Resignation. A director of the Corporation may resign at any time by giving written notice of his resignation to the Board or the Chairman of the Board or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9 11 Section 5. Removal of Directors. Any director of the Corporation may be removed by the stockholders by a vote of a majority of the votes entitled to be cast for the election of directors. Section 6. Vacancies. Any vacancies in the Board, whether arising from death, resignation, removal, an increase in the number of directors or any other cause, may be filled by a vote of the majority of the Board of Directors then in office even though such majority is less than a quorum, provided that no vacancies shall be filled by action of the remaining directors, if after the filling of said vacancy or vacancies, less than two-thirds of the directors then holding office shall have been elected by the stockholders of the Corporation. In the event that at any time there is a vacancy in any office of a director which vacancy may not be filled by the remaining directors, a special meeting of the stockholders shall be held as promptly as possible and in any event within sixty days, for the purpose of filling said vacancy or vacancies. Section 7. Place of Meetings. Meetings of the Board may be held at such place as the Board may from time to time determine or as shall be specified in the notice of such meeting. Section 8. Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined by the Board of Directors. 10 12 Section 9. Special Meetings. Special meetings of the Board may be called by two or more directors of the Corporation or by the Chairman of the Board or the President. Section 10. Telephone Meetings. Members of the Board of Directors or of any committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Subject to the provisions of the Investment Company Act of 1940, as amended, participation in a meeting by these means constitutes presence in person at the meeting. Section 11. Notice of Special Meetings. Notice of each special meeting of the Board shall be given by the Secretary as hereinafter provided, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally or by telephone or any standard form of telecommunication, at least twenty-four hours before the time at which such meeting is to be held, or by first-class mail, postage prepaid, addressed to him at his residence or usual place of business, at least three days before the day on which such meeting is to be held. Section 12. Waiver of Notice of Meetings. Notice of any special meeting need not be given to any director who shall, either before or after the meeting, sign a written waiver of notice which is filed with the records of the meeting or who 11 13 shall attend such meeting. Except as otherwise specifically required by these By-Laws, a notice or waiver or notice of any meeting need not state the purposes of such meeting. Section 13. Quorum and Voting. One-third, but not less than two, of the members of the entire Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and except as otherwise expressly required by statute, the Articles of Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or other applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting to another time and place until a quorum shall be present thereat. Notice of the time and place of any such adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless such time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 14. Organization. The Board may, by resolution adopted by a majority of the entire Board, designate a Chairman of the Board, who shall preside at each meeting of the Board. In 12 14 the absence or inability of the Chairman of the Board to preside at a meeting, the President or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence or inability to act, any person appointed by the Chairman) shall act as secretary of the meeting and keep the minutes thereof. Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to the provisions of the Investment Company Act of 1940, as amended, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writings or writing are filed with the minutes of the proceedings of the Board or committee. Section 16. Compensation. Directors may receive compensation for services to the Corporation in their capacities as directors or otherwise in such manner and in such amounts as may be fixed from time to time by the Board. Section 17. Investment Policies. It shall be the duty of the Board of Directors to direct that the purchase, sale, retention and disposal of portfolio securities and the other investment practices of the Corporation are at all times consistent with the investment policies and restrictions with respect to securities investments and otherwise of the Corporation, as 13 15 recited in the current Prospectus and Statement of Additional Information of the Corporation, as filed from time to time with the Securities and Exchange Commission and as required by the Investment Company Act of 1940, as amended. The Board however, may delegate the duty of management of the assets and the administration of its day to day operations to an individual or corporate management company and/or investment adviser pursuant to a written contract or contracts which have obtained the requisite approvals, including the requisite approvals of renewals thereof, of the Board of Directors and/or the stockholders of the Corporation in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE IV Committees Section 1. Executive Committee. The Board may, by resolution adopted by a majority of the entire board, designate an Executive Committee consisting of two or more of the directors of the Corporation, which committee shall have and may exercise all the powers and authority of the Board with respect to all matters other than: (a) the submission to stockholders of any action requiring authorization of stockholders pursuant to statute or the Articles of Incorporation; (b) the filling of vacancies on the Board of Directors; 14 16 (c) the fixing of compensation of the directors for serving on the Board or on any committee of the Board, including the Executive Committee; (d) the approval or termination of any contract with an investment adviser or principal underwriter, as such terms are defined in the Investment Company Act of 1940, as amended, or the taking of any other action required to be taken by the Board of Directors by the Investment Company Act of 1940, as amended; (e) the amendment or repeal of these By-Laws or the adoption of new By-Laws; (f) the amendment or repeal of any resolution of the Board which by its terms may be amended or repealed only by the Board; (g) the declaration of dividends and the issuance of capital stock of the Corporation; and (h) the approval of any merger or share exchange which does not require stockholder approval. The Executive Committee shall keep written minutes of its proceedings and shall report such minutes to the Board. All such proceedings shall be subject to revision or alteration by the Board; provided, however, that third parties shall not be prejudiced by such revision or alteration. Section 2. Other Committees of the Board. The Board of Directors may from time to time, by resolution adopted by a majority of the whole Board, designate one or more other committees of the Board, each such committee to consist of two or 15 17 more directors and to have such powers and duties as the Board of Directors may, by resolution, prescribe. Section 3. General. One-third, but not less than two, of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board may designate a chairman of any committee and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority or power of the Board in the management of the business or affairs of the Corporation. 16 18 ARTICLE V Officers, Agents and Employees Section 1. Number and Qualifications. The officers of the Corporation shall be a President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one or more Vice Presidents and may also appoint such other officers, agents and employees as it may deem necessary or proper. Any two or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Such officers shall be elected by the Board of Directors each year at a meeting of the Board of Directors, each to hold office for the ensuing year and until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. The Board may from time to time elect, or delegate to the President the power to appoint, such officers (including one or more Assistant Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents, as may be necessary or desirable for the business of the Corporation. Such officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. 17 19 Section 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall be necessary to make it effective. Section 3. Removal of Officer, Agent or Employee. Any officer, agent or employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate such power of removal as to agents and employees not elected or appointed by the Board of Directors. Such removal shall be without prejudice to such person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. Section 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. Compensation. The compensation of the officers of the Corporation shall be fixed by the Board of Directors, but 18 20 this power may be delegated to any officer in respect of other officers under his control. Section 6. Bonds or Other Security. If required by the Board, any officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety or sureties as the Board may require. Section 7. President. The President shall be the chief executive officer of the Corporation. In the absence of the Chairman of the Board (or if there be none), he shall preside at all meetings of the stockholders and of the Board Directors. He shall have, subject to the control of the Board of Directors, general charge of the business and affairs of the Corporation. He may employ and discharge employees and agents of the Corporation, except such as shall be appointed by the Board, and he may delegate these powers. Section 8. Vice President. Each Vice President shall have such powers and perform such duties as the Board of Directors or the President may from time to time prescribe. Section 9. Treasurer. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, except those which the Corporation has placed in the custody of a bank or trust company or member of a national securities exchange (as that term is defined in the Securities Exchange Act of 1934, as amended) 19 21 pursuant to a written agreement designating such bank or trust company or member of a national securities exchange as custodian of the property of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) cause all moneys and other valuables to be deposited to the credit of the Corporation; (d) receive, and give receipts for, moneys due and payable, to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds as ordered or authorized by the Board, taking proper vouchers therefor; and (f) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or the President. Section 10. Secretary. The Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as 20 22 hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the President. Section 11. Delegation of Duties. In case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may confer for the time being the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE VI Indemnification Each officer and director of the Corporation shall be indemnified by the Corporation to the full extent permitted under the Maryland General Corporation Law, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Absent a court determination that an 21 23 officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, the decision by the Corporation to indemnify such person must be based upon the reasonable determination of independent legal counsel in a written opinion or the vote of a majority of a quorum of the directors who are neither "interested persons," as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("non-party independent directors"), after review of the facts, that such officer or director is not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Each officer and director of the Corporation claiming indemnification within the scope of this Article VI shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permitted under the Maryland General Corporation Law without a preliminary determination as to his or her ultimate entitlement to indemnification (except as set forth below); provided, however, that the person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written 22 24 undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. The Corporation may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland, from liability arising from his activities as officer or director of the Corporation. The Corporation, however, may not purchase insurance on behalf of any officer or director of the Corporation that protects or purports to protect such person from liability to the Corporation or to its stockholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. 