<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1996
SECURITIES ACT FILE NO. 2-56978
INVESTMENT COMPANY ACT FILE NO. 811-2661
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 27
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 28
(Check appropriate box or boxes)
----------------
MERRILL LYNCH PACIFIC FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (Zip Code)
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH PACIFIC 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, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, N.Y. 10048-0557 PRINCETON, N.J. 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X]immediately upon filing pursuant to paragraph (b)
[_]on (date) pursuant to paragraph (b)
[_]60 days after filing pursuant to paragraph (a)(1)
[_]on (date) pursuant to paragraph (a)(1)
[_]75 days after filing pursuant to paragraph (a)(2)
[_]on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_]this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK 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 ON FEBRUARY 22, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH PACIFIC FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1.Cover Page..................... Cover Page
Item 2.Synopsis....................... Fee Table; Merrill Lynch Select
Pricing SM System
Item 3.Condensed Financial Informa- Financial Highlights; Performance Data
tion......................
Item 4.General Description of Regis- Investment Objective and Policies;
trant..................... Additional Information
Item 5.Management of the Fund......... Fee Table; Investment Objective and
Policies; 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 Securi- Cover Page; Additional Information
ties......................
Item 7.Purchase of Securities Being Cover Page; Fee Table; Merrill Lynch
Offered................... Select Pricing SM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8.Redemption or Repurchase....... Fee Table; Merrill Lynch Select
Pricing SM System; Shareholder
Services; 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 Histo- Not Applicable
ry........................
Item 13.Investment Objectives and Poli- Investment Objective and Policies
cies......................
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 Management of the Fund; Purchase of
Services.................. Shares; General Information
Item 17.Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices.................
Item 18.Capital Stock and Other Securi- General Information
ties......................
Item 19.Purchase, Redemption and
Pricing of Securities Being Purchase of Shares; Redemption of
Offered...................... Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20.Tax Status..................... Additional Information--Dividends,
Distributions and Taxes
Item 21.Underwriters................... Purchase of Shares
Item 22.Calculation of Performance Da- Performance Data
ta...........................
Item 23.Financial Statements........... Financial Statements
</TABLE>
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.
<PAGE>
PROSPECTUS
APRIL 26, 1996
MERRILL LYNCH PACIFIC FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Pacific Fund, Inc. (the "Fund") is a non-diversified, open-
end, management investment company seeking long-term capital appreciation
primarily through investment in equities of corporations domiciled in Far
Eastern or Western Pacific countries, including Japan, Australia, Hong Kong,
Malaysia, Singapore and Thailand. Current income from dividends and interest
will not be an important consideration in selecting portfolio securities. It
is expected that under normal conditions at least 80% of the Fund's net assets
will be invested in Far Eastern or Western Pacific corporate securities,
primarily common stocks and debt securities convertible into common stocks.
The Fund is designed for U.S. investors desiring to achieve diversification of
investments by participation in the economies of Far Eastern and Western
Pacific countries. The Fund may seek to hedge against investment, interest
rate and currency risks through the use of options, futures and foreign
currency transactions. Investments on an international basis involve special
considerations. See "Risk Factors and Special Considerations". For more
information on the Fund's investment objective and policies, please see
"Investment Objective and Policies" on page 12.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from 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 $250, 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 April 26, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge
Imposed on
Purchases (as
a percentage
of offering
price)....... 5.25%(c) None None 5.25%(c)
Sales Charge
Imposed on
Dividend
Reinvestments. None None None None
Deferred Sales
Charge (as a
percentage of
original None(d) 4.0% during the first 1% for one year None(d)
purchase year,
price or decreasing 1.0% annually
redemption thereafter to 0.0% after
proceeds, the
whichever is fourth year
lower).......
Exchange Fee.. None None None None
ANNUAL FUND OP-
ERATING EX-
PENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS):
Management
Fees(e)...... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(f):
Account Main-
tenance Fees. None 0.25% 0.25% 0.25%
Distribution None 0.75% 0.75% None
Fees......... (Class B shares convert
to
Class D shares
automatically
after approximately
eight years
and cease being subject
to
distribution fees)
OTHER EX-
PENSES:
Custodial
Fees......... 0.09% 0.09% 0.09% 0.09%
Shareholder
Servicing
Costs(g)..... 0.19% 0.22% 0.23% 0.19%
Other......... 0.05% 0.05% 0.05% 0.05%
----- ----- ----- -----
Total Other 0.33% 0.36% 0.37% 0.33%
Expenses.... ----- ----- ----- -----
Total Fund Op-
erating Ex- 0.93% 1.96% 1.97% 1.18%
penses....... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 26.
(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 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more
are not subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 26.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase.
(e) See "Management of the Fund--Management and Advisory Arrangements"--page
23.
(f) See "Purchase of Shares--Distribution Plans"--page 32.
(g) See "Management of the Fund--Transfer Agency Services"--page 24.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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..................................... $61 $81 $101 $161
Class B..................................... $60 $82 $106 $209*
Class C..................................... $30 $62 $106 $230
Class D..................................... $64 $88 $114 $188
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $61 $81 $101 $161
Class B..................................... $20 $62 $106 $209*
Class C..................................... $20 $62 $106 $230
Class D..................................... $64 $88 $114 $188
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
(the "NASD"). Merrill Lynch may charge its customers a processing fee
(presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or its affiliate, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM which utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds".
3
<PAGE>
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, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares are calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(footnotes continued on next page)
4
<PAGE>
(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 and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but 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 was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain
investment programs. In addition, Class A shares will be offered at
net asset value to Merrill Lynch & Co., Inc. ("ML&Co.") and its
subsidiaries (the term "subsidiaries", when used herein with respect
to ML&Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML&Co.) and their directors
and employees and to members of the Boards of MLAM-advised mutual
funds. The maximum initial sales charge is 5.25%, which is reduced
for purchases of $25,000 and over and waived for purchases by certain
retirement plans in connection with certain investment programs.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived, such
purchases will be subject to a 1% CDSC if the shares are redeemed
within one year after purchase. Sales charges also are reduced under
a right of accumulation which takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once 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 the conversion and
holding periods for certain retirement plans, are modified as
described under
5
<PAGE>
"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 four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchase will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
6
<PAGE>
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.
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 NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the tables below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche llp, independent auditors. Financial statements and the independent
auditors' report thereon for the year ended December 31, 1995, are included in
the Statement of Additional Information. 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.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1995++ 1994++ 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET
VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of year....... $ 21.12 $ 21.21 $ 15.80 $ 18.34 $ 16.52 $ 20.65 $ 19.11 $ 16.15 $ 34.32 $ 19.59
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .11 .10 .07 .05 .04 .10 .07 .20 .00 .09
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net. 1.61 .50 5.37 (1.63) 2.73 (1.80) 2.57 5.02 4.16 14.94
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. 1.72 .60 5.44 (1.58) 2.77 (1.70) 2.64 5.22 4.16 15.03
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--net. -- -- -- (.01) (.11) (.11) (.06) (.19) (.18) (.11)
In excess of investment
income--net............ -- (.22) (.03) -- -- -- -- -- -- --
Realized gain--net..... (.55) (.33) -- (.95) (.84) (2.32) (1.04) (2.07) (22.15) (.19)
In excess of realized
gain--net.............. (.13) (.14) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and dis-
tributions.............. (.68) (.69) (.03) (.96) (.95) (2.43) (1.10) (2.26) (22.33) (.30)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year.................... $ 22.16 $ 21.12 $ 21.21 $ 15.80 $ 18.34 $ 16.52 $ 20.65 $ 19.11 $ 16.15 $ 34.32
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:*
Based on net asset value
per share............... 8.20% 2.90% 34.41% (8.75)% 17.04% (8.39)% 14.49% 34.38% 10.77% 77.78%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .93% .91% .90% .98% 1.02% 1.07% 1.06% 1.02% .94% .98%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. .53% .47% .47% .40% .43% .94% .36% .95% .02% .47%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $607,598 $587,107 $472,322 $284,674 $304,712 $242,104 $318,613 $288,065 $283,984 $422,670
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 26.73% 23.84% 13.25% 7.62% 5.91% 31.06% 18.14% 39.22% 29.41% 44.45%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Total investment returns exclude the effects of sales loads.
++ Based on average shares outstanding during the period.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1995++ 1994++ 1993++ 1992++ 1991++ 1990++ 1989 1988+
---------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period........... $ 20.27 $ 20.41 $ 15.34 $ 18.01 $ 16.30 $ 20.49 $ 19.09 $ 17.93
---------- -------- -------- -------- -------- ------- ------- -------
Investment loss--net..... (.10) (.12) (.10) (.12) (.14) (.09) (.06) (.02)
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net.. 1.53 .49 5.17 (1.60) 2.69 (1.78) 2.50 2.38
---------- -------- -------- -------- -------- ------- ------- -------
Total from investment op-
erations................. 1.43 .37 5.07 (1.72) 2.55 (1.87) 2.44 2.36
---------- -------- -------- -------- -------- ------- ------- -------
Less dividends and dis-
tributions:
Investment income--net.. -- -- -- -- -- -- -- (.17)
In excess of investment
income--net............. -- (.04) -- -- -- -- -- --
Realized gain--net...... (.38) (.33) -- (.95) (.84) (2.32) (1.04) (1.03)
In excess of realized
gain--net............... (.10) (.14) -- -- -- -- -- --
---------- -------- -------- -------- -------- ------- ------- -------
Total dividends and dis-
tributions............... (.48) (.51) -- (.95) (.84) (2.32) (1.04) (1.20)
---------- -------- -------- -------- -------- ------- ------- -------
Net asset value, end of
period................... $ 21.22 $ 20.27 $ 20.41 $ 15.34 $ 18.01 $ 16.30 $ 20.49 $ 19.09
========== ======== ======== ======== ======== ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share................ 7.10% 1.87% 33.05% (9.72)% 15.87% (9.29)% 13.39% 13.37%#
========== ======== ======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET AS-
SETS:
Expenses, excluding ac-
count maintenance and/or
distribution fees........ .96% .94% .92% 1.00% 1.04% 1.10% 1.10% 1.17%*
========== ======== ======== ======== ======== ======= ======= =======
Expenses................. 1.96% 1.94% 1.92% 2.00% 2.04% 2.10% 2.10% 2.17%*
========== ======== ======== ======== ======== ======= ======= =======
Investment loss--net..... (.50)% (.56)% (.56)% (.61)% (.60)% (.05)% (.64)% (1.64)%*
========== ======== ======== ======== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $1,041,763 $915,351 $508,008 $165,015 $105,669 $58,013 $59,090 $ 5,952
========== ======== ======== ======== ======== ======= ======= =======
Portfolio turnover....... 26.73% 23.84% 13.25% 7.62% 5.91% 31.06% 18.14% 39.22%
========== ======== ======== ======== ======== ======= ======= =======
</TABLE>
- -----
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Class B shares commenced operations on October 21, 1988.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------------ ------------------------------------------
FOR THE FOR THE
FOR THE YEAR PERIOD FOR THE YEAR PERIOD
ENDED OCTOBER 21, 1994+ ENDED OCTOBER 21, 1994+
DECEMBER 31, 1995++ TO DECEMBER 31, 1994++ DECEMBER 31, 1995++ TO DECEMBER 31, 1994++
------------------- ---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 20.12 $21.67 $ 21.11 $ 22.70
------- ------ ------- -------
Investment income
(loss)--net............ (.12) (.03) .07 --
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--
net.................... 1.53 (.86) 1.60 (.91)
------- ------ ------- -------
Total from investment
operations............. 1.41 (.89) 1.67 (.91)
------- ------ ------- -------
Less dividends and dis-
tributions:
In excess of investment
income--net........... -- (.19) -- (.21)
Realized gain--net..... (.45) (.33) (.51) (.33)
In excess of realized
gain--net............. (.11) (.14) (.13) (.14)
------- ------ ------- -------
Total dividends and dis-
tributions............. (.56) (.66) (.64) (.68)
------- ------ ------- -------
Net asset value, end of
period................. $ 20.97 $20.12 $ 22.14 $ 21.11
======= ====== ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 7.07% (4.04)%# 7.95% (3.93)%#
======= ====== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding ac-
count maintenance
and/or distribution
fees................... .97% 1.17%* .93% 1.17%*
======= ====== ======= =======
Expenses................ 1.97% 2.17%* 1.18% 1.42%*
======= ====== ======= =======
Investment income
(loss)--net............ (.59)% (.79)%* .31% .12%*
======= ====== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $46,092 $7,841 $97,946 $22,012
======= ====== ======= =======
Portfolio turnover...... 26.73% 23.84% 26.73% 23.84%
======= ====== ======= =======
</TABLE>
- -----
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
10
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investments on an international basis involve certain risks not typically
involved in domestic investments, including, but not limited to, fluctuations
in foreign exchange rates, future foreign political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions applicable to such investments. Securities prices in
different countries are subject to different economic, financial, political and
social factors. Since the Fund will invest primarily in securities denominated
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the values of securities in the Fund's portfolio and the
unrealized appreciation or depreciation of investments so far as U.S. investors
are concerned. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
those currencies and the Fund's yield on such assets. The rates of exchange
between the dollar and other currencies are determined by forces of supply and
demand on the foreign exchange markets. These forces are, in turn, affected by
the balance of payments between countries and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Also, many of the securities held by the Fund will not be
registered with the Commission nor will the issuers thereof be subject to the
reporting requirements of the Commission.
With respect to certain countries, there is the possibility of expropriation
of assets, confiscatory taxation, political or social instability or diplomatic
developments which could affect investments in those countries. There may be
less publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which
U.S. entities are subject. In addition, certain foreign investments may be
subject to foreign withholding taxes. See "Additional Information--Taxes".
Foreign financial markets, while generally growing in volume, typically have
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable domestic companies. Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays or other
problems in settlement could result in temporary periods when assets of the
Fund are uninvested and no return is earned thereon. The inability of the Fund
to make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems either could result in losses to
the Fund due to subsequent declines in value of such portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. There is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
11
<PAGE>
The Fund anticipates that under normal conditions at least 80% of its net
assets will consist of Far Eastern or Western Pacific corporate securities.
Because of its emphasis on the economies of Far Eastern and Western Pacific
countries and the potential for substantial volatility in many of those
countries' markets, the Fund should be considered as a vehicle for
diversification and not as a balanced investment program.
In early 1995, the Fund's shareholders approved a proposal to change the
status of the Fund from a diversified to a non-diversified investment company.
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it may not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased. Also, as a non-diversified investment company, since
a relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence than a diversified
investment company. The financial information included in "Financial
Highlights" above presents information relating to the operations of the Fund
as a diversified investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is designed for U.S. investors seeking diversification of
investments by participation in the economies of Far Eastern and Western
Pacific countries. The Fund has been structured as a long-term capital
appreciation mutual fund, offering shareholder services and investment plans
typical of other U.S. mutual funds. Investors in the Fund obtain professional
investment management as to Far Eastern and Western Pacific securities and the
liquidity resulting from redeemable shares.
The Fund's investment objective is to seek long-term capital appreciation
primarily through investment in equities of corporations domiciled in Far
Eastern or Western Pacific countries, including Japan, Australia, Hong Kong,
Malaysia, Singapore and Thailand. Current income from dividends and interest
will not be an important consideration in selecting portfolio securities. The
Fund anticipates that under normal conditions at least 80% of its assets will
consist of Far Eastern or Western Pacific corporate securities, primarily
common stocks and debt securities convertible into common stock. The Fund
reserves the right as a defensive measure to hold other types of securities,
including non-convertible debt securities, government and money market
securities of U.S. and non-U.S. issuers, or cash (foreign currencies or U.S.
dollars) in such proportions as, in the opinion of management, prevailing
market, economic or political conditions warrant. A portion of the portfolio
normally will be held in dollars or short-term interest-bearing dollar-
denominated securities to provide for possible redemptions. The investment
objective of the Fund described in this paragraph is a fundamental policy of
the Fund and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities.