23 25 The Corporation may indemnify, make advances or purchase insurance to the extent provided in this Article VI on behalf of an employee or agent who is not an officer or director of the Corporation. ARTICLE VII Capital Stock Section 1. Stock Certificates. Each holder of stock of the Corporation shall be entitled upon request to have a certificate or certificates, in such form as shall be approved by the Board, representing the number of shares of stock of the Corporation owned by him, provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the Chairman, President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in office at the date of issue. 24 26 Section 2. Books of Account and Record of Stockholders. There shall be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed twelve months and the consideration received by the Corporation for each such share. Section 3. Transfers of Shares. Transfers of shares of stock of the Corporation shall be made on the stock records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation shall not be bound to recognize any equitable or 25 27 legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any certificates representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Board may, in its discretion, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance 26 28 of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Maryland. Section 6. Fixing of a Record Date for Dividends and Distributions. The Board may fix, in advance, a date not more than ninety days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. Section 7. Information to Stockholders and Others. Any stockholder of the Corporation or his agent may inspect and copy during usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual statements of its affairs, and voting trust agreements on file at its principal office. 27 29 ARTICLE VIII Seal The seal of the Corporation shall be circular in form and shall bear, in addition to any other emblem or device approved by the Board of Directors, the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Maryland." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX Fiscal Year Unless otherwise determined by the Board, the fiscal year of the Corporation shall end on the 30th day of June. ARTICLE X Depositories and Custodians Section 1. Depositories. The funds of the Corporation shall be deposited with such banks or other depositories as the Board of Directors of the Corporation may from time to time determine. Section 2. Custodians. All securities and other investments shall be deposited in the safekeeping of such banks or other companies as the Board of Directors of the Corporation may from time to time determine. Every arrangement entered into 28 30 with any bank or other company for the safekeeping of the securities and investments of the Corporation shall contain provisions complying with the Investment Company Act of 1940, as amended, and the general rules and regulations thereunder. ARTICLE XI Execution of Instruments Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts, acceptances, bills of exchange and other orders or obligations for the payment of money shall be signed by such officer or officers or person or persons as the Board of Directors by resolution shall from time to time designate. Section 2. Sale or Transfer of Securities. Stock certificates, bonds or other securities at any time owned by the Corporation may be held on behalf of the Corporation or sold, transferred or otherwise disposed of subject to any limits imposed by these By-Laws and pursuant to authorization by the Board and, when so authorized to be held on behalf of the Corporation or sold, transferred or otherwise disposed of, may be transferred from the name of the Corporation by the signature of the President or a Vice President or the Treasurer or pursuant to any procedure approved by the Board of Directors, subject to applicable law. 29 31 ARTICLE XII Independent Public Accountants The firm of independent public accountants which shall sign or certify the financial statements of the Corporation which are filed with the Securities and Exchange Commission shall be selected annually by the Board of Directors and, if required by the provisions of the Investment Company Act of 1940, as amended, ratified by the stockholders. ARTICLE XIII Annual Statement The books of account of the Corporation shall be examined by an independent firm of public accountants at the close of each annual period of the Corporation and at such other times as may be directed by the Board. A report to the stockholders based upon each such examination shall be mailed to each stockholder of the Corporation of record on such date with respect to each report as may be determined by the Board, at his address as the same appears on the books of the Corporation. Such annual statement shall also be available at the annual meeting of stockholders, if any, and within 20 days after the meeting (or, in the absence of an annual meeting, within 120 days after the end of the fiscal year), shall be placed on file at the Corporation's principal office. Each such report shall show the 30 32 assets and liabilities of the Corporation as of the close of the annual or quarterly period covered by the report and the securities in which the funds of the Corporation were then invested. Such report shall also show the Corporation's income and expenses for the period from the end of the Corporation's preceding fiscal year to the close of the annual or quarterly period covered by the report and any other information required by the Investment Company Act of 1940, as amended, and shall set forth such other matters as the Board or such firm of independent public accountants shall determine. ARTICLE XIV Fundamental Policies It is the fundamental policy of the Corporation not to: 1. Invest in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment more than 5% of the total assets of the Corporation, taken at market value, would be invested in the securities of such issuer, or more than 10% of the outstanding securities, or more than 10% of the outstanding voting securities, of such issuer would be owned by the Corporation. 2. Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry. 31 33 3. Make investments for the purpose of exercising control or management. 4. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than 10% of the Corporation's total assets, taken at market value, would be invested in such securities. 5. Purchase or sell real estate; provided that the Corporation may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 6. Purchase or sell commodities or commodity contracts. 7. Purchase any securities on margin, except that the Corporation may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, or make short sales of securities or maintain a short position. 8. Make loans to other persons (except as provided in Section 9 below); provided that for purposes of this restriction the acquisition of a portion of an issue of bonds, debentures, or other corporate debt securities and investment in United States Government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed to be the 32 34 making of a loan (the acquisition of bonds, debentures or other corporate debt securities which are not publicly distributed is considered to be the making of a loan under the Investment Company Act of 1940). 9. Lend its portfolio securities in excess of 20% of its total assets, taken at market value; provided that such loans shall be made in accordance with the guidelines set forth in the prospectus of the Corporation effective under the Securities Act of 1933. 10. 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. 11. Mortgage, pledge, hypothecate or in any manner transfer (except as provided in Section 9 above), as security for indebtedness, any securities owned or held by the Corporation except as may be necessary in connection with borrowings mentioned in Section 10 above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Corporation's total assets, taken at market value. 12. Invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which no readily available market exists or in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if, regarding all such 33 35 securities, more than 5% of its total assets, taken at market value, would be invested in such securities. 13. Underwrite securities of other issuers except insofar as the Corporation may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 14. Write, purchase or sell puts, calls or combinations thereof, except that the Corporation may write covered call options with respect to its portfolio securities, and enter into closing purchase transactions with respect to such options, if at the time of the writing of such option not more than 15% of its total assets, taken at market value, would be subject to being purchased upon the exercise of an option. 15. Invest in securities of foreign issuers if at the time of acquisition more than 10% of its total assets, taken at market value, would be invested in such securities. 16. Purchase or sell interests in oil, gas or other mineral exploration or development programs. 17. Purchase or retain the securities of any issuer, if those individual officers and directors of the Corporation, Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. 34 36 ARTICLE XV Amendments These By-Laws or any of them, except for Article XIV hereof, may be amended, altered or repealed by the Board of Directors. Except for Article XIV hereof, the stockholders shall have no power to make, amend, alter or repeal By-Laws. 35 EX-99.5.B 3 SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT 1 EXHIBIT 5(b) 2 SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT WITH FUND ASSET MANAGEMENT As of January 1, 1994 Fund Asset Management was reorganized as a limited partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. and the limited partners are Fund Asset Management, Inc. and Merrill Lynch & Co. Inc. Pursuant to Rule 202(a)(1)-1 under the Investment Advisers Act of 1940 and Rule 2a-6 under the Investment Company Act of 1940 such reorganization did not constitute an assignment of this investment advisory agreement since it did not involve a change of control or management of the investment adviser. Pursuant to the requirements of Section 205 of the Investment Advisers Act of 1940, however, Fund Asset Management hereby supplements this investment advisory agreement by undertaking to advise you of any change in the membership of the partnership within a reasonable time after any such change occurs. By /s/ Arthur Zeikel ----------------- Dated: January 3, 1994 EX-99.6.C 4 FORM OF CLASS C DISTRIBUTION AGREEMENT 1 EXHIBIT 6(c) 2 CLASS C SHARES DISTRIBUTION AGREEMENT AGREEMENT made as of the 4th day of August 1994, between MERRILL LYNCH BASIC VALUE FUND, INC., a Maryland corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor"). W I T N E S S E T H : WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end investment company, and it is affirmatively in the interest of the Fund to offer its shares for sale continuously; and WHEREAS, the Distributor is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund and the Distributor wish to enter into an agreement with each other with respect to the continuous offering of the Fund's Class C shares in order to promote the growth of the Fund and facilitate the distribution of its Class C shares. NOW, THEREFORE, the parties agree as follows: Section 1. Appointment of the Distributor. The Fund hereby appoints the Distributor as the principal underwriter and distributor of the Fund to sell Class C shares of common stock in 3 the Fund (sometimes herein referred to as "Class C shares") to the public and hereby agrees during the term of this Agreement to sell shares of the Fund to the Distributor upon the terms and conditions herein set forth. Section 2. Exclusive Nature of Duties. The Distributor shall be the exclusive representative of the Fund to act as principal underwriter and distributor of the Class C shares, except that: (a) The Fund may, upon written notice to the Distributor, from time to time designate other principal underwriters and distributors of Class C shares with respect to areas other than the United States as to which the Distributor may have expressly waived in writing its right to act as such. If such designation is deemed exclusive, the right of the Distributor under this Agreement to sell Class C shares in the areas so designated shall terminate, but this Agreement shall remain otherwise in full effect until terminated in accordance with the other provisions hereof. (b) The exclusive right granted to the Distributor to purchase Class C shares from the Fund shall not apply to Class C shares of the Fund issued in connection with the merger or consolidation of any other investment company or personal holding company with the Fund or the acquisition by purchase or otherwise of all (or substantially all) the assets or the outstanding Class C shares of any such company by the Fund. 2 4 (c) Such exclusive right also shall not apply to Class C shares issued by the Fund pursuant to reinvestment of dividends or capital gains distributions. (d) Such exclusive right also shall not apply to Class C shares issued by the Fund pursuant to any conversion, exchange or reinstatement privilege afforded redeeming shareholders or to any other Class C shares as shall be agreed between the Fund and the Distributor from time to time. Section 3. Purchase of Class C Shares from the Fund. (a) It is contemplated that the Fund will commence an offering of its Class C shares, and thereafter the Distributor shall have the right to buy from the Fund the Class C shares needed, but not more than the Class C shares needed (except for clerical errors in transmission) to fill unconditional orders for Class C shares of the Fund placed with the Distributor by eligible investors or securities dealers. Investors eligible to purchase Class C shares shall be those persons so identified in the currently effective prospectus and statement of additional information of the Fund (the "prospectus" and "statement of additional information", respectively) under the Securities Act of 1933, as amended (the "Securities Act"), relating to such Class C shares. The price which the Distributor shall pay for the Class C shares so purchased from the Fund shall be the net asset value, determined as set forth in Section 3(c) hereof. 3 5 (b) The Class C shares are to be resold by the Distributor to investors at net asset value, as set forth in Section 3(c) hereof, or to securities dealers having agreements with the Distributor upon the terms and conditions set forth in Section 7 hereof. (c) The net asset value of Class C shares of the Fund shall be determined by the Fund or any agent of the Fund in accordance with the method set forth in the prospectus and statement of additional information and guidelines established by the Board of Directors. (d) The Fund shall have the right to suspend the sale of its Class C shares at times when redemption is suspended pursuant to the conditions set forth in Section 4(b) hereof. The Fund shall also have the right to suspend the sale of its Class C shares if trading on the New York Stock Exchange shall have been suspended, if a banking moratorium shall have been declared by Federal or New York authorities, or if there shall have been some other event, which, in the judgment of the Fund, makes it impracticable or inadvisable to sell the Class C shares. (e) The Fund, or any agent of the Fund designated in writing by the Fund, shall be promptly advised of all purchase orders for Class C shares received by the Distributor. Any order may be rejected by the Fund; provided, however, that the Fund will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of Class C shares. The Fund 4 6 (or its agent) will confirm orders upon their receipt, will make appropriate book entries and, upon receipt by the Fund (or its agent) of payment therefor, will deliver deposit receipts or certificates for such Class C shares pursuant to the instructions of the Distributor. Payment shall be made to the Fund in New York Clearing House funds. The Distributor agrees to cause such payment and such instructions to be delivered promptly to the Fund (or its agent). Section 4. Repurchase or Redemption of Class C Shares by the Fund. (a) Any of the outstanding Class C shares may be tendered for redemption at any time, and the Fund agrees to repurchase or redeem the Class C shares so tendered in accordance with its obligations as set forth in Article VII of its Articles of Incorporation, as amended from time to time, and in accordance with the applicable provisions set forth in the prospectus and statement of additional information of the Fund. The price to be paid to redeem or repurchase the Class C shares shall be equal to the net asset value calculated in accordance with the provisions of Section 3(c) hereof, less any contingent deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus and statement of additional information of the Fund. All payments by the Fund hereunder shall be made in the manner set forth below. 5 7 The Fund shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of the Distributor on or before the seventh business day subsequent to its having received the notice of redemption in proper form. The proceeds of any redemption of shares shall be paid by the Fund as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or for the account of the shareholder, in each case in accordance with the applicable provisions of the prospectus and statement of additional information. (b) Redemption of Class C shares or payment may be suspended at times when the New York Stock Exchange is closed, when trading on said Exchange is suspended, when trading on said Exchange is restricted, when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or during any other period when the Securities and Exchange Commission, by order, so permits. Section 5. Duties of the Fund. (a) The Fund shall furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Class C shares of the Fund, and this shall include, upon request by the Distributor, one certified copy of all 6 8 financial statements prepared for the Fund by independent public accountants. The Fund shall make available to the Distributor such number of copies of its prospectus and statement of additional information as the Distributor shall reasonably request. (b) The Fund shall take, from time to time, but subject to any necessary approval of the shareholders, all necessary action to fix the number of authorized shares and such steps as may be necessary to register the same under the Securities Act to the end that there will be available for sale such number of Class C shares as the Distributor reasonably may be expected to sell. (c) The Fund shall use its best efforts to qualify and maintain the qualification of an appropriate number of its Class C shares for sale under the securities laws of such states as the Distributor and the Fund may approve. Any such qualification may be withheld, terminated or withdrawn by the Fund at any time in its discretion. As provided in Section 8(c) hereof, the expense of qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualification. (d) The Fund will furnish, in reasonable quantities upon request by the Distributor, copies of annual and interim reports of the Fund. 7 9 Section 6. Duties of the Distributor. (a) The Distributor shall devote reasonable time and effort to effect sales of Class C shares of the Fund but shall not be obligated to sell any specific number of shares. The services of the Distributor to the Fund hereunder are not to be deemed exclusive and nothing herein contained shall prevent the Distributor from entering into like arrangements with other investment companies so long as the performance of its obligations hereunder is not impaired thereby. (b) In selling the Class C shares of the Fund, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all Federal and state laws relating to the sale of such securities. Neither the Distributor nor any selected dealer, as defined in Section 7 hereof, nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the registration statement or related prospectus and statement of additional information and any sales literature specifically approved by the Fund. (c) The Distributor shall adopt and follow procedures, as approved by the officers of the Fund, for the confirmation of sales to investors and selected dealers, the collection of amounts payable by investors and selected dealers on such sales, and the cancellation of unsettled transactions, as may be necessary to comply with the requirements of the National Association 8 10 of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to time exist. Section 7. Selected Dealer Agreements. (a) The Distributor shall have the right to enter into selected dealer agreements with securities dealers of its choice ("selected dealers") for the sale of Class C shares; provided, that the Fund shall approve the forms of agreements with dealers. Class C shares sold to selected dealers shall be for resale by such dealers only at net asset value determined as set forth in Section 3(c) hereof. The form of agreement with selected dealers to be used during the continuous offering of the shares is attached hereto as Exhibit A. (b) Within the United States, the Distributor shall offer and sell Class C shares only to such selected dealers that are members in good standing of the NASD. Section 8. Payment of Expenses. (a) The Fund shall bear all costs and expenses of the Fund, including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required registration statements and/or prospectuses and statements of additional information under the Investment Company Act, the Securities Act, and all amendments and supplements thereto, and preparing and mailing annual and interim reports and proxy materials to Class C shareholders (including but not limited to the expense of setting in type any such registration statements, 9 11 prospectuses, statements of additional information, annual or interim reports or proxy materials). (b) The Distributor shall be responsible for any payments made to selected dealers as reimbursement for their expenses associated with payments of sales commissions to financial consultants. In addition, after the prospectuses, statements of additional information and annual and interim reports have been prepared and set in type, the Distributor shall bear the costs and expenses of printing and distributing any copies thereof which are to be used in connection with the offering of Class C shares to selected dealers or investors pursuant to this Agreement. The Distributor shall bear the costs and expenses of preparing, printing and distributing any other literature used by the Distributor or furnished by it for use by selected dealers in connection with the offering of the Class C shares for sale to the public and any expenses of advertising incurred by the Distributor in connection with such offering. It is understood and agreed that so long as the Fund's Class C Shares Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect, any expenses incurred by the Distributor hereunder may be paid from amounts recovered by it from the Fund under such Plan. (c) The Fund shall bear the cost and expenses of qualification of the Class C shares for sale pursuant to this Agreement and, if necessary or advisable in connection therewith, of quali- 10 12 fying the Fund as a broker or dealer in such states of the United States or other jurisdictions as shall be selected by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and expenses payable to each such state for continuing qualification therein until the Fund decides to discontinue such qualification pursuant to Section 5(c) hereof. Section 9. Indemnification. (a) The Fund shall indemnify and hold harmless the Distributor and each person, if any, who controls the Distributor against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith), as incurred, arising by reason of any person acquiring any Class C shares, which may be based upon the Securities Act, or on any other statute or at common law, on the ground that the registration statement or related prospectus and statement of additional information, as from time to time amended and supplemented, or an annual or interim report to Class C shareholders of the