The Fund has the ability to invest in debt securities, although it does not
presently intend to do so to any significant degree. Consequently, it has
established no rating criteria for the debt securities in which it
12
<PAGE>
may invest, and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of
comparable quality, sometimes referred to as "junk bonds", are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. See
"Investment Objective and Policies" in the Statement of Additional Information
for additional information regarding ratings of debt securities. In purchasing
such securities, the Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of an issuer of such securities.
The Manager will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or which the Manager believes will be in default.
In addition to purchasing equity securities of Far Eastern or Western Pacific
issuers in Far Eastern or other markets, the Fund may invest in American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
corporations domiciled in Far Eastern or Western Pacific countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in the U.S. securities markets, and EDRs, in bearer
form, are designed for use in European securities markets. GDRs are tradeable
both in the U.S. and Europe and are designed for use throughout the world.
The Fund may invest up to 10% of its net assets in warrants. A warrant gives
the holder thereof the right to subscribe by a specified date to a stated
number of shares of stock (or other security) of the issuer at a fixed price.
Warrants tend to be more volatile than the underlying stock, and if at a
warrant's expiration date the stock is trading at a price below the price set
in the warrant, the warrant will expire worthless. Conversely, if at the
expiration date the underlying stock is trading at a price higher than the
price set in the warrant, the Fund can acquire the stock at a price below its
market value.
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against investment, interest rate and currency risks. These strategies include
the use of options on portfolio securities, stock index options, stock index
futures, financial futures, currency options, currency futures, options on such
futures and forward foreign exchange transactions. The Fund may enter into such
transactions only in connection with its hedging strategies. While the net
asset value of the Fund's shares will continue to fluctuate and no assurance
can be given that the Fund's hedging transactions will be effective, the
Manager believes that the ability of the Fund to engage in these hedging
transactions will enhance the Fund's ability to reduce the volatility of the
net asset value of its shares. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity markets, interest rates or
currency exchange rates occur. When the Fund engages in transactions
denominated in foreign currencies, it will be subject to the risks of adverse
changes in the exchange rates between such foreign currencies and the U.S.
dollar, the currency used to value the Fund's assets. Reference is made to the
Statement of Additional Information for further information concerning these
strategies.
13
<PAGE>
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Manager believes that, because the Fund will only engage
in these transactions for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. Tax
requirements may limit the Fund's ability to engage in the hedging
transactions and strategies described below.
Set forth below is a description of the hedging instruments that the Fund
may utilize with respect to investment, interest rate and currency risks.
Hedging Investment and Interest Rate Risks. The Fund may write (i.e., sell)
covered call options on its portfolio securities, purchase put options on
securities and engage in transactions in stock index options, stock index
futures and financial futures, and related options on such futures, as
described below.
The Fund may write call options with respect to securities it owns which
provide the holder of the option with the right to buy the underlying security
covered by the option at the stated exercise price until the option expires.
The Fund will write only covered call options, which means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option. The Fund may also purchase put options,
which will provide it with the right to sell the underlying securities at the
stated exercise price, thus limiting the Fund's risk of loss through a decline
in the market value of the security until the put expires. The Fund may write
call options on securities with respect to which it has purchased a put
option. By purchasing a put option on a security, the Fund limits its risk of
loss on that security. By writing a call option on the security, the Fund will
offset, in whole or in part, the cost of purchasing such put option, but
limits its opportunity to profit from an increase in value. There is no
percentage limitation with respect to portfolio securities on which the Fund
may write call options or purchase put options. Although there is no specific
time limit on the duration of the options on the Fund's portfolio securities,
the Manager does not anticipate entering into any such transactions with a
duration of longer than one year.
The Fund may purchase or write call options and purchase put options on
stock indexes to hedge against the risks of market-wide price movements in the
Far Eastern and Western Pacific securities in which the Fund invests. The
effectiveness of the hedge will depend on the degree of diversification of the
Fund's portfolio and the sensitivity of the securities comprising the
portfolio to factors influencing the market as a whole. Because the value of
an index option depends upon movements in the level of the index rather than
the price of a particular stock, whether the Fund realizes a gain or loss on
the purchase or sale of an option on an index depends upon movements in the
level of prices in the stock market generally or in an industry or market
segment rather than movements in the price of a particular stock.
The Fund also may purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract would not require
actual delivery of securities, but would result in cash settlement based upon
the difference in value of the index between the time the contract was entered
into and the time of its settlement. The Fund may effect transactions in stock
index futures contracts in Far Eastern and Western Pacific securities and
financial futures contracts
14
<PAGE>
in U.S., Far Eastern and Western Pacific government and agency securities and
corporate debt securities. It is anticipated that the underlying securities
involved in stock index futures contracts will be securities listed on
exchanges. Transactions by the Fund in stock index futures and financial
futures are subject to limitations as described below under "Restrictions on
the Use of Futures Transactions". There is no percentage limitation with
respect to portfolio securities on which the Fund may purchase or sell futures
contracts.
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the Far Eastern and Western Pacific securities markets and
anticipates a significant market advance, it may purchase stock index futures
in order to gain rapid market exposure that may in part or entirely offset
increases in the cost of securities that the Fund intends to purchase. As such
purchases are made, an equivalent amount of stock index futures contracts will
be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It
is anticipated that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position,
whether the long position is the purchase of a stock index futures contract or
the purchase of a call option on a stock index future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of
redemptions), a long futures position may be terminated without the
corresponding purchase of securities.
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of fixed-income securities which may be held by the Fund as a
temporary defensive measure will fall, thus reducing the net asset value of
the Fund. However, as interest rates rise, the value of the Fund's short
position in the futures contract will also tend to increase, thus offsetting
all or a portion of the depreciation in the market value of the Fund's
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which the Fund would have
incurred had the Fund sold portfolio securities in order to reduce its
exposure to increases in interest rates. The Fund also may purchase financial
futures contracts in anticipation of a decline in interest rates when it is
not fully invested in a particular market in which it intends to make
investments to gain market exposure that may in part or entirely offset an
increase in the cost of securities it intends to purchase. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
securities upon termination of the futures contract.
The Fund also may write call and purchase put options on futures contracts
in connection with its hedging activities. Generally, these strategies are
utilized under the same market and market sector conditions (i.e., conditions
relating to specific types of investments) in which the Fund enters into
futures transactions. The Fund would be able to purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of
such futures to hedge against the increased cost resulting from an increase in
the market value or a decline in interest rates of securities that the Fund
intends to purchase. Limitations on transactions in options on futures
contracts are described below.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter ("OTC") markets. In general, exchange-traded contracts
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and
15
<PAGE>
expiration dates. OTC transactions are two-party contracts with prices and
terms negotiated by the buyer and seller. The Fund will acquire only those OTC
options for which management believes the Fund can receive on each business day
at least two independent bids or offers (one of which will be from an entity
other than a party to the option). The Fund will engage in OTC options only
with member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks and dealers which have
capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million or any other bank or dealer
having capital of at least $150 million or whose obligations are guaranteed by
an entity having capital of at least $150 million.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit", equal to a small percentage (typically between 2%
and 15%) of the value of the futures contract. As a result, a relatively small
adverse move in the price of a futures contract may result in immediate and
substantial losses to the Fund. For example, if at the time of purchase 10% of
the price of a futures contract is deposited as margin, a 10% decrease in the
price of that contract would, if the contract were then closed out, result in a
total loss of the initial margin deposit before any deduction for brokerage
commissions and other transaction costs. A decrease of more than 10% would
result in a loss of more than the total initial margin deposit.
To some extent, options on futures contracts are even more highly leveraged
than futures contracts. For example, if an in-the-money call (put) option is
sold for its intrinsic value plus a premium representing the time value of that
option, a 10% rise (drop) in the value of the underlying futures contract does
not create a loss equal to just 10% of the value of the option. Such a rise
(drop) creates a loss approximately equal to 10% of the value of the underlying
interest, less the time value, which loss may be many times greater than the
price for which the Fund sold the option. In addition, investors who sell
options are required only to deposit a percentage of the value of the option at
the time of sale as margin, thereby leveraging the investment even further.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceeds 15% (10% to the extent required by certain
state laws) of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Fund to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to repurchase such
OTC option from the dealer at a predetermined price, then the Fund will treat
as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money". This policy is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. The Fund will not change
or modify this policy, however, prior to the change or modification by the
Commission staff of its position.
16
<PAGE>
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange transactions between currencies of Far Eastern and Western
Pacific countries and the U.S. dollar as a hedge against possible variations
in the foreign exchange rates between these currencies. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. All dealings in forward foreign exchange will be
limited to contracts involving currencies of Far Eastern and Western Pacific
countries and the U.S. dollar. The Fund may not position hedge with respect to
the currency of a particular country to an extent greater than the aggregate
market value (at the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular foreign currency. If the
Fund enters into a position hedging transaction, its custodian will place cash
or liquid equity or debt securities in a separate account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. If the value of the securities placed
in the separate account declines, additional cash or securities will be placed
in the account so that the value of the account will equal the amount of the
Fund's commitment with respect to such contracts. The Fund will not attempt to
hedge all of its portfolio positions and will enter into such transactions
only to the extent, if any, deemed appropriate by the Manager of the Fund.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
or dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the
bank or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward
contract trading. With respect to its trading of forward contracts, if any,
the Fund will be subject to the risk of bank or dealer failure and the
inability of, or refusal by, a bank or dealer to perform with respect to such
contracts. Any such default would deprive the Fund of any profit potential or
force the Fund to cover its commitments for resale, if any, at the then-market
price and could result in a loss to the Fund.
The Fund is also authorized to purchase and sell listed or OTC foreign
currency options, futures and related options on such futures as a short or
long hedge against possible variations in foreign exchange rates. Unlike
forward foreign exchange transactions, which are accomplished by entering into
private contractual arrangements, the options and futures which the Fund will
purchase and sell will be either exchange or OTC traded, providing a greater
degree of market access and liquidity than forward foreign exchange
transactions. The Fund may purchase and/or sell listed or OTC foreign currency
options, foreign currency futures and related options on foreign currency
futures as a short (i.e., hedge against a decline in value of the foreign
17
<PAGE>
currency) or long (i.e., participate in appreciation of the foreign currency)
hedge against possible variations in foreign exchange rates. Such transactions
may be effected with respect to hedges on Far Eastern and Western Pacific
currency denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in
U.S. dollars of an investment in a Japanese yen-denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price
by a future date (a technique called a "spread"). By selling such a call option
in this illustration, the Fund gives up the opportunity to profit without limit
from increases in the relative value of the yen to the dollar. The Manager
believes that "spreads" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. Listed options are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing corporation,
are traded on an exchange and have standardized strike prices and expiration
dates. OTC options are two-party contracts and have negotiated strike prices
and expiration dates. The Fund will engage in OTC options only with member
banks of the Federal Reserve System or primary dealers in U.S. Government
securities or with affiliates of such banks or dealers which have capital of at
least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million or any other bank or dealer having capital of
at least $150 million or whose obligations are guaranteed by an entity having
capital of at least $150 million. The Fund will acquire only those OTC options
for which management believes the Fund can receive on each business day at
least two independent bids or offers (one of which will be from an entity other
than a party to the option). A futures contract on a foreign currency is an
agreement between two parties to buy and sell a specified amount of a currency
for a set price on a future date. Futures contracts and options on futures
contracts are generally traded on boards of trade or futures exchanges. The
Fund will not speculate in foreign currency options, futures or related
options. Accordingly, the Fund will not hedge a currency substantially in
excess of the market value of the securities denominated in such currency which
it owns, the expected acquisition price of securities which it has committed or
anticipates to purchase which are denominated in such currency and, in the case
of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. Further, the Fund will segregate
at its custodian U.S. Government or other high quality securities having a
market value substantially representing any subsequent net decrease in the
market value of such hedged positions, including net positions with respect to
cross-currency hedges. The Fund may not incur potential net liabilities of more
than 33 1/3% of its total assets from foreign currency options, futures or
related options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" as defined under such regulations if the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) for bona fide hedging purposes and (ii) for
non-hedging purposes, if the aggregate initial margin and premiums
18
<PAGE>
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash or cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act of 1940, as amended (the
"Investment Company Act") in connection with transactions involving futures
contracts and options thereon.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts and movements in the price of the securities and
currencies which are the subject of the hedge. If the price of the futures
contract moves more or less than the price of the securities or currencies, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of the securities or currencies which are the subject of
the hedge. There is also a risk of imperfect correlations where the securities
or currencies underlying futures contracts have different maturities than the
portfolio securities or currencies being hedged. Transactions in options and
options on futures contracts involve similar risks.
The Fund intends to enter into options and futures transactions on an
exchange or in the OTC market only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions,
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures transaction. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security and currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading Limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. The
Manager does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
Because the Fund will engage in the options and futures transactions
described above solely in connection with its hedging activities, the Manager
does not believe that such options and futures transactions necessarily will
have any significant effect on the Fund's portfolio turnover.
19
<PAGE>
OTHER INVESTMENT POLICIES AND PRACTICES
Swap Agreements. The Fund is authorized to enter into equity swap agreements,
which are generally contracts in which one party agrees to make periodic
payments based on the change in market value of a specified equity security,
basket of equity securities or equity index in return for periodic payments
based on a fixed or variable interest rate or the change in market value of a
different equity security, basket of equity securities or equity index. For
example, swap agreements may be used to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impractical. The
swap agreement will be structured to provide for early termination in the
event, for example, that the Fund desires to lock in appreciation. If the Fund
were to enter into a swap agreement, the Fund would typically receive periodic
equity-based payments and make payments based on a variable interest rate.
Swap agreements entail the risk that a party will default on its payment
obligations to the Fund thereunder. The Fund will seek to lessen the risk to
some extent by entering into a transaction only if the counterparty meets the
current credit requirement for OTC option counterparties. Swap agreements also
bear the risk that the Fund will not be able to meet its obligation to the
counterparty. The Fund, however, will deposit in a segregated account with its
custodian high quality liquid fixed income instruments or cash or cash
equivalents or other assets permitted to be so segregated by the Commission in
an amount equal to or greater than the market value of the liabilities under
the swap agreement or the amount it would have cost the Fund initially to make
an equivalent direct investment, plus or minus any amount the Fund is obligated
to pay or is to receive under the swap agreement. The Fund will enter into a
swap transaction only if, immediately following the time the Fund enters into
the transaction, the aggregate notional principal amount of swap transactions
to which the Fund is a party would not exceed 5% of the Fund's net assets.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in the value of a
securities index or a basket of securities. Interest and principal payable on a
security also may be based on relative changes among particular indices. In
addition, the Fund may invest in securities whose potential investment return
is inversely based on the change in particular indices. For example, the Fund
may invest in securities that pay a higher rate of interest and principal when
a particular index decreases and pay a lower rate of interest and principal
when the value of the index increases. To the extent that the Fund invests in
such types of securities, it will be subject to the risks associated with
changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal. Examples of such types of
securities are indexed or inverse securities issued with respect to a stock
market index in a particular Far Eastern or Western Pacific country.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage because they may
increase or decrease in value at a rate that is a multiple of the
changes in applicable indices. As a result, the market value of such securities
generally will be more volatile than the market values of fixed-rate
securities. Management of the Fund believes that indexed securities, including
inverse securities, represent flexible portfolio management instruments that
may allow the Fund to seek potential investment rewards, hedge other portfolio
positions, or vary the degree of portfolio leverage relatively efficiently
under different market conditions.