Fund, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished to the Fund in connection therewith by or on behalf of the Distributor; provided, however, that in no case (i) 11 13 is the indemnity of the Fund in favor of the Distributor and any such controlling persons to be deemed to protect such Distributor or any such controlling persons thereof against any liability to the Fund or its security holders to which the Distributor or any such controlling persons would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their obligations and duties under this Agreement; or (ii) is the Fund to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Distributor or any such controlling persons, unless the Distributor or such controlling persons, as the case may be, shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Distributor or such controlling persons (or after the Distributor or such controlling persons shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Fund will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Fund elects to assume the defense, such defense shall be 12 14 conducted by counsel chosen by it and satisfactory to the Distributor or such controlling person or persons, defendant or defendants in the suit. In the event the Fund elects to assume the defense of any such suit and retain such counsel, the Distributor or such controlling person or persons, defendant or defendants in the suit shall bear the fees and expenses, as incurred, of any additional counsel retained by them, but in case the Fund does not elect to assume the defense of any such suit, it will reimburse the Distributor or such controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses, as incurred, of any counsel retained by them. The Fund shall promptly notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or Directors in connection with the issuance or sale of any of the Class C shares. (b) The Distributor shall indemnify and hold harmless the Fund and each of its Directors and officers and each person, if any, who controls the Fund against any loss, liability, claim, damage or expense, as incurred, described in the foregoing indemnity contained in subsection (a) of this Section, but only with respect to statements or omissions made in reliance upon, and in conformity with, information furnished to the Fund in writing by or on behalf of the Distributor for use in connection with the registration statement or related prospectus and statement of additional information, as from time to time amended, or the 13 15 annual or interim reports to shareholders. In case any action shall be brought against the Fund or any person so indemnified, in respect of which indemnity may be sought against the Distributor, the Distributor shall have the rights and duties given to the Fund, and the Fund and each person so indemnified shall have the rights and duties given to the Distributor by the provisions of subsection (a) of this Section 9. Section 10. Duration and Termination of this Agreement. This Agreement shall become effective as of the date first above written and shall remain in force until August 4, 1995 and thereafter, but only for so long as such continuance is specifically approved at least annually by (i) the Directors or by the vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, by the Directors or by vote of a majority of the outstanding voting securities of the Fund, or by the Distributor, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. The terms "vote of a majority of the outstanding voting securities", "assignment", "affiliated person" and "interested 14 16 person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. Section 11. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Directors or by the vote of a majority of outstanding voting securities of the Fund and (ii) by the vote of a majority of those Directors of the Fund who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. Section 12. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MERRILL LYNCH BASIC VALUE FUND, INC. By ------------------------------------ Title: Executive Vice President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------ Title: Vice President 15 17 EXHIBIT A MERRILL LYNCH BASIC VALUE FUND, INC. CLASS C SHARES OF COMMON STOCK SELECTED DEALER AGREEMENT Gentlemen: Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement with Merrill Lynch Basic Value Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as the distributor for the sale of Class C shares of common stock, par value $0.10 per share (herein referred to as the "Class C shares"), of the Fund and as such has the right to distribute Class C shares of the Fund for resale. The Fund is an open-end investment company registered under the Investment Company Act of 1940, as amended, and its Class C shares being offered to the public are registered under the Securities Act of 1933, as amended. You have received a copy of the Class C Shares Distribution Agreement (the "Distribution Agreement") between ourself and the Fund and reference is made herein to certain provisions of such Distribution Agreement. The terms "Prospectus" and "Statement of Additional Information" as used herein refer to the prospectus and statement of additional information, respectively, on file with the Securities and Exchange Commission which is part of the most recent effective registration statement pursuant to the Securities Act of 1933, as amended. We offer to sell to you, as a member of the Selected Dealers Group, Class C shares of the Fund upon the following terms and conditions: 1. In all sales of these Class C shares to the public, you shall act as dealer for your own account and in no transaction shall you have any authority to act as agent for the Fund, for us or for any other member of the Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser program and such other special programs as we from time to time agree, in which case you shall have authority to offer and sell shares, as agent for the Fund, to participants in such program. 2. Orders received from you will be accepted through us only at the public offering price applicable to each order, as set forth in the current Prospectus and Statement of Additional Information of the Fund. The procedure relating to the handling of orders shall be subject to Section 4 hereof and instructions which we or the Fund shall forward from time to time to you. All orders are subject to acceptance or rejection by the Distributor or the Fund in the sole discretion of either. The minimum ini- 1 18 tial and subsequent purchase requirements are as set forth in the current Prospectus and Statement of Additional Information of the Fund. 3. You shall not place orders for any of the Class C shares unless you have already received purchase orders for such Class C shares at the applicable public offering prices and subject to the terms hereof and of the Distribution Agreement. You agree that you will not offer or sell any of the Class C shares except under circumstances that will result in compliance with the applicable Federal and state securities laws and that in connection with sales and offers to sell Class C shares you will furnish to each person to whom any such sale or offer is made a copy of the Prospectus and, if requested, the Statement of Additional Information (as then amended or supplemented) and will not furnish to any person any information relating to the Class C shares of the Fund which is inconsistent in any respect with the information contained in the Prospectus and Statement of Additional Information (as then amended or supplemented) or cause any advertisement to be published in any newspaper or posted in any public place without our consent and the consent of the Fund. 4. As a selected dealer, you are hereby authorized (i) to place orders directly with the Fund for Class C shares of the Fund to be resold by us to you subject to the applicable terms and conditions governing the placement of orders by us set forth in Section 3 of the Distribution Agreement and (ii) to tender Class C shares directly to the Fund or its agent for redemption subject to the applicable terms and conditions set forth in Section 4 of the Distribution Agreement. 5. You shall not withhold placing orders received from your customers so as to profit yourself as a result of such withholding: e.g., by a change in the "net asset value" from that used in determining the offering price to your customers. 6. No person is authorized to make any representations concerning Class C shares of the Fund except those contained in the current Prospectus and Statement of Additional Information of the Fund and in such printed information subsequently issued by us or the Fund as information supplemental to such Prospectus and Statement of Additional Information. In purchasing Class C shares through us you shall rely solely on the representations contained in the Prospectus and Statement of Additional Information and supplemental information above mentioned. Any printed information which we furnish you other than the Fund's Prospectus, Statement of Additional Information, periodic reports and proxy solicitation material is our sole responsibility and not the responsibility of the Fund, and you agree that the Fund shall 2 19 have no liability or responsibility to you in these respects unless expressly assumed in connection therewith. 7. You agree to deliver to each of the purchasers making purchases from you a copy of the then current Prospectus and, if requested, the Statement of Additional Information at or prior to the time of offering or sale and you agree thereafter to deliver to such purchasers copies of the annual and interim reports and proxy solicitation materials of the Fund. You further agree to endeavor to obtain proxies from such purchasers. Additional copies of the Prospectus and Statement of Additional Information, annual or interim reports and proxy solicitation materials of the Fund will be supplied to you in reasonable quantities upon request. 8. We reserve the right in our discretion, without notice, to suspend sales or withdraw the offering of Class C shares entirely or to certain persons or entities in a class or classes specified by us. Each party hereto has the right to cancel this Agreement upon notice to the other party. 9. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the continuous offering. We shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. Nothing contained in this paragraph is intended to operate as, and the provisions of this paragraph shall not in any way whatsoever constitute, a waiver by you of compliance with any provision of the Securities Act of 1933, as amended, or of the rules and regulations of the Securities and Exchange Commission issued thereunder. 10. You represent that you are a member of the National Association of Securities Dealers, Inc. and, with respect to any sales in the United States, we both hereby agree to abide by the Rules of Fair Practice of such Association. 11. Upon application to us, we will inform you as to the states in which we believe the Class C shares have been qualified for sale under, or are exempt from the requirements of, the respective securities laws of such states, but we assume no responsibility or obligation as to your right to sell Class C shares in any jurisdiction. We will file with the Department of State in New York a Further State Notice with respect to the Class C shares, if necessary. 12. All communications to us should be sent to the address below. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 3 20 13. Your first order placed pursuant to this Agreement for the purchase of Class C shares of the Fund will represent your acceptance of this Agreement. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ---------------------------------- (Authorized Signature) Please return one signed copy of this Agreement to: MERRILL LYNCH FUNDS DISTRIBUTOR, INC. Box 9011 Princeton, New Jersey 08543-9011 Accepted: Firm Name: -------------------------------------------- By: --------------------------------------------------- Address: ---------------------------------------------- ------------------------------------------------------- Date: ------------------------------------------------- 4 EX-99.6.D 5 FORM OF CLASS D DISTRIBUTION AGREEMENT 1 EXHIBIT 6(d) 2 CLASS D SHARES DISTRIBUTION AGREEMENT AGREEMENT made as of the 4th day of August 1994 between MERRILL LYNCH BASIC VALUE FUND, INC., a Maryland corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor"). W I T N E S S E T H : WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), as an open-end investment company, and it is affirmatively in the interest of the Fund to offer its shares for sale continuously; and WHEREAS, the Distributor is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund and the Distributor wish to enter into an agreement with each other with respect to the continuous offering of the Class D shares of common stock in the Fund. NOW, THEREFORE, the parties agree as follows: Section 1. Appointment of the Distributor. The Fund hereby appoints the Distributor as the principal underwriter and distributor of the Fund to sell Class D shares of common stock in the Fund (sometimes herein referred to as "Class D shares") to the 3 public and hereby agrees during the term of this Agreement to sell Class D shares of the Fund to the Distributor upon the terms and conditions herein set forth. Section 2. Exclusive Nature of Duties. The Distributor shall be the exclusive representative of the Fund to act as principal underwriter and distributor, except that: (a) The Fund may, upon written notice to the Distributor, from time to time designate other principal underwriters and distributors of Class D shares with respect to areas other than the United States as to which the Distributor may have expressly waived in writing its right to act as such. If such designation is deemed exclusive, the right of the Distributor under this Agreement to sell Class D shares in the areas so designated shall terminate, but this Agreement shall remain otherwise in full effect until terminated in accordance with the other provisions hereof. (b) The exclusive right granted to the Distributor to purchase Class D shares from the Fund shall not apply to Class D shares issued in connection with the merger or consolidation of any other investment company or personal holding company with the Fund or the acquisition by purchase or otherwise of all (or substantially all) the assets or the outstanding Class D shares of any such company by the Fund. (c) Such exclusive right also shall not apply to Class D shares issued by the Fund pursuant to reinvestment of dividends or capital gains distributions. 2 4 (d) Such exclusive right also shall not apply to Class D shares issued by the Fund pursuant to any conversion, exchange or reinstatement privilege afforded redeeming shareholders or to any other Class D shares as shall be agreed between the Fund and the Distributor from time to time. Section 3. Purchase of Class D Shares from the Fund. (a) It is contemplated that the Fund will commence an offering of its Class D shares, and thereafter the Distributor shall have the right to buy from the Fund the Class D shares needed, but not more than the Class D shares needed (except for clerical errors in transmission) to fill unconditional orders for Class D shares of the Fund placed with the Distributor by eligible investors or securities dealers. Investors eligible to purchase Class D shares shall be those persons so identified in the currently effective prospectus and statement of additional information of the Fund (the "prospectus" and "statement of additional information", respectively) under the Securities Act of 1933, as amended (the "Securities Act"), relating to such Class D shares. The price which the Distributor shall pay for the Class D shares so purchased from the Fund shall be the net asset value, determined as set forth in Section 3(d) hereof, used in determining the public offering price on which such orders were based. (b) The Class D shares are to be resold by the Distributor to investors at the public offering price, as set forth in Section 3(c) hereof, or to securities dealers having agreements 3 5 with the Distributor upon the terms and conditions set forth in Section 7 hereof. (c) The public offering price(s) of the Class D shares,i.e., the price per share at which the Distributor or selected dealers may sell Class D shares to the public, shall be the public offering price as set forth in the prospectus and statement of additional information relating to such Class D shares, but not to exceed the net asset value at which the Distributor is to purchase the Class D shares, plus a sales charge not to exceed 5.25% of the public offering price (5.54% of the net amount invested), subject to reductions for volume purchases. Class D shares may be sold to certain Directors, officers and employees of the Fund, directors and employees of Merrill Lynch & Co., Inc. and its subsidiaries, and to certain other persons described in the prospectus and statement of additional information, without a sales charge or at a reduced sales charge, upon terms and conditions set forth in the prospectus and statement of additional information. If the public offering price does not equal an even cent, the public offering price may be adjusted to the nearest cent. All payments to the Fund hereunder shall be made in the manner set forth in Section 3(f). (d) The net asset value of Class D shares shall be determined by the Fund or any agent of the Fund in accordance with the method set forth in the prospectus and statement of additional 4 6 information of the Fund and guidelines established by the Directors. (e) The Fund shall have the right to suspend the sale of its Class D shares at times when redemption is suspended pursuant to the conditions set forth in Section 4(b) hereof. The Fund shall also have the right to suspend the sale of its Class D shares if trading on the New York Stock Exchange shall have been suspended, if a banking moratorium shall have been declared by Federal or New York authorities, or if there shall have been some other event, which, in the judgment of the Fund, makes it impracticable or inadvisable to sell the Class D shares. (f) The Fund, or any agent of the Fund designated in writing by the Fund, shall be promptly advised of all purchase orders for Class D shares received by the Distributor. Any order may be rejected by the Fund; provided, however, that the Fund will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of Class D shares. The Fund (or its agent) will confirm orders upon their receipt, will make appropriate book entries and, upon receipt by the Fund (or its agent) of payment therefor, will deliver deposit receipts or certificates for such Class D shares pursuant to the instructions of the Distributor. Payment shall be made to the Fund in New York Clearing House funds. The Distributor agrees to cause such payment and such instructions to be delivered promptly to the Fund (or its agent). 5 7 Section 4. Repurchase or Redemption of Class D Shares by the Fund. (a) Any of the outstanding Class D shares may be tendered for redemption at any time, and the Fund agrees to repurchase or redeem the Class D shares so tendered in accordance with its obligations as set forth in Article VII of its Articles of Incorporation, as amended from time to time, and in accordance with the applicable provisions set forth in the prospectus and statement of additional information. The price to be paid to redeem or repurchase the Class D shares shall be equal to the net asset value calculated in accordance with the provisions of Section 3(d) hereof, less any contingent deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus and statement of additional information of the Fund. All payments by the Fund hereunder shall be made in the manner set forth below. The redemption or repurchase by the Fund of any of the Class D shares purchased by or through the Distributor will not affect the sales charge secured by the Distributor or any selected dealer in the course of the original sale, except that if any Class D shares are tendered for redemption or repurchase within seven business days after the date of the confirmation of the original purchase, the right to the sales charge shall be forfeited by the Distributor and the selected dealer which sold such Class D shares. The Fund shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of 6 8 the Distributor in New York Clearing House funds on or before the seventh business day subsequent to its having received the notice of redemption in proper form. The proceeds of any redemption of shares shall be paid by the Fund as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or for the account of the shareholder, in each case in accordance with the applicable provisions of the prospectus and statement of additional information. (b) Redemption of Class D shares or payment may be suspended at times when the New York Stock Exchange is closed, when trading on said Exchange is suspended, when trading on said Exchange is restricted, when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or during any other period when the Securities and Exchange Commission, by order, so permits. Section 5. Duties of the Fund. (a) The Fund shall furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Class D shares of the Fund, and this shall include, upon request by the Distributor, one certified copy of all financial statements prepared for the Fund by independent public accountants. The Fund shall make available to the Distributor 7 9 such number of copies of the prospectus and statement of additional information as the Distributor shall reasonably request. (b) The Fund shall take, from time to time, but subject to any necessary approval of the Class D shareholders, all necessary action to fix the number of authorized Class D shares and such steps as may be necessary to register the same under the Securities Act, to the end that there will be available for sale such number of Class D shares as the Distributor may reasonably be expected to sell. (c) The Fund shall use its best efforts to qualify and maintain the qualification of an appropriate number of its Class D shares for sale under the securities laws of such states as the Distributor and the Fund may approve. Any such qualification may be withheld, terminated or withdrawn by the Fund at any time in its discretion. As provided in Section 8(c) hereof, the expense of qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualification. (d) The Fund will furnish, in reasonable quantities upon request by the Distributor, copies of annual and interim reports of the Fund. Section 6. Duties of the Distributor. (a) The Distributor shall devote reasonable time and effort to effect sales of Class D shares of the Fund but shall not be obligated to sell any specific number of Class D shares. The 8 10 services of the Distributor to the Fund hereunder are not to be deemed exclusive and nothing herein contained shall prevent the Distributor from entering into like arrangements with other investment companies so long as the performance of its obligations hereunder is not impaired thereby. (b) In selling the Class D shares of the Fund, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all Federal and state laws relating to the sale of such securities. Neither the Distributor nor any selected dealer, as defined in Section 7 hereof, nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the registration statement or related prospectus and statement of additional information and any sales literature specifically approved by the Fund. (c) The Distributor shall adopt and follow procedures, as approved by the officers of the Fund, for the confirmation of sales to investors and selected dealers, the collection of amounts payable by investors and selected dealers on such sales, and the cancellation of unsettled transactions, as may be necessary to comply with the requirements of the National Association of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to time exist. Section 7. Selected Dealers Agreements. (a) The Distributor shall have the right to enter into selected dealers agreements with securities dealers of its choice 9 11 ("selected dealers") for the sale of Class D shares and fix therein the portion of the sales charge which may be allocated to the selected dealers; provided that the Fund shall approve the forms of agreements with dealers and the dealer compensation set forth therein. Class D shares sold to selected dealers shall be for resale by such dealers only at the public offering price(s) set forth in the prospectus and statement of additional information. The form of agreement with selected dealers to be used during the continuous offering of the Class D shares is attached hereto as Exhibit A. (b) Within the United States, the Distributor shall offer and sell Class D shares only to such selected dealers as are members in good standing of the NASD. Section 8. Payment of Expenses. (a) The Fund shall bear all costs and expenses of the Fund, including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required registration statements and/or prospectuses and statements of additional information under the Investment Company Act, the Securities Act, and all amendments and supplements thereto, and preparing and mailing annual and interim reports and proxy materials to Class D shareholders (including but not limited to the expense of setting in type any such registration statements, prospectuses, statements of additional information, annual or interim reports or proxy materials). 