20
<PAGE>
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 20% of its total
assets to banks, brokers and other financial institutions and receive
collateral in cash (or cash equivalents consisting of securities issued or
guaranteed by the governments of the U.S. or Japan or other Far Eastern or
Western Pacific countries or their agencies or instrumentalities). Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. During the period of such
a loan, the Fund typically receives the income on the loaned securities and
receives either the income on the collateral or other compensation, i.e.,
negotiated loan premium or fee, for entering into the loan and thereby
increases its yield. Such loans are terminable at any time, and the borrower,
after notice, will be required to return borrowed securities within five
business days. In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its assets, taken at market value, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies or instrumentalities). In addition, the Fund has adopted non-
fundamental restrictions which may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
amounts in excess of 5% of its total assets (taken at acquisition cost or
market value) and then only from banks as a temporary measure for extraordinary
or emergency purposes.
As a non-fundamental policy, the Fund will not 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, regarding all such securities, more than 15% of its total assets (or 10% of
its total assets as presently required by certain state laws) taken at market
value would be invested in such securities. Not-withstanding the foregoing, the
Fund may purchase without regard to this limitation securities that are not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Fund's Board of Directors
continuously determines, based on the trading markets for the specific Rule
144A security that it is liquid. The Board of Directors may adopt guidelines
and delegate to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Board has determined that securities
which are freely tradeable in their primary market offshore should be deemed
liquid. The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
Non-diversified Status. As noted above, in early 1995, the Fund's
shareholders approved a proposal to change the status of the Fund from a
diversified to a non-diversified investment company. Previously, the
21
<PAGE>
Fund was subject to an investment restriction prohibiting investment in
securities of any one issuer (other than the Government of Japan, the United
States Government, their agencies and instrumentalities) if immediately after
and as a result of such investment the market value of the holdings of the Fund
in the securities of such issuer exceeded 5% of the Fund's total assets, taken
at market value.
Under present law, a mutual fund can be classified as a diversified company
yet meet less stringent conditions. Current applicable law regarding
diversification of assets requires that with respect to 75% of its total
assets, a diversified mutual fund may not invest more than 5% of its total
assets (taken at market value at the time of each investment) in the securities
of any one issuer or acquire more than 10% of the voting securities of any one
issuer. The U.S. Government, its agencies and instrumentalities are not
included within the definition of "issuer" for purposes of these limitations.
At one time, applicable state securities regulations applied the
diversification restriction to 100% of a mutual fund's assets, thereby
prohibiting an investment company from investing more than 5% of total assets
in a single issuer or from holding more than 10% of the voting securities of a
single issuer; however, these state regulation imposed limitations have been
eliminated.
As a non-diversified fund, the Fund is not subject to the above-described
investment restriction. A "non-diversified" mutual fund is able to invest more
than 5% of the value of its assets in the obligations of a single issuer. The
Fund's investments will be limited, however, in order to qualify for the
special tax treatment afforded regulated investment companies under the
Internal Revenue Code of 1986, as amended (the "Code"). To qualify, the Fund
must comply with certain requirements, including limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the market value of the Fund's total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer, and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. Foreign
government securities (unlike U.S. Government securities) are not exempt from
these diversification requirements.
Although changing from a diversified to a non-diversified fund increased the
flexibility with which the Manager can manage the Fund's assets, to the extent
the Fund invests a relatively high percentage of its assets in obligations of a
limited number of issuers, the Fund may be more susceptible than would be a
more widely diversified fund to any single economic, political or regulatory
occurrence or to changes in an issuer's financial condition or in the market's
assessment of the issuers.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Directors of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Manager and FAM; President and Director of
Princeton Services, Inc.; Executive Vice President of ML&Co.; Director of the
Distributor.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
22
<PAGE>
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the Fund's investment adviser. The Manager is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Manager provides the Fund with management and investment
advisory services. The Manager or its affiliate, FAM, acts as the investment
adviser for more than 130 other registered investment companies. The Manager
also offers portfolio management and portfolio analysis services to
individuals and institutions. As of March 31, 1996, the Manager and FAM had a
total of approximately $207.7 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager.
Pursuant to the management agreement between the Fund and the Manager (the
"Management Agreement"), and subject to the direction of the Board of
Directors, the Manager is responsible for the actual management of the Fund's
portfolio and constantly reviews the Fund's holdings in light of its own
research analysis and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Manager, subject to review by the Board of Directors. The Manager performs
certain other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
As compensation for its services, the Manager receives a fee from the Fund
at the end of each month at the annual rate of 0.60% of the average daily net
assets of the Fund. For the fiscal year ended December 31, 1995, the
management fee paid by the Fund to the Manager aggregated $9,381,493 (based on
average net assets of approximately $1.6 billion). At March 31, 1996, the net
assets of the Fund aggregated approximately $2.2 billion. At this asset level,
the annual management fee would aggregate approximately $13.1 million.
Stephen I. Silverman, Vice President of the Fund, is the Fund's Portfolio
Manager. Mr. Silverman has been a Vice President and Portfolio Manager of the
Manager and its predecessor since 1983. Mr. Silverman has been primarily
responsible for the management of the Fund's portfolio since 1983.
The Management Agreement obligates the Fund to pay certain expenses incurred
in its operations, including, among other things, the management fee; legal
and audit fees; unaffiliated Directors' fees and expenses; registration fees;
custodian and transfer agency fees; accounting and pricing costs; the costs of
printing proxies; and certain of the costs of printing shareholder reports,
prospectuses and statements of additional information.
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<PAGE>
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal year ended December 31, 1995, the amount of
such reimbursement was $133,747. For the fiscal year ended December 31, 1995,
the ratio of total expenses to average net assets for each class of shares was
.93% for Class A shares; 1.96% for Class B shares; 1.97% for Class C shares;
and 1.18% for Class D shares.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch 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 Transfer
Agent receives a fee of $11.00 per Class A or Class D shareholder account and
$14.00 per Class B or Class C shareholder account, nominal miscellaneous fees
(e.g., account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For the fiscal
year ended December 31, 1995, the Fund paid $3,281,511 to the Transfer Agent
pursuant to the Transfer Agency Agreement. At March 31, 1996, the Fund had
66,314 Class A shareholder accounts, 118,664 Class B shareholder accounts
(including certain subaccounts on which the standard annual transfer agency
fees are assessed), 9,814 Class C shareholder accounts and 10,991 Class D
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate approximately $2.6 million, plus miscellaneous
and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager 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
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<PAGE>
minimum subsequent purchase is $50, except that for retirement plans, the
minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund 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
PricingSM System, as described below. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange (the "NYSE") (generally, 4:00 p.m., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor
in turn receives the orders from the securities dealer prior to 30 minutes
after the close of business on the NYSE on that day. The applicable offering
price for purchase orders is based on the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, such orders shall be deemed received on the
next business day. Any order may be rejected by the Distributor or the Fund.
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
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing SM System is set forth
under "Merrill Lynch Select Pricing SM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
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.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that
25
<PAGE>
class. Class B, Class C and Class D shares each have exclusive voting rights
with respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which account maintenance and/or distribution fees are paid.
See "Distribution Plans" below. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0% eight years(/4/)
- ------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead will be subject to a
1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ -------------- -------------- ------------------
<S> <C> <C> <C>
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
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994 might have been subject to a CDSC
if the shares were redeemed within one year of purchase at the following
annual rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to
$5,000,000; and 0.25% on purchases of more than $5,000,000 in lieu of
paying an initial sales charge. The charge is assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer
sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended December 31, 1995, the Fund sold 8,478,331 of
its Class A shares for aggregate net proceeds to the Fund of $178,519,975. The
gross sales charges for the sale of its Class A shares for the period were
$267,481, of which $22,264 and $245,217 were received by the Distributor and
Merrill Lynch, respectively. During the fiscal year ended December 31, 1995,
the Distributor received CDSCs of $112, all of which was paid to Merrill
Lynch, with respect to redemptions within one year after purchase of Class A
shares purchased subject to front-end sales charge waivers. During the fiscal
year ended December 31, 1995, the Fund sold 7,041,007 of its Class D shares
for aggregate net proceeds to the Fund of $150,994,718. The gross sales
charges for the sale of its Class D shares for the period were $1,047,900, of
which $74,607 and $973,293 were received by the Distributor and Merrill Lynch,
respectively. During the fiscal year ended December 31, 1995, the Distributor
received CDSCs of $999, all of which was paid to Merrill Lynch with respect to
redemptions within one year after purchase of Class D 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 of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint SM Program, are entitled to purchase additional Class A shares of
the Fund in that account. Certain employer
27
<PAGE>
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. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services and
certain purchases made in connection with the Merrill Lynch Mutual Fund
Adviser ("MFA") program. In addition, Class A shares will be offered to ML &
Co. and its subsidiaries and their directors and employees and to members of
the Boards of MLAM-advised investment companies, including the Fund. Certain
persons who acquired shares of certain MLAM-advised closed-end funds in their
initial offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock pursuant to a tender
offer conducted by such funds in shares of the Fund and certain other MLAM-
advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and D shares are offered at net asset value to certain employer-
sponsored retirement or savings plans, to Employee Access Accounts SM
available through employers which provide such plans and to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
28
<PAGE>
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 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 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 proceeds of
29
<PAGE>
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price.
In addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1...................................................... 4.00%
1-2...................................................... 3.00
2-3...................................................... 2.00
3-4...................................................... 1.00
4 and thereafter......................................... 0.00
</TABLE>
For the fiscal year ended December 31, 1995, the Distributor received CDSCs of
$3,023,322 with respect to redemptions of Class B shares, all of which was
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to a 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 for shares
purchased on or after October 21, 1994).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included
in determining the holding period of Class B shares reacquired upon
termination of participation in the MFA program (see "Shareholder Services--
Exchange Privilege").
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans placing orders through the Merrill
Lynch Blueprint SM Program. The CDSC also is waived for any Class B shares
30
<PAGE>
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. For the fiscal year ended December
31, 1995, the Distributor received CDSCs of $18,089 with respect to redemptions
of Class C shares, all of which was paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
31
<PAGE>
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 at net
asset value.
The Conversion Period is also modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares acquired upon termination
of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer
32
<PAGE>
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.
For the fiscal year ended December 31, 1995, the Fund paid the Distributor
$9,131,372 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of approximately $915.6 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended December 31, 1995, the Fund paid the Distributor
$228,521 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Distribution Plan of approximately $22.9 million, all of which
was paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class C shares. For the
fiscal year ended December 31, 1995, the Fund paid the Distributor $142,796
pursuant to the Class D Distribution Plan (based on average net assets subject
to such Distribution Plan of approximately $57.3 million), all of which was
paid to Merrill Lynch for providing account maintenance services in connection
with Class D shares. At March 31, 1996, the net assets of the Fund subject to
the Class B Distribution Plan aggregated approximately $1.3 billion. At this
asset level, the annual fee payable pursuant to the Class B Distribution Plan
would aggregate approximately $12.6 million. At March 31, 1996, the net assets
of the Fund subject to the Class C Distribution Plan aggregated approximately
$84.6 million. At this asset level, the annual fee payable pursuant to the
Class C Distribution Plan would aggregate $845,734. At March 31, 1996, the net
assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $148.9 million. At this asset level, the annual fee payable
pursuant to the Class D Distribution Plan would aggregate $372,294.
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 December 31, 1995, with respect to Class B shares, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since October 21, 1988 (commencement of operations) exceeded fully allocated
accrual revenues by approximately $14,075,000 (1.35% of Class B net assets at
that date). As of December 31, 1995, with respect to Class B shares, direct
cash revenues for the period since October 21, 1988 (commencement of
operations) exceeded direct cash expenses by $12,438,458 (1.19% of Class B net
assets at that date). Similar fully allocated accrual data for Class C shares
is not presented because such revenues and expenses for the period from October
21, 1994 (commencement of operations) to December 31, 1995 are de minimis. As
of December 31, 1995, with respect to Class C shares, direct cash revenues for
33
<PAGE>
the period since October 21, 1994 (commencement of operations) exceeded direct
cash expenses by $68,938 (1.50% of Class C net assets at that date).
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".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales charge
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Fund to (1) 6 1/4% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fees and the CDSCs). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving 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.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt of
a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for 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 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.
34
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. The notice in either event requires
the signatures of all persons in whose names the shares are registered, signed
exactly as their names appear on the Transfer Agent's register or on the
certificates, as the case may be. The signatures on the notice must be
guaranteed by an "eligible guarantor institution" (including, for example,
Merrill Lynch branch offices and certain other financial institutions) as such
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a U.S. bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE (generally, 4:00 p.m., New York time) on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund may redeem shares as set forth above.
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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 of the Fund, as the case may be, 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. Alternatively, the reinstatement privilege
may be exercised through the investor's Merrill Lynch financial consultant
within 30 days after the date the request for redemption was accepted by the
Transfer Agent or the Distributor.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch BlueprintSM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or how to change options with respect thereto can be
obtained from the Fund by calling the telephone number on the cover page hereof
or from the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive, at least quarterly,
statements from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her 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 will be opened automatically,
without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account
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registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the 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. Redemption
payments will be made within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated
in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his 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 perClass A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of
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any CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised 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 exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a 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 Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Fund, without sales charge, at the net asset value per share next
determined after the close of business on the NYSE on the ex-dividend date of
such dividend or distribution. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends, or both dividends and capital gains distributions,
paid in cash rather than reinvested, in which event payment will be mailed on
the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his 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
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redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA (R)/CBA (R) Systematic Redemption Program, subject to certain
conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his regular bank account. Investors who
maintain CMA (R) or CBA (R) accounts may arrange to have periodic investments
made in the Fund in their CMA (R) or CBA (R) accounts or in certain related
accounts in amounts of $100 or more through the CMA (R)/CBA (R) Automated
Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager 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 Manager generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available. The Fund has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. The Fund
contemplates that, consistent with the above policy of obtaining the best net
results, a portion of its brokerage transactions with respect to equities may
be conducted through Merrill Lynch and its affiliates. Subject to obtaining the
best price and execution, brokers who provide supplemental investment research
to the Manager may receive orders for transactions by the Fund. Information so
received will be in addition to and not in lieu of the services required to be
performed by the Manager under the Management Agreement, and the expenses of
the Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. It is possible that certain of the supplementary
investment research so received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other accounts or investment companies. Consistent with the Rules of Fair
Practices of the NASD, the Manager may consider sales of shares of the Fund as
a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities of
corporations domiciled in Far Eastern or Western Pacific countries will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than commissions on U.S. transactions, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of foreign stock exchanges and brokers than in the United States.
The Fund may invest in securities traded in the OTC markets and deals
directly with the dealers who make markets in the securities involved except in
those circumstances where better prices and execution are available elsewhere.
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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 and distribution fees 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 annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A or Class D shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
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.