10 12 (b) The Distributor shall be responsible for any payments made to selected dealers as reimbursement for their expenses associated with payments of sales commissions to financial consultants. In addition, after the prospectuses, statements of additional information and annual and interim reports have been prepared and set in type, the Distributor shall bear the costs and expenses of printing and distributing any copies thereof which are to be used in connection with the offering of Class D shares to selected dealers or investors pursuant to this Agreement. The Distributor shall bear the costs and expenses of preparing, printing and distributing any other literature used by the Distributor or furnished by it for use by selected dealers in connection with the offering of the Class D shares for sale to the public and any expenses of advertising incurred by the Distributor in connection with such offering. It is understood and agreed that so long as the Fund's Class D Shares Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect, any expenses incurred by the Distributor hereunder in connection with account maintenance activities may be paid from amounts recovered by it from the Fund under such plan. (c) The Fund shall bear the cost and expenses of qualification of the Class D shares for sale pursuant to this Agreement and, if necessary or advisable in connection therewith, of qualifying the Fund as a broker or dealer in such states of the United States or other jurisdictions as shall be selected by the Fund 11 13 and the Distributor pursuant to Section 5(c) hereof and the cost and expenses payable to each such state for continuing qualification therein until the Fund decides to discontinue such qualification pursuant to Section 5(c) hereof. Section 9. Indemnification. (a) The Fund shall indemnify and hold harmless the Distributor and each person, if any, who controls the Distributor against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith), as incurred, arising by reason of any person acquiring any Class D shares, which may be based upon the Securities Act, or on any other statute or at common law, on the ground that the registration statement or related prospectus and statement of additional information, as from time to time amended and supplemented, or an annual or interim report to shareholders of the Fund, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless such statement or omission was made in reliance upon, and in conformity with, information furnished to the Fund in connection therewith by or on behalf of the Distributor; provided, however, that in no case (i) is the indemnity of the Fund in favor of the Distributor and any such controlling persons to be deemed to protect such Distributor or any such controlling persons thereof against any liability to the 12 14 Fund or its security holders to which the Distributor or any such controlling persons would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their obligations and duties under this Agreement; or (ii) is the Fund to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Distributor or any such controlling persons, unless the Distributor or such controlling persons, as the case may be, shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Distributor or such controlling persons (or after the Distributor or such controlling persons shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Fund will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Fund elects to assume the defense, such defense shall be conducted by counsel chosen by it and satisfactory to the Distributor or such controlling person or persons, defendant or defendants in the suit. In the event the Fund elects to assume the defense of any such suit and retain such counsel, the 13 15 Distributor or such controlling person or persons, defendant or defendants in the suit shall bear the fees and expenses of any additional counsel retained by them, but in case the Fund does not elect to assume the defense of any such suit, it will reimburse the Distributor or such controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Fund shall promptly notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or Directors in connection with the issuance or sale of any of the Class D shares. (b) The Distributor shall indemnify and hold harmless the Fund and each of its Directors and officers and each person, if any, who controls the Fund against any loss, liability, claim, damage or expense described in the foregoing indemnity contained in subsection (a) of this Section, but only with respect to statements or omissions made in reliance upon, and in conformity with, information furnished to the Fund in writing by or on behalf of the Distributor for use in connection with the registration statement or related prospectus and statement of additional information, as from time to time amended, or the annual or interim reports to Class D shareholders. In case any action shall be brought against the Fund or any person so indemnified, in respect of which indemnity may be sought against the Distributor, the Distributor shall have the rights and duties given to the Fund, and the Fund and each person so indemnified 14 16 shall have the rights and duties given to the Distributor by the provisions of subsection (a) of this Section 9. Section 10. Duration and Termination of this Agreement. This Agreement shall become effective as of the date first above written and shall remain in force until August 4, 1995 and thereafter, but only for so long as such continuance is specifically approved at least annually by (i) the Directors or by the vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Directors who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, by the Directors or by vote of a majority of the outstanding voting securities of the Fund, or by the Distributor, on sixty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment. The terms "vote of a majority of the outstanding voting securities", "assignment", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act. Section 11. Amendments of this Agreement. This Agreement may be amended by the parties only if such amendment is specifically approved by (i) the Directors or by the vote of a majority of outstanding voting securities of the Fund and (ii) by the vote 15 17 of a majority of those Directors of the Fund who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. Section 12. Governing Law. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MERRILL LYNCH BASIC VALUE FUND, INC. By ------------------------------------- Title: Executive Vice President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------- Title: Vice President 16 18 EXHIBIT A MERRILL LYNCH BASIC VALUE FUND, INC. CLASS D SHARES OF COMMON STOCK SELECTED DEALERS AGREEMENT Gentlemen: Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement with Merrill Lynch Basic Value Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as the distributor for the sale of Class D shares of common stock, par value $0.10 per share (herein referred to as "Class D shares"), of the Fund and as such has the right to distribute Class D shares of the Fund for resale. The Fund is an open-end investment company registered under the Investment Company Act of 1940, as amended, and its Class D shares being offered to the public are registered under the Securities Act of 1933, as amended. You have received a copy of the Class D Shares Distribution Agreement (the "Distribution Agreement") between ourself and the Fund and reference is made herein to certain provisions of such Distribution Agreement. The terms "Prospectus" and "Statement of Additional Information" used herein refer to the prospectus and statement of additional information, respectively, on file with the Securities and Exchange Commission which is part of the most recent effective registration statement pursuant to the Securities Act of 1933, as amended. We offer to sell to you, as a member of the Selected Dealers Group, Class D shares of the Fund upon the following terms and conditions: 1. In all sales of these Class D shares to the public, you shall act as dealer for your own account and in no transaction shall you have any authority to act as agent for the Fund, for us or for any other member of the Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser program and such other special programs as we from time to time agree, in which case you shall have authority to offer and sell shares, as agent for the Fund, to participants in such program. 2. Orders received from you will be accepted through us only at the public offering price applicable to each order, as set forth in the current Prospectus and Statement of Additional Information of the Fund. The procedure relating to the handling of orders shall be subject to Section 5 hereof and instructions which we or the Fund shall forward from time to time to you. All 1 19 orders are subject to acceptance or rejection by the Distributor or the Fund in the sole discretion of either. The minimum initial and subsequent purchase requirements are as set forth in the current Prospectus and Statement of Additional Information of the Fund. 3. The sales charges for sales to the public, computed as percentages of the public offering price and the amount invested, and the related discount to Selected Dealers are as follows:
Discount to Selected Sales Charge Dealers as Sales Charge as Percentage* Percentage as Percentage of the Net of the of the Amount Offering Amount of Purchase Offering Price Invested Price ------------------ -------------- ---------- ----------- Less than $25,000.... 5.25% 5.54% % $25,000 but less than $50,000........ 4.75% 4.99% % $50,000 but less than $100,000....... 4.00% 4.17% % $100,000 but less than $250,000....... 3.00% 3.09% % $250,000 but less than $1,000,000.. 2.00% 2.04% % $1,000,000 and over**.. 0.00% 0.00% %
- ------------------- * Rounded to the nearest one-hundredth percent. ** Initial sales charges will be waived for certain classes of offerees as set forth in the current Prospectus and Statement of Additional Information of the Fund. Such purchases may be subject to a contingent deferred sales charge if the shares are redeemed within one year after purchase at the following rates: 2 20
Contingent Deferred Sales Charge as a Percentage of Dollar Amount Subject to Amount of Purchase Charge - ------------------ ------------------------- $1 million up to $2.5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00 Over $2.5 million up to $3.5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.60 Over $3.5 million up to $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40 Over $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.25