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On occasion, the Fund may compare its performance to 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, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include its
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and net
realized long- or short-term capital gains, if any, to the Fund's shareholders
at least annually. The per share dividends and distributions on each class of
shares will be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable to that class. See "Additional Information--
Determination of Net Asset Value". Dividends and distributions are
automatically reinvested in full and fractional shares of the Fund, without a
sales charge, at the net asset value per share next determined after the close
of business on the NYSE on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends, or both dividends and capital gains distributions, paid in cash
rather than reinvested. Dividends and distributions are taxable to investors
whether received in cash or reinvested in additional shares of the Fund. 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 "Determination of Net Asset Value" below.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other income during a taxable year, (a)
the Fund would not be able to make any ordinary income dividend distributions,
and (b) all or a portion of distributions made before the losses were realized
but in the same taxable year would be recharacterized as returns of capital to
shareholders, rather than as ordinary income dividends, reducing each
shareholder's tax basis in the Fund shares for Federal income tax purposes and
resulting in a capital gain for any shareholder who received such a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). See "Additional Information--Taxes".
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time), on each day during which the NYSE is open for
trading. 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 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.
Expenses, including the
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fees payable to the Manager and any account maintenance and/or distribution
fees payable to the Distributor, are accrued daily. The per share net asset
value of the Class A shares generally will be higher than the per share net
asset value of the other classes, reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares and the daily expense accruals of
the account maintenance fees applicable with respect to Class D shares;
moreover, the per share net asset value of Class D shares generally will be
higher than the per share net asset value of Class B and Class C shares,
reflecting the daily expense accruals of the distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares. It is
expected, however, that the per share net asset value of the classes will tend
to converge (although not necessarily meet) immediately after the payment of
dividends or distributions which will differ by approximately the amount of the
expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. However, in certain circumstances, the Fund will value a
security traded on a Japanese stock exchange based upon the last bid or ask
price as reported on such exchange after trading in such security has been
halted for the day. Japanese stock exchanges may impose limits, based on a
percentage of a security's value, on the amount such security may move in a
single day. If the security reaches its limit during the day, further trading
is halted. However, a bid or ask quotation may be reported following the
suspension of trading. Management of the Fund believes such bid or ask
quotation is more indicative of where trading in the security will open on the
following business day and is more representative of the security's value at
the close of trading on the exchange than is the last sale. In situations where
both a bid and ask price are reported following a trading suspension due to the
circumstances described above, the Fund will utilize the bid price for
valuation purposes. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities which are traded both in the OTC market and on a stock exchange will
be valued according to the broadest and most representative market. When the
Fund writes a call option, the amount of the premium received is recorded on
the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, will be stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the 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.
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Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, 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. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
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 U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes on
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding 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").
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Generally, shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or who, to
the Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
44
<PAGE>
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on August 5, 1976. As of the
date of this Prospectus, the Fund has an authorized capital of 500,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes
designated Class A, Class B, Class C and Class D Common Stock. Class A, Class C
and Class D each consists of 100,000,000 shares and Class B consists of
200,000,000 shares. Shares of Class A, Class B, Class C and Class D Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that Class B, Class C and Class D shares bear certain
expenses related to the account maintenance associated with such shares, and
Class B and Class C shares bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures, as applicable.
See "Purchase of Shares". The Directors of the Fund may classify and reclassify
the shares of the Fund into additional classes of Common Stock at a future
date.
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. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. 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, and except as noted above, the Class B, Class C and
Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 1-800-637-3863.
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.
45
<PAGE>
[This page is intentionally left blank]
46
<PAGE>
MERRILL LYNCH PACIFIC FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM 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: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Pacific Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. ................................... 4. ...................................
2. ................................... 5. ...................................
3. ................................... 6. ...................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
.................................................. Date.........................
(Zip Code)
Occupation............................ Name and Address of Employer .........
......................................
......................................
...................................... ......................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT ONE: SELECT ONE:
[_] Reinvest [_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Pacific Fund, Inc. Authorization Form.
Specify type of account (check one): [_] checking [_] savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ....................... Account Number .............................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ................................ Date....................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
- --------------------------------------------------------------------------------
47
<PAGE>
MERRILL LYNCH PACIFIC FUND, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
...................................... ......................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
...................., 19....
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Pacific Fund, Inc. or any other investment company with an initial sales
charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc.
acts as distributor over the next 13 month period which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Pacific Fund, Inc.
Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Pacific Fund, Inc. held as security.
By: .................................. ......................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must
sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name.............................. (2) Name..............................
Account Number........................
Account Number........................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp 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.
This form when completed, should be ......................................
mailed to: Dealer Name and Address
By: ..................................
Authorized Signature of Dealer
Merrill Lynch Pacific Fund, Inc.
[ ][ ][ ] [ ][ ][ ][ ]
c/o Merrill Lynch Financial Data Services, Branch Code F/C No.
Inc.
P.O. Box 45289 ....................
Jacksonville, FL 32232-5289 F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
48
<PAGE>
MERRILL LYNCH PACIFIC FUND, INC . -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
Name...................................... Social Security Number or
First Name Initial Last Name Taxpayer Identification Number
Name of Co-Owner (if any)........................
First Name Initial Last Name
Address............................. Account Number .....................
(if existing account)
....................................
(Zip Code)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A or [_] Class D shares in Merrill Lynch Pacific Fund, Inc. at
cost or current offering price. Withdrawals to be made either (check one)
[_] monthly on the 24th day of each month, or [_] quarterly on the 24th day
of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ___________________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address ........................................................................
..........................................................................
Signature of Owner................................ Date...................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number......................... Account Number.............................
Bank Address....................................................................
........................................................................
Signature of Depositor.................................. Date...................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
49
<PAGE>
MERRILL LYNCH PACIFIC FUND, INC. -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Pacific Fund, Inc. subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC. AUTHORIZATION TO HONOR ACH DEBITS
You are hereby authorized to draw an DRAWN BY MERRILL LYNCH FINANCIAL
ACH debit each month on my bank DATA SERVICES, INC.
account for investment in Merrill
Lynch Pacific Fund, Inc. as
indicated below:
Amount of each ACH debit $........ To.............................. Bank
(Investor's Bank)
Account No. ......................
Bank Address ........................
Please date and invest ACH debits on
the 20th of each month beginning.. or
as soon thereafter as possible. City...... State...... Zip Code......
(Month)
I agree that you are drawing these
ACH debits voluntarily at my request As a convenience to me, I hereby
and that you shall not be liable for request and authorize you to pay and
any loss arising from any delay in charge to my account ACH debits
preparing or failure to prepare any drawn on my account by and payable
such debit. If I change banks or to Merrill Lynch Financial Data
desire to terminate or suspend this Services, Inc. I agree that your
program, I agree to notify you rights in respect to each such debit
promptly in writing. I hereby shall be the same as if it were a
authorize you to take any action to check drawn on you and signed
correct erroneous ACH debits of my personally by me. This authority is
bank account or purchases of Fund to remain in effect until revoked by
shares including liquidating shares me in writing. Until you receive
of the Fund and credit my bank such notice, you shall be fully
account. I further agree that if a protected in honoring any such
check or debit is not honored upon debit. I further agree that if any
presentation, Merrill Lynch Financial such debit be dishonored, whether
Data Services, Inc. is authorized to with or without cause and whether
discontinue immediately the Automatic intentionally or inadvertently, you
Investment Plan and to liquidate shall be under no liability.
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ ..................... ............ .....................
Date Signature of Date Signature of
Depositor Depositor
...................... ............ .....................
Signature of Depositor Bank Signature of Depositor
(If joint account, Account (If joint account,
both must sign) Number both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE MANAGER 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 2
Merrill Lynch Select Pricing SM System.................................... 3
Financial Highlights...................................................... 8
Risk Factors and Special Considerations................................... 11
Investment Objective and Policies......................................... 12
Hedging Techniques....................................................... 13
Other Investment Policies and Practices.................................. 20
Investment Restrictions.................................................. 21
Management of the Fund.................................................... 22
Board of Directors....................................................... 22
Management and Advisory Arrangements..................................... 23
Code of Ethics........................................................... 24
Transfer Agency Services................................................. 24
Purchase of Shares........................................................ 24
Initial Sales Charge Alternatives--Class A and Class D Shares............ 26
Deferred Sales Charge Alternatives--Class B and Class C Shares........... 29
Distribution Plans....................................................... 32
Limitations on the Payment of Deferred Sales Charges..................... 34
Redemption of Shares...................................................... 34
Redemption............................................................... 35
Repurchase............................................................... 35
Reinstatement Privilege--Class A and Class D Shares...................... 36
Shareholder Services...................................................... 36
Portfolio Transactions and Brokerage...................................... 39
Performance Data.......................................................... 40
Additional Information.................................................... 41
Dividends and Distributions.............................................. 41
Determination of Net Asset Value......................................... 41
Taxes.................................................................... 42
Organization of the Fund................................................. 45
Shareholder Reports...................................................... 45
Shareholder Inquiries.................................................... 45
Authorization Form........................................................ 47
</TABLE>
Code #10073-0496
[LOGO] MERRILL LYNCH
Merrill Lynch
Pacific Fund, Inc.
[ART]
Prospectus
April 26, 1996
Distributor:
Merrill Lynch
Funds Distributor
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH PACIFIC FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Pacific Fund, Inc. (the "Fund") is a non-diversified, open-
end, management investment company seeking long-term capital appreciation
primarily through investment in equities of corporations domiciled in Far
Eastern or Western Pacific countries, including Japan, Australia, Hong Kong,
Malaysia and Singapore. Current income from dividends and interest will not be
an important consideration in selecting portfolio securities. It is expected
that under normal conditions at least 80% of the Fund's net assets will be
invested in Far Eastern or Western Pacific corporate securities, primarily
common stocks and debt securities convertible into common stocks. The Fund is
designed for U.S. investors desiring to achieve diversification of investments
by participation in the economies of Far Eastern and Western Pacific
countries. The Fund may seek to hedge against investment, interest rate and
currency risks through the use of options, futures and foreign currency
transactions.
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated April 26,
1996 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is April 26, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term capital appreciation
primarily through investment in equities of corporations domiciled in Far
Eastern or Western Pacific countries, including Japan, Australia, Hong Kong,
Malaysia, Singapore and Thailand. Reference is made to "Investment Objective
and Policies" in the Prospectus for a discussion of the investment objective
and policies of the Fund.
It is anticipated that the Japanese common stocks in which the Fund will
invest will primarily be those listed on the First Section of the Tokyo Stock
Exchange and that common stocks of corporations in other Far Eastern and
Western Pacific countries will be listed on the principal stock exchanges in
such countries.
Many of the securities held by the Fund will not be registered with the
Commission nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information concerning certain of the issuers of securities held by the Fund
than is available concerning U.S. companies. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards or to practices and requirements comparable to those applicable to
domestic companies. Securities of many foreign companies may be less liquid and
more volatile than securities of comparable domestic companies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect U.S. investment in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") will effect portfolio transactions without regard to the holding
period if, in its judgment, such transactions are advisable in light of a
change in circumstances of a particular company or within a particular industry
or in general market, economic or political conditions. While the Fund
anticipates that its annual portfolio turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover rates.
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 whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. For the fiscal years ended December 31, 1995 and 1994, the
Fund's portfolio turnover rates were 26.73% and 23.84%, respectively.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions,
management of the Fund does not believe that these considerations will have any
significant effect on its portfolio strategy.
Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive collateral in cash (or cash
equivalents consisting of securities issued or guaranteed by the governments of
the U.S. or Japan or other Far Eastern or Western Pacific countries or their
agencies and instrumentalities) which are maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
During the period of such a loan, the Fund typically receives the income on the
loaned securities and receives either
2
<PAGE>
the income on the collateral or other compensation, i.e., negotiated loan
premium or fee, for entering into the loan and thereby increases its yield. 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 and other distributions. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk
of failure by borrower to return the securities involved in such transactions.
HEDGING TECHNIQUES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Hedging Techniques" in the Prospectus for information with
respect to various portfolio strategies involving options and futures. The Fund
may seek to hedge its portfolio against movements in the equity markets,
interest rates and exchange rates between currencies through the use of options
and futures transactions and forward foreign exchange transactions. The Fund
has authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put options on securities and engage in transactions in
stock index options, stock index futures and financial futures, and related
options on such futures. The Fund may also deal in forward foreign exchange
transactions and foreign currency options and futures and related options on
such futures. The Fund is authorized to enter into such options and futures
transactions either on exchanges or in the over-the-counter ("OTC") markets.
Each of such portfolio strategies is described in the Prospectus. Although
certain risks are involved in options and futures transactions (as discussed in
the Prospectus and below), the Manager believes that, because the Fund will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of option and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. The following is further information relating
to portfolio strategies involving options and futures that the Fund may
utilize.
Hedging Investment and Interest Rate Risks. The Fund may write (i.e., sell)
covered call options on the equity securities in which it may invest and may
enter into closing purchase transactions with respect to certain of such
options. Covered call options serve as a partial hedge against the decline in
price of the underlying security. A covered call option is an option where the
Fund, in return for a premium, gives another party a right to buy specified
securities owned by the Fund at a specified future date and price set at the
time of the contract. By writing covered call options, the Fund gives up the
opportunity, while the option is in effect, to profit from any price increase
in the underlying security above the option exercise price. In addition, the
Fund's ability to sell the underlying security will be limited while the option
is in effect unless 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. The writer of a covered call option
has no control over when he may be required to sell his securities since he may
be assigned an exercise notice at any time prior to the termination of his
obligation as a writer. 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 value of the underlying security during the option
period. If a call option is exercised, the writer realizes a gain or loss from
the sale of the underlying security.
The Fund may also purchase put options to hedge against a decline in the
market value of its securities holdings. By buying a put the Fund has a right
to sell the underlying security at the exercise price, thus limiting the Fund's
risk of loss through a decline in the market value of the security until the
put option
3
<PAGE>
expires. The amount of any appreciation in the value of the underlying security
will be offset partially by the amount of the premium paid for the put option
and any related transaction costs. Prior to its expiration, a put option may be
sold in a closing sale transaction, and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction cost. A closing sale transaction
cancels out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option it
has purchased.
The Fund also may engage in transactions in stock index options and futures,
financial futures in U.S. and foreign agency and government securities and
corporate debt securities, and related options on such futures. A futures
contract is an agreement between two parties to buy and sell a particular
commodity, such as a security, or, in the case of an index-based futures
contract, to make and accept a cash settlement for a set price on a future
date. A majority of transactions in futures contracts, however, do not result
in the actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% to 15% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Fund and commodities
brokers with respect to initial and variation margin. Section 18(f) of the
Investment Company Act prohibits an open-end investment company such as the
Fund from issuing a "senior security" other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be "senior security" under the Investment Company Act.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the price of the
securities and currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities or
currencies which are the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance
4
<PAGE>
that a liquid secondary market will exist for any particular call or put option
or futures contract at any specific time. Thus, it may not be possible to close
an option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). In the case of a futures position or an option on a
futures position written by the Fund, in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security or currency underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying currency (whether or not covered) which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Manager does not believe that these
trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
Hedging Foreign Currency Risks. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot, i.e., cash, basis at the spot rate
then prevailing for purchasing or selling currency in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange between currencies of Far Eastern and Western
Pacific countries and the dollar as a hedge against possible variations in the
foreign exchange rates between these currencies. This is accomplished through
contractual agreements to purchase or to sell a specified currency at a
specified future date and price set at the time of the contract. The Fund's
dealings in forward foreign exchange will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund accruing in connection with the purchase
and sale of its portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Fund will not
speculate in forward foreign exchange. All dealings in forward exchange will be
limited to contracts involving currencies of Far Eastern and Western Pacific
countries and the dollar. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian will place cash or liquid
equity or debt securities in a separate account of the Fund in an amount equal
to the value of the Fund's total assets committed to the consummation of such
forward contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts. Alternatively, no such segregation of funds
5
<PAGE>
need be made when the Fund "covers" its open positions. The position is
considered "covered" if the Fund holds securities denominated in the currency
underlying the forward contract, or in a demonstrably correlated currency,
having a value equal to or greater than the Fund's obligation under the forward
contract. The Fund will not attempt to hedge all of its portfolio positions and
will enter into such transactions only to the extent, if any, deemed
appropriate by the Manager. The Fund will not enter into a forward contract
with a term of more than one year.
As discussed in the Prospectus, the Fund may also purchase or sell listed or
OTC foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. It is possible
that, under certain circumstances, the Fund may have to limit its currency
transactions to qualify for the special tax treatment afforded regulated
investment companies ("RICs") under the Internal Revenue Code of 1986, as
amended (the "Code"); in this regard, the Fund presently intends to limit its
gross income from currency hedging transactions to less than 10% of its gross
income in any taxable year until such time as the Fund determines that income
from such transactions need not be subject to this restriction. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Debt Securities. The Fund may hold convertible debt securities and may also
invest in other debt securities, although it does not presently intend to do so
to any significant degree. The Fund has established no rating criteria for the
debt securities in which it may invest. Therefore, the Fund may invest in debt
securities either (a) rated in one of the top four rating categories by a
nationally recognized rating organization or which, in the Manager's judgment,
possess similar credit characteristics ("investment grade securities") or (b)
rated below the top four rating categories or which, in the Manager's judgment,
possess similar credit characteristics ("high yield securities"). The Manager
considers ratings as one of several factors in its independent credit analysis
of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During such periods, such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
6
<PAGE>
High yield securities frequently have call or redemption features which would
permit issuers to repurchase such securities from the Fund. If a call were
exercised by an issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to affect adversely the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of an obligation.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
Under the fundamental investment restrictions, the Fund may not:
1. 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).
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. 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.
5. Issue senior securities to the extent such issuance would violate
applicable law.
7
<PAGE>
6. 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.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without approval of the Fund's shareholders.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified for sale require a lower limitation, the
Fund will observe such limitation. As of the date hereof, therefore, the
Fund will not invest more than 10% of its total assets in securities which
are subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investment in
warrants, valued at the lower of cost or market value, would exceed 10% of
the Fund's net assets.
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.
8
<PAGE>
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
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 5% of its total assets, taken at acquisition cost or
market value, whichever is lower, and then only from banks as a temporary
measure for extraordinary or emergency purposes.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceeds 15% of the total assets of the Fund (10%
to the extent required by certain state laws), taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. However, if an OTC option is sold by the Fund to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to repurchase such
OTC option from the dealer at a predetermined price, then the Fund will treat
as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (i.e.,
current market value of the underlying securities minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money". This policy is
not a fundamental policy of the Fund and may be amended by the Board of
Directors without the approval of the Fund's shareholders. The Fund will not
change or modify this policy, however, prior to the change or modification by
the Commission staff of its position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. Without such an order, the Fund would
be prohibited from engaging in portfolio transactions with Merrill Lynch or any
of its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firm
or any of its affiliates participates as an underwriter or dealer.
Nothing in the foregoing investment restrictions shall be deemed to prohibit
the Fund from purchasing the securities of any issuer pursuant to the exercise
of subscription rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund would not satisfy
requirements applicable to RICs under the Code.
9
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and principal executive officers of the Fund,
including their ages and their principal occupations for at least the past five
years, is set forth below. Unless otherwise noted, the address of each Director
and officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Donald Cecil (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970, and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (64)--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York. 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.
Richard R. West (58)--Director(2)--Box 604, Genoa, Nevada 89491. Professor of
Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus, New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (61)--Director(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of The Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
Terry K. Glenn (55)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Norman R. Harvey (62)--Executive Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
10
<PAGE>
Donald C. Burke (35)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from 1982
to 1990.
Stephen I. Silverman (45)--Vice President(1)(2)--Vice President of the
Manager and Portfolio Manager since 1983.
Gerald M. Richard (46)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981 and
Treasurer since 1984.
Robert Harris (44)--Secretary(1)(2)--Vice President of the Manager since 1984
and attorney associated with the Manager since 1980; Secretary of the
Distributor since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
other investment companies for which the Manager, or its affiliate, FAM,
acts as investment adviser or manager.
At March 31, 1996, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML&Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Directors, at a rate of $500 per meeting attended. The Chairman of
the Committee receives an additional fee of $250 per meeting attended. Fees and
expenses paid to the non-affiliated Directors aggregated $48,782 for the fiscal
year ended December 31, 1995.
The following table sets forth for the fiscal year ended December 31, 1995,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1995, the aggregate compensation paid by all registered
investment companies advised by the Manager and its affiliate, FAM ("MLAM/FAM
Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT FROM FUND AND OTHER
BENEFITS ACCRUED MLAM/FAM ADVISED
NAME OF COMPENSATION AS PART OF FUND FUNDS PAID TO
DIRECTOR FROM FUND EXPENSES DIRECTORS(1)
-------- ------------ ---------------- ----------------------
<S> <C> <C> <C>
Donald Cecil.............. $10,500 None $271,850
Edward H. Meyer........... $ 9,500 None $239,225
Charles C. Reilly......... $ 9,500 None $269,600
Richard R. West........... $ 9,500 None $294,600
Edward D. Zinbarg......... $10,083 None $155,063
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Cecil (35 funds and portfolios); Mr.
Meyer (35 funds and portfolios); Mr. Reilly (54 funds and portfolios); Mr.
West (54 funds and portfolios); and Mr. Zinbarg (17 funds and portfolios).
11
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Pursuant to the Fund's management agreement (the "Management Agreement"), and
subject to the direction of the Board of Directors, the Manager is responsible
for the actual management of the Fund's portfolio and constantly reviews the
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Manager. The Manager performs certain
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
Securities held by the Fund may also be held by other clients to which the
Manager or its affiliate, FAM, provides investment advice. Transactions based
upon such advice during the same period by more than one client of the Manager
or FAM may increase the demand for securities being purchased or the supply of
securities being sold and thereby may have an adverse effect on price.
As compensation for its services, the Manager receives a fee from the Fund at
the end of each month at the annual rate of 0.60% of the average daily net
assets of the Fund. For the fiscal years ended December 31, 1993, 1994 and
1995, the total management fees paid by the Fund to the Manager aggregated
$4,179,008, $8,074,688 and $9,381,493, respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding 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
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to the Manager during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment. For the fiscal years ended
December 31, 1993, 1994 and 1995, no reimbursement of expenses was required
pursuant to the applicable expense limitation provisions discussed above.
Under the Management Agreement, the Manager agrees to furnish the Fund with
administrative services, office space, equipment and facilities for management
of the Fund's affairs and to pay all compensation of officers of the Fund as
well as all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays all other expenses incurred in its operation including, among
other things, taxes; expenses for legal and auditing services; accounting
services; allocated portions of clerical salaries related to Fund activities;
the expense of preparing (including typesetting), printing and mailing reports,
prospectuses, statements of additional information (except to the extent paid
by the Distributor) and notices to its shareholders; costs of printing stock
certificates; charges of the custodian and transfer agent; expenses of
redemption of shares; Commission fees; the cost of issuing shares of the Fund
and registering shares of the Fund under Federal, state and foreign laws;
shareholder meeting and related proxy solicitation expenses; costs of
conducting shareholder relations; fees and actual out-of-pocket expenses of
Directors who are not affiliated persons of the Manager; insurance; interest;
brokerage costs; litigation and other extraordinary or non-
12
<PAGE>
recurring expenses; and other like expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal years ended December 31, 1993, 1994 and 1995
the amounts of such reimbursement were $68,896, $157,585 and $133,747,
respectively. Certain expenses in connection with the distribution of Class B,
Class C and Class D shares will be financed by the Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the vote of the holders of a majority of the Fund's voting
securities (as defined in the Investment Company Act) or by its Board of
Directors and (b) by a majority of Directors who are not parties to such
agreement or interested persons of any such party. Such agreement will
terminate upon assignment and may be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
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
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, 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 PricingSM System is used by more than 50 mutual
funds advised by the Manager, or its affiliate, FAM. Funds advised by the
Manager or FAM which utilize the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds".
The Fund has entered into 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
13
<PAGE>
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 Management Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal years ended December 31, 1993, 1994 and 1995, the Fund sold
its shares through the Distributor and Merrill Lynch, as dealers. The gross
sales charges for the sale of Class A shares of the Fund for the fiscal year
ended December 31, 1993, were $3,636,042, of which $223,158 and $3,412,884 were
received by the Distributor and Merrill Lynch, respectively. The gross sales
charges for the sale of Class A shares of the Fund for the fiscal year ended
December 31, 1994, were $3,046,441, of which $200,828 and $2,845,613 were
received by the Distributor and Merrill Lynch, respectively. The gross sales
charges for the sale of Class A shares of the Fund for the fiscal year ended
December 31, 1995, were $267,481, of which $22,264 and $245,217 were received
by the Distributor and Merrill Lynch, respectively. The gross sales charges for
the sale of Class D shares for the period October 21, 1994 (commencement of
operations) to December 31, 1994, were $195,085, of which $183,381 and $11,704
were received by the Distributor and Merrill Lynch, respectively. The gross
sales charges for the sale of Class D shares for the fiscal year ended December
31, 1995, were $1,047,900, of which $74,607 and $973,293 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended December
31, 1995, the Distributor received contingent deferred sales charges ("CDSCs")
of $112, all of which was paid to Merrill Lynch, with respect to redemptions
within one year after purchase of Class A shares purchased subject to front-end
sales charge waivers. For the fiscal year ended December 31, 1995, the
Distributor received CDSCs of $999, all of which was paid to Merrill Lynch,
with respect to redemptions within one year after purchase of Class D shares
purchased subject to front-end sales charge waivers.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information 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 (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company", as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount. The term "purchase" 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 term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Fund. Purchases by such a company
or non-qualified employee benefit plan will qualify for the above quantity
discounts only if the Fund and the Distributor are able to realize economies of
scale in sales effort and sales related expense by means of the company,
employer or plan making the Fund's Prospectus available to individual investors
or employees and forwarding investments by such persons to the Fund and by any
such employer or plan bearing the expense of any payroll deduction plan.
14
<PAGE>
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing SM System commenced
operations), and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994, and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares
of the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"),
if the following conditions are met. First, the sale of the closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class A or Class D Shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds may
reinvest at net asset value the net proceeds from a sale of certain shares of
common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC
(each as defined in the eligible fund's prospectus) is applicable. Purchase
orders from eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender offer
terminates and will be effected at the net asset value of the designated class
of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The Fund offers a right of accumulation under which
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 (in the case of a purchase made through a
securities dealer) 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 for such right of accumulation. 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.
15
<PAGE>
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 credit toward completion of such Letter but the reduced sales
charge applicable to the amount covered by such Letter will be applied only to
new purchases. If the total amount of shares does not equal the amount stated
in the Letter of Intention (minimum of $25,000), the investor will be notified
and must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A or Class D shares equal to five percent of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the
right of accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the Class A
or Class D shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales 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 a MLAM-advised money
market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
placing orders to purchase Class A or Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00 and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are offered at
net asset value plus a sales charge of 1/2 of 1% for corporate or group IRA
programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services, including the exchange privilege, available to Class A
and Class D investors through Blueprint, however, may differ from those
available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business
16
<PAGE>
Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program
is available to custodian rollover assets from employer sponsored retirement
and savings plans whose trustee and/or plan sponsor has entered into a Merrill
Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co. includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees,
and any trust, pension, profit-sharing or other benefit plan for such persons
may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
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, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of the other mutual fund, and such shares of such
other fund were subject to a sales charge either at the time of purchase or on
a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the other mutual fund and such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the
17
<PAGE>
redemption, and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500 except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Acquisition of Assets 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 public or private investment company. The value of the
assets or company acquired in a tax-free transaction may in appropriate cases
be adjusted to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the
realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based
on similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
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.
18
<PAGE>
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 to its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the 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 Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fees and the CDSCs). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain 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.
19
<PAGE>
The following table sets forth comparative information as of December 31,
1995 indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule with respect to Class B and Class C shares and the
Distributor's voluntary maximum with respect to Class B shares, for the
periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1995
-----------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- ------- -------------- --------- ------------
CLASS B SHARES, FOR THE
PERIOD OCTOBER 21, 1988
(COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1995:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted. $1,149,298 $71,831 $11,877 $83,708 $24,480 $59,228 $7,813
Under Distributor's
Voluntary Waiver.......... $1,149,298 $71,831 $ 5,746 $77,577 $24,480 $53,097 $7,813
<CAPTION>
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1995:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As Adopted. $ 39,908 $ 2,494 $ 129 $ 2,623 $ 197 $ 2,426 $ 346
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993, under the distribution plan in effect at that time, 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 NASD maximum or, with respect to
Class B shares, the voluntary maximum.
20
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to receive payment with respect to any redemption of shares may be
suspended by the Fund for a period of up to seven days. Suspensions of more
than seven days may not be made except (1) for any period (a) during which the
NYSE is closed other than customary weekend and holiday closings or (b) during
which trading on the NYSE is restricted; (2) for any period during which an
emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or
(3) for such other periods as the Commission may by order permit for the
protection of security holders of the Fund. The Commission shall by rules and
regulations determine the conditions under which (i) trading shall be deemed
to be restricted and (ii) an emergency shall be deemed to exist within the
meaning of clause (2) above.
DEFERRED SALES 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 are subject to a CDSC under most
circumstances, the charge is waived (i) on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or (ii) on redemptions of
Class B shares following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are: (a) any partial or complete
redemption in connection with a distribution following retirement under a tax-
deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one
who owns the Class B shares as joint tenant with his or her spouse), provided
the redemption is requested within one year of the death or initial
determination of disability. For the fiscal years ended December 31, 1993,
1994 and 1995, the Distributor received CDSCs of $1,036,912, $1,830,114 and
$3,023,322, respectively, with respect to redemptions of Class B shares, all
of which was paid to Merrill Lynch. For the period October 21, 1994
(commencement of operations) to December 31, 1994 and for the fiscal year
ended December 31, 1995, the Distributor received CDSCs of $1 and $18,089,
respectively, with respect to redemptions of Class C shares, all of which was
paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations
and credit unions. Class B shares of the Fund are offered through Blueprint
only to members of certain affinity groups. The CDSC is waived in connection
with purchase orders placed through Blueprint. Services, including the
exchange privilege, available to Class B investors through Blueprint, however,
may differ from those available to other investors in Class B shares. Orders
for purchases and redemptions of Class B shares of the Fund will be grouped
for execution purposes which, in some circumstances, may involve the execution
of such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no
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minimum initial or subsequent purchase requirement for investors who are part
of the Blueprint automatic investment plan. Additional information concerning
these Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable brokerage commissions
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 Manager generally seeks reasonably competitive
commission rates, the Fund does not necessarily pay the lowest commissions or
spread available. The Fund has no obligation to deal with any broker or group
of brokers in the execution of transactions in portfolio securities. The Fund
contemplates that, consistent with the above policy of obtaining the best net
results, a portion of its brokerage transactions with respect to equities may
be conducted through Merrill Lynch and its affiliates. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Manager may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under its agreement, and the expenses
of the Manager will not necessarily be reduced as a result of the receipt of
such supplemental information. It is possible that certain of the
supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary
of the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies. In addition,
consistent with the Rules of Fair Practice of the NASD and policies
established by the Directors of the Fund, the Manager may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities of
corporations domiciled in Far Eastern or Western Pacific countries will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than commissions on U.S. transactions, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less government supervision and
regulation of foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or securities convertible into foreign equity
securities. ADRs, EDRs and GDRs may be listed on stock exchanges or traded in
the over-the-counter markets. ADRs and GDRs traded in the U.S., like other
securities traded in the U.S., will be subject to negotiated commission rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved,
except in those circumstances where better prices and
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execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the OTC market usually
involve transactions with dealers acting as principal for their own account,
the Fund will not deal with affiliated persons, including Merrill Lynch and any
of its affiliates, in connection with such transactions. However, affiliated
persons of the Fund may serve as its broker in listed or over-the-counter
transactions conducted on an agency basis provided that, among other things,
the fee or commission received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions. See "Investment Objective and
Policies--Investment Restrictions".