The term "purchase" refers to a single purchase by an individual, or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his spouse and their children under the age of 21 years purchasing Class D shares for his or their own account and to single purchases by a trustee or other fiduciary purchasing Class D 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 of 1940, as amended, but does not include purchases by any such company which has not been in existence for at least six months or which has no purpose other than the purchase of Class D shares of the Fund or Class D 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. The reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase Class D shares of the Fund at the offering price applicable to the total of (a) the dollar amount 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 Class A, Class B, Class C and Class D shares of the Fund and of any other investment company with an initial sales charge for which the Distributor acts as the distributor. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or you, with sufficient information to permit confirmation of qualification, and acceptance of the purchase order is subject to such confirmation. The reduced sales charges are applicable to purchases aggregating $25,000 or more of Class A shares or of Class D shares of any other investment company with an initial sales charge for which the Distributor acts as the distributor made through you within a thirteen-month period starting with the first purchase pursuant to a Letter of Intention in the form provided in the Prospectus. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent letter executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. If the intended amount of shares is not purchased within the 3 21 thirteen-month period, an appropriate price adjustment will be made pursuant to the terms of the Letter of Intention. You agree to advise us promptly at our request as to amounts of any sales made by you to the public qualifying for reduced sales charges. Further information as to the reduced sales charges pursuant to the right of accumulation or a Letter of Intention is set forth in the Prospectus and Statement of Additional Information. 4. You shall not place orders for any of the Class D shares unless you have already received purchase orders for such Class D shares at the applicable public offering prices and subject to the terms hereof and of the Distribution Agreement. You agree that you will not offer or sell any of the Class D shares except under circumstances that will result in compliance with the applicable Federal and state securities laws and that in connection with sales and offers to sell Class D shares you will furnish to each person to whom any such sale or offer is made a copy of the Prospectus and, if requested, the Statement of Additional Information (as then amended or supplemented) and will not furnish to any person any information relating to the Class D shares of the Fund which is inconsistent in any respect with the information contained in the Prospectus and Statement of Additional Information (as then amended or supplemented) or cause any advertisement to be published in any newspaper or posted in any public place without our consent and the consent of the Fund. 5. As a selected dealer, you are hereby authorized (i) to place orders directly with the Fund for Class D shares of the Fund to be resold by us to you subject to the applicable terms and conditions governing the placement of orders by us set forth in Section 3 of the Distribution Agreement and subject to the compensation provisions of Section 3 hereof and (ii) to tender Class D shares directly to the Fund or its agent for redemption subject to the applicable terms and conditions set forth in Section 4 of the Distribution Agreement. 6. You shall not withhold placing orders received from your customers so as to profit yourself as a result of such withholding: e.g., by a change in the "net asset value" from that used in determining the offering price to your customers. 7. If any Class D shares sold to you under the terms of this Agreement are repurchased by the Fund or by us for the account of the Fund or are tendered for redemption within seven business days after the date of the confirmation of the original purchase by you, it is agreed that you shall forfeit your right to, and refund to us, any discount received by you on such Class D shares. 8. No person is authorized to make any representations concerning Class D shares of the Fund except those contained in the current Prospectus and Statement of Additional Information of the Fund and in 4 22 such printed information subsequently issued by us or the Fund as information supplemental to such Prospectus and Statement of Additional Information. In purchasing Class D shares through us you shall rely solely on the representations contained in the Prospectus and Statement of Additional Information and supplemental information above mentioned. Any printed information which we furnish you other than the Fund's Prospectus, Statement of Additional Information, periodic reports and proxy solicitation material is our sole responsibility and not the responsibility of the Fund, and you agree that the Fund shall have no liability or responsibility to you in these respects unless expressly assumed in connection therewith. 9. You agree to deliver to each of the purchasers making purchases from you a copy of the then current Prospectus and, if requested, the Statement of Additional Information at or prior to the time of offering or sale and you agree thereafter to deliver to such purchasers copies of the annual and interim reports and proxy solicitation materials of the Fund. You further agree to endeavor to obtain proxies from such purchasers. Additional copies of the Prospectus and Statement of Additional Information, annual or interim reports and proxy solicitation materials of the Fund will be supplied to you in reasonable quantities upon request. 10. We reserve the right in our discretion, without notice, to suspend sales or withdraw the offering of Class D shares entirely or to certain persons or entities in a class or classes specified by us. Each party hereto has the right to cancel this agreement upon notice to the other party. 11. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the continuous offering. We shall be under no liability to you except for lack of good faith and for obligations expressly assumed by us herein. Nothing contained in this paragraph is intended to operate as, and the provisions of this paragraph shall not in any way whatsoever constitute, a waiver by you of compliance with any provision of the Securities Act of 1933, as amended, or of the rules and regulations of the Securities and Exchange Commission issued thereunder. 12. You represent that you are a member of the National Association of Securities Dealers, Inc. and, with respect to any sales in the United States, we both hereby agree to abide by the Rules of Fair Practice of such Association. 13. Upon application to us, we will inform you as to the states in which we believe the Class D shares have been qualified for sale under, or are exempt from the requirements of, the respective securities laws of such states, but we assume no responsibility or obligation as to your right to sell Class D shares in any jurisdiction. We will file with the 5 23 Department of State in New York a Further State Notice with respect to the Class D shares, if necessary. 14. All communications to us should be sent to the address below. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 15. Your first order placed pursuant to this Agreement for the purchase of Class D shares of the Fund will represent your acceptance of this Agreement. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ---------------------------------- (Authorized Signature) Please return one signed copy of this agreement to: MERRILL LYNCH FUNDS DISTRIBUTOR, INC. Box 9011 Princeton, New Jersey 08543-9011 Accepted: Firm Name: ---------------------------------------------- By: ----------------------------------------------------- Address: ------------------------------------------------ -------------------------------------------------------- Date: --------------------------------------------------- 6 EX-99.11 6 CONSENT OF DELOITTE & TOUCH LLP 1 EXHIBIT 11 2 EXHIBIT 11 INDEPENDENT AUDITORS' CONSENT Merrill Lynch Basic Value Fund, Inc.: We consent to the use in Post-Effective Amendment No. 22 to Registration Statement No. 2-58521 of our report dated July 29, 1994 appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the caption "Financial Highlights" appearing in the Prospectus, which also is a part of such Registration Statement. DELOITTE & TOUCHE LLP Princeton, New Jersey September 2, 1994 EX-99.15.B 7 FORM OF CLASS D DISTRIBUTION AGREEMENT 1 EXHIBIT 15(b) 2 CLASS C DISTRIBUTION PLAN OF MERRILL LYNCH BASIC VALUE FUND, INC. PURSUANT TO RULE 12b-1 DISTRIBUTION PLAN made as of the 4th day of August 1994, by and between Merrill Lynch Basic Value Fund, Inc., a Maryland corporation (the "Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"). W I T N E S S E T H: WHEREAS, the Fund is engaged in business as an open-end investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund proposes to enter into a Class C Shares Distribution Agreement with MLFD, pursuant to which MLFD will act as the exclusive distributor and representative of the Fund in the offer and sale of Class C shares of common stock, par value $0.10 per share (the "Class C shares"), of the Fund to the public; and WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to MLFD with respect to the Fund's Class C shares; and WHEREAS, the Directors of the Fund have determined that there is a reasonable likelihood that adoption of the Plan will benefit the Fund and its shareholders. NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on the following terms and conditions: 1. The Fund shall pay MLFD an account maintenance fee under the Plan at the end of each month at the annual rate of 0.25% of average daily net assets of the Fund relating to Class C shares to compensate MLFD and securities firms with which MLFD enters 3 into related agreements pursuant to Paragraph 3 hereof ("Sub-Agreements") for providing account maintenance activities with respect to Class C shareholders of the Fund. Expenditures under the Plan may consist of payments to financial consultants for maintaining accounts in connection with Class C shares of the Fund and payment of expenses incurred in connection with such account maintenance activities including the costs of making services available to shareholders including assistance in connection with inquiries related to shareholder accounts. 2. The Fund shall pay MLFD a distribution fee under the Plan at the end of each month at the annual rate of 0.75% of average daily net assets of the Fund relating to Class C shares to compensate MLFD and securities firms with which MLFD enters into related Sub-Agreements for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class C shares of the Fund. Such expenditures may consist of sales commissions to financial consultants for selling Class C shares of the Fund, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Fund and the costs of preparing and distributing promotional materials. The distribution fee may also be used to pay the financing costs of carrying the unreimbursed expenditures described in this Paragraph 2. Payment of the distribution fee described in this Paragraph 2 shall be subject to any limitations set forth in any applicable regulation of the National Association of Securities Dealers, Inc. 3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities Firms for activities and services of the type referred to in Paragraphs 1 and 2 hereof. MLFD may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such Sub-Agreement shall provide that the Securities Firms shall provide MLFD with such information as is reasonably necessary to permit MLFD to comply with the reporting requirements set forth in Paragraph 4 hereof. 4. MLFD shall provide the Fund for review by the Board of Directors, and the Directors shall review, at least quarterly, a written report complying with the requirements of Rule 12b-1 regarding the disbursement of the account maintenance fee and the distribution fee during such period. 2 4 5. This Plan shall not take effect until it has been approved by a vote of at least a majority, as defined in the Investment Company Act, of the outstanding Class C voting securities of the Fund. 6. This Plan shall not take effect until it has been approved, together with any related agreements, by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Investment Company Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on the Plan and such related agreements. 7. The Plan shall continue in effect for so long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 6. 8. The Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the outstanding Class C voting securities of the Fund. 9. The Plan may not be amended to increase materially the rate of payments provided for herein unless such amendment is approved by at least a majority, as defined in the Investment Company Act, of the outstanding Class C voting securities of the Fund, and by the Directors of the Fund in the manner provided for in Paragraph 6 hereof, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal in Paragraph 6 hereof. 10. While the Plan is in effect, the selection and nomination of Directors who are not interested persons, as defined in the Investment Company Act, of the Fund shall be committed to the discretion of the Directors who are not interested persons. 