The Board of Directors has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the management fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
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 disclosing the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
For the fiscal year ended December 31, 1995, the Fund paid total brokerage
commissions of $2,622,844, of which $95,598, or 3.6%, was paid to Merrill Lynch
for effecting 3.7% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended December 31, 1994,
the Fund paid total brokerage commissions of $3,851,175, of which $21,610, or
0.6%, was paid to Merrill Lynch for effecting 0.9% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. For the
fiscal year ended December 31, 1993, the Fund paid total brokerage commissions
of $1,891,212, of which $27,267, or 1.4%, was paid to Merrill Lynch for
effecting 1.6% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily as of 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m., New York time), on each
day during which the NYSE is open for trading. The NYSE is not open on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
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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.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Manager 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 Class D shares;
moreover the per share net asset value of Class B and Class C shares generally
will be lower than the per share net asset value of its Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to Class B and Class C shares of
the Fund. It is expected, however, that the per share net asset value of the
four classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials among the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. However, in certain circumstances, the Fund will value a
security traded on a Japanese stock exchange based upon the last bid or ask
price as reported on such exchange after trading in such security has been
halted for the day. Japanese stock exchanges may impose limits, based on a
percentage of a security's value, on the amount such security may move in a
single day. If the security reaches its limit during the day, further trading
is halted. However, a bid or ask quotation may be reported following the
suspension of trading. Management of the Fund believes such bid or ask
quotation is more indicative of where trading in the security will open on the
following business day and is more representative of the security's value at
the close of trading on the exchange than is the last sale. In situations where
both a bid and ask price are reported following a trading suspension due to the
circumstances described above, the Fund will utilize the bid price for
valuation purposes. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities which are traded both in the OTC market and on a stock exchange will
be valued according to the broadest and most representative market. When the
Fund writes a call option, the amount of the premium received is recorded on
the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including future contracts and
related options, will be stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund.
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<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund's shares through the
Merrill Lynch BlueprintSM Program. Certain of these services are available only
to U.S. investors. Full details as to each of such services, copies of the
various plans described below and instructions as to how to participate in the
various services or plans, or how to change options with respect thereto, can
be obtained from the Fund by calling the telephone number on the cover page
hereof or from the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases, the reinvestment
of ordinary income dividends and long-term capital gain distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the transfer
agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the transfer agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he 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 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.
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<PAGE>
AUTOMATIC INVESTMENT PLANS
A U.S. 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 his
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint no minimum charge to the
investor's bank account is required. Investors who maintain CMA (R) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA (R) or CBA (R) accounts or in certain related accounts in amounts of $100
or more ($1 for retirement accounts) through the CMA (R) or CBA (R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions are automatically reinvested in full and fractional shares of the
Fund at the net asset value per share next determined after the close of
business on the NYSE on the ex-dividend date of such dividend or distribution.
A shareholder may at any time, by written notification to the Fund's transfer
agent, elect to have subsequent dividends, or both dividends and capital gains
distributions, paid in cash rather than reinvested. To be effective as to a
particular distribution, such notification must be received by the transfer
agent sufficiently in advance of the record date (approximately ten days) to
permit the change to be entered in the shareholder records.
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 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 upon 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 Investment 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. Redemptions will be made at the net asset value next
determined as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the shares will be redeemed at the net asset value
next determined after the close of business on
26
<PAGE>
the NYSE 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 Class A or Class D
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are automatically reinvested 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.
If periodic withdrawals continuously exceed reinvested dividends and capital
gains distributions, the shareholder's original investment may be
correspondingly reduced. 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 accept additions
of Class A or Class D shares to an Investment Account in which an election has
been made to receive systematic withdrawals only if such addition is equal to
at least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held with a
CMA (R), CBA (R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA (R)
or CBA (R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to
the shareholder's account five business days after the date the shares are
redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month; bimonthly systematic redemptions will be made
at net asset value on the first Monday of every other month; and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The CMA (R) or CBA (R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the Automatic Investment Program. For more information on the CMA (R) or
CBA (R) Systematic Redemption Program, eligible shareholders should contact
their Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing SM System, Class A shareholders may exchange 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 are exchangeable with shares of the same class of
other MLAM-advised mutual funds. For purposes of computing the CDSC that may
be payable
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<PAGE>
upon a disposition of the shares acquired in the exchange, the holding period
for the previously owned shares of the Fund is "tacked" to the holding period
for the newly acquired shares of the other fund as more fully described below.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds as follows: Class A shares may be
exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A 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
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period for the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since
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<PAGE>
by "tacking" the two and a half year holding period of Fund Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Special Value Fund Class B shares
for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the conversion period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager 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 that fund will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares 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.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and net
realized long- or short-term capital gains, if any, to the Fund's shareholders
at least annually. See "Shareholder Services" for information concerning the
manner in which dividends and distributions are automatically reinvested 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 investors whether received in cash or reinvested in additional
shares of the Fund. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and
Class C shares; similarly, the per share dividends and distributions on Class D
shares will be lower than the per share dividends and distributions on Class A
shares as a result of the account maintenance fees applicable with respect to
the Class D shares. See "Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded RICs under the Code. If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, 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. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals
30
<PAGE>
and entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its fiscal year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes on
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to the
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon 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.
31
<PAGE>
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 minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause
the Fund to accrue income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes; in such case, if the
issuer of such high yield securities is a domestic corporation, dividend
payments by the Fund will be eligible for the dividends received deduction to
the extent of the deemed dividend portion of such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092,
32
<PAGE>
the Fund may be required to postpone recognition for tax purposes of losses
incurred in certain sales of securities and certain closing transactions in
options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and mark-to-market rules described above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain developing Asia-Pacific countries in which the Fund
intends to invest. No such regulations have been issued.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
33
<PAGE>
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
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
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
Set forth in the tables following is total return information for Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
34
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------- -------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000
BASED INVESTMENT BASED INVESTMENT
ON A AT THE ON A AT THE
HYPOTHETICAL END OF HYPOTHETICAL END OF
$1,000 THE $1,000 THE
ERIODP INVESTMENT PERIOD INVESTMENT PERIOD
- ------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December 31,
1995...................... 2.52 % $ 1,025.20 3.10 % $ 1,031.00
Five Years Ended December
31, 1995.................. 8.65 % $ 1,514.30 8.71 % $ 1,518.60
Ten Years Ended December
31, 1995.................. 15.44 % $ 4,202.70
Inception (October 21,
1988) to
December 31, 1995......... 8.26 % $ 1,770.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31,
1995...................... 8.20 % $ 1,082.00 7.10 % $ 1,071.00
Year Ended December 31,
1994...................... 2.90 % $ 1,029.00 1.87 % $ 1,018.70
Year Ended December 31,
1993...................... 34.41 % $ 1,344.10 33.05 % $ 1,330.50
Year Ended December 31,
1992...................... (8.75)% $ 912.50 (9.72)% $ 902.80
Year Ended December 31,
1991...................... 17.04 % $ 1,170.40 15.87 % $ 1,158.70
Year Ended December 31,
1990...................... (8.39)% $ 916.10 (9.29)% $ 907.10
Year Ended December 31,
1989...................... 14.49 % $ 1,144.90 13.39 % $ 1,133.90
Year Ended December 31,
1988...................... 34.38 % $ 1,343.80
Year Ended December 31,
1987...................... 10.77 % $ 1,107.70
Year Ended December 31,
1986...................... 77.78 % $ 1,777.80
Year Ended December 31,
1985...................... 40.96 % $ 1,409.60
Year Ended December 31,
1984...................... 2.92 % $ 1,029.20
Year Ended December 31,
1983...................... 38.54 % $ 1,385.40
Year Ended December 31,
1982...................... 0.46 % $ 1,004.60
Year Ended December 31,
1981...................... 22.22 % $ 1,222.20
Year Ended December 31,
1980...................... 38.49 % $ 1,384.90
Inception (October 21,
1988) to
December 31, 1988......... 13.37 % $ 1,133.70
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (September 23,
1976) to
December 31, 1995......... 1,638.17 % $17,381.70
Inception (October 21,
1988) to
December 31, 1995......... 77.06 % $ 1,770.60
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------- -------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000
BASED INVESTMENT BASED INVESTMENT
ON A AT THE ON A AT THE
HYPOTHETICAL END OF HYPOTHETICAL END OF
$1,000 THE $1,000 THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December 31,
1995...................... 6.07% $1,060.70 2.29 % $1,022.90
Inception (October 21,
1994) to
December 31, 1995......... 2.29% $1,027.40 (1.46)% $ 982.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December 31,
1995...................... 7.07 % $1,070.70 7.95 % $1,079.50
Inception (October 21,
1994) to
December 31, 1994......... (4.04)% $ 959.60 (3.93)% $ 960.70
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to
December 31, 1995......... 2.74% $1,027.40 (1.74)% $ 982.60
</TABLE>
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 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
charges or the waiver of CDSCs, a lower amount of expenses may be deducted.
36
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on August 5, 1976. As of the
date of this Statement of Additional Information, the Fund has an authorized
capital of 500,000,000 shares of Common Stock, par value $0.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock. Class A, Class C and Class D each consists of 100,000,000 shares
and Class B consists of 200,000,000 shares. Each share of Class A, Class B,
Class C and Class D Common Stock represents an interest in the same assets of
the Fund and is 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 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 upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive rights. 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 upon 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. Shareholders may, in accordance with Maryland law, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors
at the request of 25% of the outstanding shares of the Fund. A Director may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Directors.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on December 31, 1995, and its shares outstanding on that date follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Net Assets................ $607,598,154 $1,041,762,957 $ 46,091,959 $97,945,663
============ ============== ============ ===========
Number of Shares Outstand-
ing...................... 27,423,514 49,103,338 2,197,882 4,424,454
============ ============== ============ ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............. $ 22.16 $ 21.22 $ 20.97 $ 22.14
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price (5.54%
of net asset value per
share))*................. 1.23 ** ** 1.23
------------ -------------- ------------ -----------
Offering Price............ $ 23.39 $ 21.22 $ 20.97 $ 23.37
============ ============== ============ ===========
</TABLE>
(footnotes on next page)
37
<PAGE>
- --------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" in the
Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as custodian of the Fund's assets. The Custodian,
under its contract with the Fund, is authorized to establish separate accounts
in foreign currencies and to cause securities of the Fund to be held in
separate accounts in any office of approved subcustodians outside of the U.S.
and with certain foreign banks and securities depositories. The Custodian and
subcustodians are responsible for safeguarding and controlling the Fund's cash
and securities, handling the receipt and delivery of securities and collecting
dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484 acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening, maintenance and servicing
of shareholder accounts. 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 December 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
38
<PAGE>
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 31, 1996.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Pacific Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Pacific Fund, Inc. as of December
31, 1995, 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
December 31, 1995 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
Pacific Fund, Inc. as of December 31, 1995, 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
February 2, 1996
40
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Japanese Securities
Automobile 4,861,000 Suzuki Motor Corp. $ 51,258,498 $ 54,147,133 3.0%
Beverage 380,000 Chukyo Coca-Cola Bottling Co., Ltd. 5,420,506 3,717,551 0.2
424,000 Hokkaido Coca-Cola Bottling Co., Ltd. 6,399,350 5,133,669 0.3
386,000 Kinki Coca-Cola Bottling Co., Ltd. 7,430,096 5,234,405 0.3
476,000 Mikuni Coca-Cola Bottling Co., Ltd. 8,487,431 6,500,969 0.4
470,000 Sanyo Coca-Cola Bottling Co., Ltd. 7,028,799 6,828,749 0.4
-------------- -------------- ------
34,766,182 27,415,343 1.6
Capital Goods 10,275,000 Mitsubishi Heavy Industries, Ltd. 72,860,934 81,909,386 4.6
Chemicals 2,403,000 Shin-Etsu Chemical Co., Ltd. 44,008,434 49,810,345 2.8
Consumer Electronics YEN 409,000,000 Matsushita Electric Works, Ltd.-
C.E.W. #8, 2.70% due 5/31/2002 4,543,869 4,841,128 0.3
Containers 2,926,000 Toyo Seikan Kaisha, Ltd. 66,781,229 87,575,940 4.9
Electric Construction 1,377,000 Chudenko Corp. 44,034,570 47,216,001 2.6
2,299,000 Kinden Corp. 40,928,144 39,860,616 2.2
1,120,000 Taihei Dengyo Kaisha, Ltd. 24,789,475 17,683,069 1.0
-------------- -------------- ------
109,752,189 104,759,686 5.8
Electric Equipment 3,200,000 Murata Manufacturing Co., Ltd. 110,654,033 117,783,805 6.6
2,557,000 NEC Corporation 37,256,072 31,207,090 1.7
857,000 The Nippon Signal Co., Ltd. 12,946,455 7,014,384 0.4
1,062,000 Rohm Co., Ltd. 44,672,431 59,971,523 3.3
169 Sumitomo Electric Industries,
Ltd., #1 Y (Warrants)(a) 185,351 137,505 0.0
-------------- -------------- ------
205,714,342 216,114,307 12.0
Iron & Steel 475,000 Maruichi Steel Tube, Ltd. 6,023,843 8,695,757 0.5
Office Equipment 5,139,000 Canon, Inc. 81,282,305 93,083,398 5.2
Pharmaceuticals 2,377,000 Sankyo Co., Ltd. 53,325,831 53,415,730 3.0
Property & Casualty 8,338,000 Dai-Tokyo Fire & Marine Insurance
Insurance Co., Ltd. 50,642,574 63,641,457 3.5
4,492,000 Fuji Fire & Marine Insurance Co.,
Ltd. 16,261,457 23,669,585 1.3
6,843,000 Koa Fire & Marine Insurance Co.,
Ltd. 41,125,130 41,890,507 2.3
6,210,000 Nichido Fire & Marine Insurance
Co., Ltd. 33,868,984 49,925,417 2.8
5,038,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 44,246,350 41,381,480 2.3
4,550,000 Tokio Marine & Fire Insurance Co.,
Ltd. 45,703,327 59,497,288 3.3
-------------- -------------- ------
231,847,822 280,005,734 15.5
Retailing 1,243,000 Ito-Yokado Co., Ltd. 59,932,061 76,573,809 4.3
364,000 Sangetsu Co., Ltd. 8,382,717 9,166,989 0.5
352,000 Senshukai Co., Ltd. 5,696,494 5,762,108 0.3
-------------- -------------- ------
74,011,272 91,502,906 5.1
Total Investments in Japan 1,036,176,750 1,153,276,793 64.3
</TABLE>
41
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Australian Securities
Food & Beverage 7,542,057 Coca-Cola Amatil, Ltd. $ 36,058,150 $ 60,176,776 3.4%
Leisure 13,840,684 Village Roadshow Ltd. 'A'
(Preferrred) 24,574,258 43,226,117 2.4
Property 5,425,378 Lend Lease Corp. 67,977,434 78,669,066 4.4
US$ 1,500,000 Lend Lease Finance International,
4.75% due 6/01/2003 1,736,250 1,869,150 0.1
-------------- -------------- ------
69,713,684 80,538,216 4.5
Total Investments in Australia 130,346,092 183,941,109 10.3
Hong Kong Securities
Banking 5,975,094 HSBC Holdings PLC 75,810,267 90,414,640 5.0
Conglomerates 12,407,035 Hutchison Whampoa Limited 65,495,149 75,578,291 4.2
Diversified 5,462,500 Swire Pacific Ltd. 'A' 44,702,320 42,388,774 2.4
Total Investments in Hong Kong 186,007,736 208,381,705 11.6
Indian Securities
Banking 5,100 SCICI, Ltd. 15,309 5,405 0.0
4,900 ++SCICI, Ltd. (Rights) 0 0 0.0
-------------- -------------- ------
15,309 5,405 0.0
Broadcast/Media 620,000 ++Shivalik Projects Ltd. 3,557,823 3,174,964 0.2
Diversified Mutual 1,705,000 ++Master Plus 1,083,668 509,317 0.0
Fund
Financial Services 72,000 ++Housing Development Finance
Corp. Limited 5,781,901 5,561,309 0.3
Total Investments in India 10,438,701 9,250,995 0.5
Indonesian Securities
Pharmaceuticals 1,634,000 P.T. Kalbe Farma 5,525,626 5,544,440 0.3
Total Investments in Indonesia 5,525,626 5,544,440 0.3
Malaysian Securities
Diversified 4,739,000 Renong BHD 6,981,270 7,019,358 0.4
Transportation 3,661,000 Malaysian International Shipping BHD 12,515,710 9,590,565 0.5
Total Investments in Malaysia 19,496,980 16,609,923 0.9
</TABLE>
42
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
New Zealand Securities
Diversified 36,600,000 ++Guiness Peat Group PLC $ 15,917,954 $ 19,131,552 1.1%
Total Investments in New Zealand 15,917,954 19,131,552 1.1
Pakistan Securities
Utilities 43,298 ++Pakistan Telecommunications
(GDR)(b)++++ 7,783,681 3,680,330 0.2
Total Investments in Pakistan 7,783,681 3,680,330 0.2
Singaporean Securities
Food 3,600,000 Cerebos Pacific Ltd. 5,153,632 24,950,495 1.4
Transportation 300,000 Singapore Bus Co. Ltd.-Foreign
Registered 1,060,285 2,142,857 0.1
Total Investments in Singapore 6,213,917 27,093,352 1.5
South Korean Securities
Textiles 3,080 Taekwang Industries Co. 716,353 2,017,068 0.1
Total Investments in South Korea 716,353 2,017,068 0.1
Face Amount
Short-Term Securities
Commercial Paper* US$ 28,913,000 General Electric Capital Corp.,
5.90% due 1/02/1996 28,898,784 28,898,784 1.6
45,000,000 Goldman Sachs Group L.P., 6.10% due
1/05/1996 44,954,250 44,954,250 2.5
45,000,000 UBS Finance Delaware Inc., 6.00% due
1/03/1996 44,970,000 44,970,000 2.5
Total Investments in Short-Term
Securities 118,823,034 118,823,034 6.6
Premiums
Issue Paid
Currency Put Options Purchased
YEN 323,000,000 Japanese Yen, expiring January 1996
at YEN 102 5,963,200 5,071,100 0.3
156,010,000 Japanese Yen, expiring January 1996
at YEN 102 2,752,016 2,925,187 0.2
120,848,684 Japanese Yen, expiring Februaury 1996
at YEN 102 1,836,900 2,610,332 0.1
275,641,027 Japanese Yen, expiring March 1996 at
YEN 92 6,450,000 30,003,526 1.7
Total Currency Put Options Purchased 17,002,116 40,610,145 2.3
Total Investments 1,554,448,940 1,788,360,446 99.7
</TABLE>
43
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Number of Contracts/ Value Percent of
Face Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Call Options Written
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,356 $ (57,605) $ (14,335) 0.0%
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,239 (56,423) (19,850) 0.0
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,313 (49,371) (50,175) 0.0
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,346 (50,112) (56,792) 0.0
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,279 (50,445) (73,884) 0.0
4,263 HSBC Holdings PLC, expiring January
1996 at HK$12,291 (50,502) (72,230) 0.0
Total Call Options Written (314,458) (287,266) 0.0
Total Investments, Net of Options Written $1,554,134,482 1,788,073,180 99.7
==============
Unrealized Appreciation on Forward Foreign Exchange Contracts** 9,847,257 0.6
Liabilities in Excess of Other Assets (4,521,704) (0.3)
-------------- ------
Net Assets $1,793,398,733 100.0%
============== ======
<FN>
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration
date.
(b)GDR--Global Depositary Receipts.
*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.
**Forward foreign exchange contracts as of December 31, 1995 were as
follows:
Unrealized
Expiration Appreciation
Foreign Currency Sold Date (Note 1b)
YEN 36,012,098,761 July 1996 $9,847,257
Total Unrealized Appreciation on
Forward Foreign Exchange Contracts
(US Commitment--$368,236,564) $9,847,257
==========
++Non-Income producing security.
++++Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately $3,680,000,
representing 0.2% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Pakistan Telecommunications
(GDR) 9/16/1994 $7,783,681 $3,680,330
Total $7,783,681 $3,680,330
========== ==========
See Notes to Financial Statements.
</TABLE>
44
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of December 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,537,446,824) (Note 1a) $1,747,750,301
Options purchased, at value (premiums paid--$17,002,116)
(Notes 1a & 1b) 40,610,145
Unrealized appreciation on forward foreign exchange contracts
(Note 1b) 9,847,257
Foreign cash (Note 1c) 3,757,770
Cash 1,021
Receivables:
Capital shares sold $ 9,625,282
Dividends 403,024
Interest 13,558
Securities sold 501 10,042,365
--------------
Prepaid registration fees and other assets (Note 1f) 99,521
--------------
Total assets 1,812,108,380
--------------
Liabilities: Options written, at value (premiums received--$314,458)
(Notes 1a & 1b) 287,266
Payables:
Securities purchased 13,040,586
Capital shares redeemed 2,944,699
Distributor (Note 2) 859,934
Investment adviser (Note 2) 833,826 17,679,045
--------------
Accrued expenses and other liabilities 743,336
--------------
Total liabilities 18,709,647
--------------
Net Assets: Net assets $1,793,398,733
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 2,742,351
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 4,910,334
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 219,788
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 442,445
Paid-in capital in excess of par 1,550,045,045
Accumulated distributions in excess of realized capital gains on
investments and foreign currency transactions--net (8,718,743)
Unrealized appreciation on investments and foreign currency
transactions--net 243,757,513
--------------
Net assets $1,793,398,733
==============
Net Asset Value: Class A--Based on net assets of $607,598,154 and 27,423,514 shares
outstanding $ 22.16
==============
Class B--Based on net assets of $1,041,762,957 and 49,103,338 shares
outstanding $ 21.22
==============
Class C--Based on net assets of $46,091,959 and 2,197,882 shares
outstanding $ 20.97
==============
Class D--Based on net assets of $97,945,663 and 4,424,454 shares
outstanding $ 22.14
==============
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended December 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $1,452,909 foreign withholding tax) $ 18,636,335
Income Interest and discount earned (net of $6,289 foreign
(Notes 1d & 1e): withholding tax) 4,194,289
--------------
Total income 22,830,624
--------------
Expenses: Investment advisory fees (Note 2) $ 9,381,493
Account maintenance and distribution fees--Class B (Note 2) 9,131,372
Transfer agent fees--Class B (Note 2) 2,030,445
Custodian fees 1,368,188
Transfer agent fees--Class A (Note 2) 1,089,887
Printing and shareholder reports 315,385
Account maintenance and distribution fees--Class C (Note 2) 228,521
Account maintenance fees--Class D (Note 2) 142,796
Accounting services (Note 2) 133,747
Registration fees (Note 1f) 127,667
Transfer agent fees--Class D (Note 2) 108,592
Professional fees 108,252
Transfer agent fees--Class C (Note 2) 52,587
Directors' fees and expenses 48,782
Pricing fees 8,059
Other 40,404
--------------
Total expenses 24,316,177
--------------
Investment loss--net (1,485,553)
--------------
Realized & Realized gain from:
Unrealized Gain on Investments--net 30,613,219
Investments & Foreign currency transactions--net 24,573,057 55,186,276
Foreign Currency --------------
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1b, 1c, Investments--net 20,384,295
1d & 3): Foreign currency transactions--net 48,721,522 69,105,817
-------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions 124,292,093
--------------
Net Increase in Net Assets Resulting from Operations $ 122,806,540
==============
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment loss--net $ (1,485,553) $ (1,579,329)
Realized gain on investments and foreign currency
transactions--net 55,186,276 33,063,391
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 69,105,817 (31,301,124)
-------------- --------------
Net increase in net assets resulting from operations 122,806,540 182,938
-------------- --------------
Dividends & In excess of investment income--net:
Distributions to Class A -- (5,944,755)
Shareholders Class B -- (1,798,546)
(Note 1g): Class C -- (67,122)
Class D -- (185,967)
Realized gain--net:
Class A (14,499,563) (8,886,236)
Class B (18,356,327) (14,441,473)
Class C (910,272) (115,222)
Class D (1,710,133) (286,591)
In excess of realized gain--net:
Class A (3,585,642) (3,830,198)
Class B (4,539,392) (6,224,649)
Class C (225,104) (49,664)
Class D (422,904) (123,527)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (44,249,337) (41,953,950)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 182,530,658 593,752,517
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 261,087,861 551,981,505
Beginning of year 1,532,310,872 980,329,367
-------------- --------------
End of year $1,793,398,733 $1,532,310,872
============== ==============
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1995++ 1994++ 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 21.12 $ 21.21 $ 15.80 $ 18.34 $ 16.52
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .11 .10 .07 .05 .04
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.61 .50 5.37 (1.63) 2.73
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.72 .60 5.44 (1.58) 2.77
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net -- -- -- (.01) (.11)
In excess of investment income--net -- (.22) (.03) -- --
Realized gain--net (.55) (.33) -- (.95) (.84)
In excess of realized gain--net (.13) (.14) -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.68) (.69) (.03) (.96) (.95)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 22.16 $ 21.12 $ 21.21 $ 15.80 $ 18.34
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 8.20% 2.90% 34.41% (8.75%) 17.04%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .93% .91% .90% .98% 1.02%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .53% .47% .47% .40% .43%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 607,598 $ 587,107 $ 472,322 $ 284,674 $ 304,712
========== ========== ========== ========== ==========
Portfolio turnover 26.73% 23.84% 13.25% 7.62% 5.91%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1995++ 1994++ 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 20.27 $ 20.41 $ 15.34 $ 18.01 $ 16.30
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment loss--net (.10) (.12) (.10) (.12) (.14)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.53 .49 5.17 (1.60) 2.69
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.43 .37 5.07 (1.72) 2.55
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
In excess of investment income--net -- (.04) -- -- --
Realized gain--net (.38) (.33) -- (.95) (.84)
In excess of realized gain--net (.10) (.14) -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.48) (.51) -- (.95) (.84)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 21.22 $ 20.27 $ 20.41 $ 15.34 $ 18.01
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 7.10% 1.87% 33.05% (9.72%) 15.87%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees .96% .94% .92% 1.00% 1.04%
========== ========== ========== ========== ==========
Expenses 1.96% 1.94% 1.92% 2.00% 2.04%
========== ========== ========== ========== ==========
Investment loss--net (.50%) (.56%) (.56%) (.61%) (.60%)
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $1,041,763 $ 915,351 $ 508,008 $ 165,015 $ 105,669
========== ========== ========== ========== ==========
Portfolio turnover 26.73% 23.84% 13.25% 7.62% 5.91%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 20.12 $ 21.67 $ 21.11 $ 22.70
Operating ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net (.12) (.03) .07 --
Realized and unrealized gain (loss) on
investments income and foreign currency
transactions--net 1.53 (.86) 1.60 (.91)
---------- ---------- ---------- ----------
Total from investment operations 1.41 (.89) 1.67 (.91)
---------- ---------- ---------- ----------
Less dividends and distributions:
In excess of investment income--net -- (.19) -- (.21)
Realized gain--net (.45) (.33) (.51) (.33)
In excess of realized gain--net (.11) (.14) (.13) (.14)
---------- ---------- ---------- ----------
Total dividends and distributions (.56) (.66) (.64) (.68)
---------- ---------- ---------- ----------
Net asset value, end of period $ 20.97 $ 20.12 $ 22.14 $ 21.11
========== ========== ========== ==========
Total Investment Based on net asset value per share 7.07% (4.04%)+++ 7.95% (3.93%)+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, excluding account maintenance and
Net Assets: distribution fees .97% 1.17%* .93% 1.17%*
========== ========== ========== ==========
Expenses 1.97% 2.17%* 1.18% 1.42%*
========== ========== ========== ==========
Investment income (loss)--net (.59%) (.79%)* .31% .12%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 46,092 $ 7,841 $ 97,946 $ 22,012
Data: ========== ========== ========== ==========
Portfolio turnover 26.73% 23.84% 26.73% 23.84%
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Pacific Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. However, in certain circumstances, the
Fund will value a security traded on a Japanese stock exchange based
upon the last bid or ask price as reported on such exchange after
trading in such security has been halted for the day. Japanese stock
exchanges may impose limits, based on a percentage of a security's
value, on the amount such security may move in a single day. If the
security reaches its limit during the day, further trading is
halted. However, a bid or ask quotation may be reported following
the suspension of trading. In situations where both a bid and ask
price are reported following a trading suspension due to the
circumstances described above, the Fund will utilize the bid price
for valuation purposes. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. 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. Options written are valued at the
last sale price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Options--The Fund can write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to
market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
51
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
* Financial futures contracts--The Fund may purchase or sell stock
index futures contracts and options on such futures contracts. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) 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.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on dividends and interest at various
rates. There is no tax imposed on capital gains arising from the
sale of foreign investments.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions to shareholders--Dividends and
distributions paid by the Fund are recorded on the ex-dividend
dates. Dividends in excess of net investment income and
distributions in excess of realized capital gains are due primarily
to differing tax treatments for futures transactions and post-
October losses.
(h) Reclassification-- Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $54,299 have been reclassified from paid-in capital in excess of
par to accumulated net realized capital losses. These reclassifi-
cations have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.60% of the average daily
net assets of the Fund. The Management Agreement obligates MLAM to
reimburse the Fund to the extent the Fund's expenses (excluding
interest, taxes, distribution fees, brokerage fees and commissions,
and extraordinary items) exceed 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the next $70 million of
average daily net assets and 1.5% of the average daily net assets in
excess thereof. MLAM's obligation to reimburse the Fund is limited
to the amount of the management fee. No fee payment will be made to
MLAM during any fiscal year which will cause such expenses to exceed
the most restrictive expense limitation applicable at the time of
such payment.