11. The Fund shall preserve copies of the Plan and any related agreements and all reports made pursuant to Paragraph 4 hereof, for a period of not less than six years from the date of the Plan, or the agreements or such report, as the case may be, the first two years in an easily accessible place. 3 5 IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan as of the date first above written. MERRILL LYNCH BASIC VALUE FUND, INC. By ------------------------------------- Title: Executive Vice President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------- Title: Vice President 4 6 CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT AGREEMENT made as of the 4th day of August 1994, by and between Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities Firm"). W I T N E S S E T H WHEREAS, MLFD has entered into an agreement with Merrill Lynch Basic Value Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as the exclusive distributor for the sale of Class C shares of common stock, par value $0.10 per share (the "Class C shares"), of the Fund; and WHEREAS, MLFD and the Fund have entered into a Class C Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an account maintenance fee from the Fund at the annual rate of 0.25% of average daily net assets of the Fund relating to Class C shares for account maintenance activities related to Class C shares of the Fund and a distribution fee from the Fund at the annual rate of 0.75% of average daily net assets of the Fund relating to Class C shares for providing sales and promotional activities and services related to the distribution of Class C shares; and WHEREAS, MLFD desires the Securities Firm to perform certain account maintenance activities and sales and promotional activities and services for the Fund's Class C shareholders and the Securities Firm is willing to perform such activities and services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereby agree as follows: 1. The Securities Firm shall provide account maintenance activities and services with respect to the Class C shares of the Fund and incur expenditures in connection with such activities and services of the types referred to in Paragraph 1 of the Plan. 2. The Securities Firm shall provide sales and promotional activities and services with respect to the sale of the Class C shares of the Fund, and incur distribution expenditures, of the types referred to in Paragraph 2 of the Plan. EX-99.15.C 8 FORM OF CLASS D DISTRIBUTION PLAN 1 3. As compensation for its activities and services performed under this Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a distribution fee at the end of each calendar month in an amount agreed upon by the parties hereto. 4. The Securities Firm shall provide MLFD, at least quarterly, such information as reasonably requested by MLFD to enable MLFD to comply with the reporting requirements of Rule 12b-1 regarding the disbursement of the account maintenance fee and the distribution fee during such period referred to in Paragraph 4 of the Plan. 5. This Agreement shall not take effect until it has been approved by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Act, and have no direct or indirect financial interest in the operation of the Plan, this Agreement or any agreements related to the Plan or this Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on this Agreement. 6. This Agreement shall continue in effect for as long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 6. 7. This Agreement shall automatically terminate in the event of its assignment or in the event of the termination of the Plan or any amendment to the Plan that requires such termination. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ----------------------------------- Title: Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ----------------------------------- Title: 2 2 EXHIBIT 15(c) 3 CLASS D DISTRIBUTION PLAN OF MERRILL LYNCH BASIC VALUE FUND, INC. PURSUANT TO RULE 12b-1 DISTRIBUTION PLAN made as of the 4th day of August 1994, by and between MERRILL LYNCH BASIC VALUE FUND, INC., a Maryland corporation (the "Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"). W I T N E S S E T H : WHEREAS, the Fund is engaged in business as an open-end investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund proposes to enter into a Class D Shares Distribution Agreement with MLFD, pursuant to which MLFD will act as the exclusive distributor and representative of the Fund in the offer and sale of Class D shares of common stock, par value $0.10 per share (the "Class D shares"), of the Fund to the public; and WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee to MLFD with respect to the Fund's Class D shares; and WHEREAS, the Directors of the Fund have determined that there is a reasonable likelihood that adoption of the Plan will benefit the Fund and its shareholders. NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on the following terms and conditions: 1. The Fund shall pay MLFD an account maintenance fee under the Plan at the end of each month at the annual rate of 0.25% of average daily net assets of the Fund relating to Class D shares to compensate MLFD and securities firms with which MLFD enters 4 into related agreements ("Sub-Agreements") pursuant to Paragraph 2 hereof for providing account maintenance activities with respect to Class D shareholders of the Fund. Expenditures under the Plan may consist of payments to financial consultants for maintaining accounts in connection with Class D shares of the Fund and payment of expenses incurred in connection with such account maintenance activities including the costs of making services available to shareholders including assistance in connection with inquiries related to shareholder accounts. 2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities Firms for activities of the type referred to in Paragraph 1. MLFD may reallocate all or a portion of its account maintenance fee to such Securities Firms as compensation for the above-mentioned activities. Such Sub-Agreement shall provide that the Securities Firms shall provide MLFD with such information as is reasonably necessary to permit MLFD to comply with the reporting requirements set forth in Paragraph 3 hereof. 3. MLFD shall provide the Fund for review by the Board of Directors, and the Directors shall review, at least quarterly, a written report complying with the requirements of Rule 12b-1 regarding the disbursement of the account maintenance fee during such period. 4. This Plan shall not take effect until it has been approved by a vote of at least a majority, as defined in the Investment Company Act, of the outstanding Class D voting securities of the Fund. 5. This Plan shall not take effect until it has been approved, together with any related agreements, by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Investment Company Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on the Plan and such related agreements. 6. The Plan shall continue in effect for so long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 5. 7. The Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the outstanding Class D voting securities of the Fund. 2 5 8. The Plan may not be amended to increase materially the rate of payments provided for in Paragraph 1 hereof unless such amendment is approved by at least a majority, as defined in the Investment Company Act, of the outstanding Class D voting securities of the Fund, and by the Directors of the Fund in the manner provided for in Paragraph 5 hereof, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal in Paragraph 5 hereof. 9. While the Plan is in effect, the selection and nomination of Directors who are not interested persons, as defined in the Investment Company Act, of the Fund shall be committed to the discretion of the Directors who are not interested persons. 10. The Fund shall preserve copies of the Plan and any related agreements and all reports made pursuant to Paragraph 3 hereof, for a period of not less than six years from the date of the Plan, or the agreements or such report, as the case may be, the first two years in an easily accessible place. IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan as of the date first above written. MERRILL LYNCH BASIC VALUE FUND, INC. By ------------------------------------- Title: Executive Vice President MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------- Title: Vice President 3 6 CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT AGREEMENT made as of the 4th day of August 1994, by and between Merrill Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities Firm"). W I T N E S S E T H: WHEREAS, MLFD has entered into an agreement with Merrill Lynch Basic Value Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as the exclusive distributor for the sale of Class D shares of common stock, par value $0.10 per share (the "Class D shares"), of the Fund; and WHEREAS, MLFD and the Fund have entered into a Class D Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an account maintenance fee from the Fund at the annual rate of 0.25% of average daily net assets of the Fund relating to Class D shares for providing account maintenance activities and services with respect to Class D shares; and WHEREAS, MLFD desires the Securities Firm to perform certain account maintenance activities and services, including assistance in connection with inquiries related to shareholder accounts, for the Fund's Class D shareholders and the Securities Firm is willing to perform such services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereby agree as follows: 1. The Securities Firm shall provide account maintenance activities and services with respect to the Class D shares of the Fund and incur expenditures in connection with such activities and services, of the types referred to in Paragraph 1 of the Plan. 2. As compensation for its services performed under this Agreement, MLFD shall pay the Securities Firm a fee at the end of each calendar month in an amount agreed upon by the parties hereto. 3. The Securities Firm shall provide MLFD, at least quarterly, such information as reasonably requested by MLFD to enable MLFD to comply with reporting requirements of Rule 7 12b-1 regarding the disbursement of the fee during such period referred to in Paragraph 3 of the Plan. 4. This Agreement shall not take effect until it has been approved by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Act, and have no direct or indirect financial interest in the operation of the Plan, this Agreement or any agreements related to the Plan or this Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on this Agreement. 5. This Agreement shall continue in effect for as long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 5. 6. This Agreement shall automatically terminate in the event of its assignment or in the event of the termination of the Plan or any amendment to the Plan that requires such termination. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ------------------------------------- Title: Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ------------------------------------- Title: EX-27.A 9 FINANCIAL DATA SCHEDULE FOR CLASS A SHARES WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000216557 MERRILL LYNCH BASIC VALUE FUND, INC. YEAR JUN-30-1994 JUL-01-1993 JUN-30-1994 $3,479,473,318 $4,043,247,441 $21,779,946 $73,525 0 $4,065,100,912 $31,274,427 0 $16,139,635 $47,414,062 0 $3,286,976,511 98,095,819 86,804,056 $45,703,737 0 $121,232,479 0 $563,774,123 $2,272,982,770 $98,527,728 $25,933,615 $232,965 $36,271,215 $88,423,093 $163,320,957 ($76,944,519) $174,799,531 0 $62,663,619 $64,558,638 0 22,051,928 15,739,255 4,979,090 $610,674,159 $50,625,023 $68,215,671 0.53 0 $15,452,148 0 $36,271,215 $2,195,440,555 $23.31 $0.62 $0.67 $0.70 $0.73 0 $23.17 0.53 0 0
EX-27.B 10 FINANCIAL DATA SCHEDULE FOR CLASS B SHARES WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000216557 MERRILL LYNCH BASIC VALUE FUND, INC. YEAR JUN-30-1994 JUL-01-1993 JUN-30-1994 $3,479,473,318 $4,043,247,441 $21,779,946 $73,525 0 $4,065,100,912 $31,274,427 0 $16,139,635 $47,414,062 0 $3,286,976,511 76,276,115 60,070,313 $45,703,737 0 $121,232,479 0 $563,774,123 $1,744,704,080 $98,527,728 $25,933,615 $232,965 $36,271,215 $88,423,093 $163,320,957 ($76,944,519) $174,799,531 0 $30,680,760 $45,745,511 0 25,498,592 12,261,811 2,969,021 $610,674,159 $50,625,023 $68,215,671 0 0 $15,452,148 0 $36,271,215 $1,592,596,375 $23.04 $0.42 $0.62 $0.48 $0.73 0 $22.87 1.55 0 0
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