52
<PAGE>
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1995, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $22,264 $245,217
Class D $74,607 $973,293
For the year ended December 31, 1995 MLPF&S received contingent
deferred sales charges of $3,023,322 and $18,089 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $95,598 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1995 were $519,394,744 and
$392,365,590, respectively.
Net realized and unrealized gains (losses) as of December 31, 1995
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 30,613,750 $210,303,477
Short-term investments (531) --
Options written -- 27,192
Currency options purchased (16,928,250) 23,608,029
Forward foreign exchange
contracts 40,356,683 9,847,257
Foreign currency
transactions 1,144,624 (28,442)
------------ ------------
Total $ 55,186,276 $243,757,513
============ ============
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $210,316,429, of which $251,331,610
related to appreciated securities and $41,015,181 related to
depreciated securities. At December 31, 1995, the aggregate cost of
investments for Federal income tax purposes was $1,537,461,064.
Transactions in options written for the year ended December 31, 1995
were as follows:
Number of Premiums
Call Options Written Contracts/Face Amount Received
Outstanding call options
written, beginning of year -- $ --
Options written 25,578 $ 314,458
----------- ------------
Outstanding call options
written, end of year 25,578 $ 314,458
=========== ============
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $182,530,658 and $593,752,517 for the years ended December 31,
1995 and December 31, 1994, respectively.
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in capital shares for each class were as follows:
Class A Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 8,478,331 $178,519,975
Shares issued to shareholders
in reinvestment of dividends
and distributions 726,709 15,820,443
------------ ------------
Total issued 9,205,040 194,340,418
Shares redeemed (9,586,611) (201,845,917)
------------ ------------
Net decrease (381,571) $ (7,505,499)
============ ============
Class A Shares for the
Year Ended Dollar
December 31, 1994 Shares Amount
Shares sold 10,984,489 $247,288,984
Shares issued to shareholders
in reinvestment of dividends
and distributions 768,428 15,860,370
------------ ------------
Total issued 11,752,917 263,149,354
Shares redeemed (6,215,599) (138,930,148)
------------ ------------
Net increase 5,537,318 $124,219,206
============ ============
Class B Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 19,257,866 $389,172,718
Shares issued to shareholders
in reinvestment of dividends
and distributions 953,264 19,875,556
------------ ------------
Total issued 20,211,130 409,048,274
Shares redeemed (15,730,552) (315,601,539)
Automatic conversion of
shares (543,764) (10,926,453)
------------ ------------
Net increase 3,936,814 $ 82,520,282
============ ============
Class B Shares for the
Year Ended Dollar
December 31, 1994 Shares Amount
Shares sold 28,150,808 $607,930,382
Shares issued to shareholders
in reinvestment of dividends
and distributions 983,066 19,484,381
------------ ------------
Total issued 29,133,874 627,414,763
Shares redeemed (8,356,463) (178,494,709)
Automatic conversion of
shares (495,115) (10,418,140)
------------ ------------
Net increase 20,282,296 $438,501,914
============ ============
Class C Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 2,790,493 $ 56,351,329
Shares issued to shareholders
in reinvestment of dividends
and distributions 49,346 1,017,019
------------ ------------
Total issued 2,839,839 57,368,348
Shares redeemed (1,031,723) (20,975,963)
------------ ------------
Net increase 1,808,116 $ 36,392,385
============ ============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Dec. 31, 1994 Shares Amount
Shares sold 405,281 $ 8,528,274
Shares issued to shareholders
in reinvestment of dividends
and distributions 10,503 205,553
------------ ------------
Total issued 415,784 8,733,827
Shares redeemed (26,018) (537,293)
------------ ------------
Net increase 389,766 $ 8,196,534
============ ============
++Commencement of Operations.
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 7,041,007 $150,994,718
Shares issued to shareholders
in reinvestment of dividends
and distributions 87,778 1,909,163
Automatic conversion of
shares 520,220 10,926,453
------------ ------------
Total issued 7,649,005 163,830,334
Shares redeemed (4,267,099) (92,706,844)
------------ ------------
Net increase 3,381,906 $ 71,123,490
============ ============
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Dec. 31, 1994 Shares Amount
Shares sold 624,623 $ 13,638,511
Shares issued to shareholders
in reinvestment of dividends
and distributions 26,192 537,989
Automatic conversion of
shares 472,533 10,418,140
------------ ------------
Total issued 1,123,348 24,594,640
Shares redeemed (80,800) (1,759,777)
------------ ------------
Net increase 1,042,548 $ 22,834,863
============ ============
++Commencement of Operations.
6. Commitments:
At December 31, 1995, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase various foreign
currencies with approximate values of $8,838,000.
54
<PAGE>
[This page is intentionally left blank]
55
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Hedging Techniques....................................................... 3
Investment Restrictions.................................................. 7
Management of the Fund.................................................... 10
Directors and Officers................................................... 10
Compensation of Directors................................................ 11
Management and Advisory Arrangements..................................... 12
Purchase of Shares........................................................ 13
Initial Sales Charge Alternatives--Class A and Class D Shares............ 14
Reduced Initial Sales Charges............................................ 15
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 18
Distribution Plans....................................................... 18
Limitations on the Payment of Deferred Sales Charges..................... 19
Redemption of Shares...................................................... 21
Deferred Sales Charges--Class B and Class C Shares....................... 21
Portfolio Transactions and Brokerage...................................... 22
Determination of Net Asset Value.......................................... 23
Shareholder Services...................................................... 25
Investment Account....................................................... 25
Automatic Investment Plans............................................... 26
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 26
Systematic Withdrawal Plans--Class A and Class D Shares.................. 26
Exchange Privilege....................................................... 27
Dividends, Distributions and Taxes........................................ 30
Dividends and Distributions.............................................. 30
Taxes.................................................................... 30
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 32
Special Rules for Certain Foreign Currency Transactions.................. 33
Performance Data.......................................................... 34
General Information....................................................... 37
Description of Shares.................................................... 37
Computation of Offering Price Per Share.................................. 37
Independent Auditors..................................................... 38
Custodian................................................................ 38
Transfer Agent........................................................... 38
Legal Counsel............................................................ 38
Reports to Shareholders.................................................. 38
Additional Information................................................... 38
Independent Auditors' Report.............................................. 40
Financial Statements...................................................... 41
</TABLE>
Code # 10241-0496
[LOGO] MERRILL LYNCH
MERRILL LYNCH
PACIFIC FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
APRIL 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
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 December 31, 1995.
Contained in Part B:
Schedule of Investments as of December 31, 1995.
Statement of Assets and Liabilities as of December 31, 1995.
Statement of Operations for the year ended December 31, 1995.
Statements of Changes in Net Assets for each of the years in the two-
year period ended December 31, 1995.
Financial Highlights for each of the years in the five-year period
ended December 31, 1995.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of the Registrant, as amended, dated
August 5, 1976.(c)
(b) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated October 14, 1986.(c)
(c) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated October 3, 1988.(c)
(d) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated February 1, 1994.(c)
(e) --Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 21, 1994.(d)
(f) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated October 21, 1994.(d)
(g) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated April 15, 1996.
2 --By-Laws of the Registrant, as amended.
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended
and supplemented, and By-Laws of Registrant.(b)
5(a) --Management Agreement between the Registrant and Merrill Lynch Asset
Management, Inc.(d)
(b) --Supplement to Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P.(c)
6(a) --Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(b) --Class B Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser Program.(c)
(d) --Class C Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(e) --Class D Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
7 --None.
8(a) --Form of Custodian Agreement between the Registrant and Brown
Brothers Harriman & Co.(d)
(b) --Form of Master Subcustodian Agreement of Brown Brothers Harriman &
Co.(d)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(d)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(b) --Form of Agreement relating to use of name among the Registrant,
Merrill Lynch Asset Management, Inc., and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.(a)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --None.
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan and Class B
Shares Distribution Plan Sub-Agreement of the Registrant.(c)
(b) --Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
(c) --Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(a)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
shares.(d)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
shares.(d)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(e)
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) phase-in requirements.
(b) Reference is made to Article III (Sections 3, 4 and 5), Article V, Article
VI (Sections 2, 3, 4 and 5), Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation, as amended and supplemented, filed
as Exhibit 1(a), 1(b), 1(c), 1(d), 1(e), 1(f) and l(g) to the Registrant's
Registration Statement on Form N-1A; and Article II, Article III (Sections
1, 2, 3, 5, 6 and 17), Article VI, Article VII, Article XII, Article XIII
and Article XV of the Registrant's By-Laws filed as Exhibit 2 to the
Registrant's Registration Statement on Form N-1A.
(c) Filed on April 29, 1994, as an Exhibit to Post-Effective Amendment No. 24
to the Registrant's Registration Statement under the Securities Act of
1933, on Form N-1A.
(d) Filed on April 28, 1995, as an Exhibit to Post-Effective Amendment No. 26
to the Registrant's Registration Statement under the Securities Act of
1933, on Form N-1A.
(e) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (File No. 2-
99473), filed on January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1996
-------------- --------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per
share................................................... 66,314
Class B Shares of Common Stock, par value $0.10 per
share................................................... 118,664
Class C Shares of Common Stock, par value $0.10 per
share................................................... 9,814
Class D Shares of Common Stock, par value $0.10 per
share................................................... 10,991
</TABLE>
- --------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
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.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or 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 Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at
the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or
purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
C-3
<PAGE>
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 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 THE INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P., ("MLAM" or the "Manager"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., 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, Inc., 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 Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, 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. and for the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, 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
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State 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., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, 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., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II,
C-4
<PAGE>
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 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., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest
Fund, 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, FAM, Princeton Services, Inc. ("Princeton Services")
and Princeton Administrators L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services,
Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
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
January 1, 1994 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 listed in the first two paragraphs of this Item 28 and
Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors, trustees
or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
ML & Co. ............... Limited Partner Financial Services Holding
Company; Limited Partner of
FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President
and Director of Princeton
Services; Director of MLFD;
Executive Vice President of
ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of
President FAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of FAM
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of FAM; Senior
Secretary Vice President, General
Counsel, Director and
Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and
and Controller Controller of FAM; Senior
Vice President and
Controller of Princeton
Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators,
L.P.
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Richard L. Reller....... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of FAM; Senior
Vice President and Treasurer
of Princeton Services; Vice
President and Treasurer of
MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first two paragraphs of
Item 28 except 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., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate 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 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
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
Kevin P. Boman............. Vice President None
Michael J. Brady........... Vice President None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant None
Treasurer
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary Secretary
</TABLE>
(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, Merrill Lynch
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, Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and 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 25th day of April 1996.
Merrill Lynch Pacific Fund, Inc.
(Registrant)
/s/ Terry K. Glenn
By: _______________________________
(TERRY K. GLENN, EXECUTIVE VICE
PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATES
President and
Arthur Zeikel* Director (Principal
- ------------------------------------- Executive Officer)
(ARTHUR ZEIKEL)
Treasurer (Principal
Gerald M. Richard* Financial and
- ------------------------------------- Accounting Officer)
(GERALD M. RICHARD)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Director
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director
- -------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
- -------------------------------------
(EDWARD D. ZINBARG)
/s/ Terry K. Glenn April 25, 1996
*By: ___________________________
(TERRY K. GLENN, ATTORNEY-IN-FACT)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(g) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated April 15, 1996.
2 --By-Laws of the Registrant, as amended.
9(b) --Form of Agreement relating to use of name among the Registrant,
Merrill Lynch Asset Management, Inc., and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.(a)
11 --Consent of Deloitte & Touche llp, independent auditors for the
Registrant.
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) phase-in requirements.
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH PACIFIC FUND, INC. - CLASS A
<NUMBER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1554134482
<INVESTMENTS-AT-VALUE> 1788073180
<RECEIVABLES> 10042365
<ASSETS-OTHER> 13705569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1811821114
<PAYABLE-FOR-SECURITIES> 13040586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5381795
<TOTAL-LIABILITIES> 18422381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1558359963
<SHARES-COMMON-STOCK> 27423514
<SHARES-COMMON-PRIOR> 27805085
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8718743
<ACCUM-APPREC-OR-DEPREC> 243757513
<NET-ASSETS> 607598154
<DIVIDEND-INCOME> 18636335
<INTEREST-INCOME> 4194289
<OTHER-INCOME> 0
<EXPENSES-NET> 24316177
<NET-INVESTMENT-INCOME> (1485553)
<REALIZED-GAINS-CURRENT> 55186276
<APPREC-INCREASE-CURRENT> 69105817
<NET-CHANGE-FROM-OPS> 122806540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 18085205
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8478331
<NUMBER-OF-SHARES-REDEEMED> 9586611
<SHARES-REINVESTED> 726709
<NET-CHANGE-IN-ASSETS> 261087861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18224428
<GROSS-ADVISORY-FEES> 9381493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24316177
<AVERAGE-NET-ASSETS> 572041866
<PER-SHARE-NAV-BEGIN> 21.12
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 1.61
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .68
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.16
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH PACIFIC FUND, INC. - CLASS B
<NUMBER> 2
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1554134482
<INVESTMENTS-AT-VALUE> 1788073180
<RECEIVABLES> 10042365
<ASSETS-OTHER> 13705569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1811821114
<PAYABLE-FOR-SECURITIES> 13040586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5381795
<TOTAL-LIABILITIES> 18422381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1558359963
<SHARES-COMMON-STOCK> 49103338
<SHARES-COMMON-PRIOR> 45166524
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8718743
<ACCUM-APPREC-OR-DEPREC> 243757513
<NET-ASSETS> 1041762957
<DIVIDEND-INCOME> 18636335
<INTEREST-INCOME> 4194289
<OTHER-INCOME> 0
<EXPENSES-NET> 24316177
<NET-INVESTMENT-INCOME> (1485553)
<REALIZED-GAINS-CURRENT> 55186276
<APPREC-INCREASE-CURRENT> 69105817
<NET-CHANGE-FROM-OPS> 122806540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 22895719
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19257866
<NUMBER-OF-SHARES-REDEEMED> 16274316
<SHARES-REINVESTED> 953264
<NET-CHANGE-IN-ASSETS> 261087861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18224428
<GROSS-ADVISORY-FEES> 9381493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24316177
<AVERAGE-NET-ASSETS> 915645817
<PER-SHARE-NAV-BEGIN> 20.27
<PER-SHARE-NII> (.10)
<PER-SHARE-GAIN-APPREC> 1.53
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .48
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.22
<EXPENSE-RATIO> 1.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH PACIFIC FUND, INC. - CLASS C
<NUMBER> 3
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1554134482
<INVESTMENTS-AT-VALUE> 1788073180
<RECEIVABLES> 10042365
<ASSETS-OTHER> 13705569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1811821114
<PAYABLE-FOR-SECURITIES> 13040586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5381795
<TOTAL-LIABILITIES> 18422381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1558359963
<SHARES-COMMON-STOCK> 2197882
<SHARES-COMMON-PRIOR> 389766
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8718743
<ACCUM-APPREC-OR-DEPREC> 243757513
<NET-ASSETS> 46091959
<DIVIDEND-INCOME> 18636335
<INTEREST-INCOME> 4194289
<OTHER-INCOME> 0
<EXPENSES-NET> 24316177
<NET-INVESTMENT-INCOME> (1485553)
<REALIZED-GAINS-CURRENT> 55186276
<APPREC-INCREASE-CURRENT> 69105817
<NET-CHANGE-FROM-OPS> 122806540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1135376
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2790493
<NUMBER-OF-SHARES-REDEEMED> 1031723
<SHARES-REINVESTED> 49346
<NET-CHANGE-IN-ASSETS> 261087861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18224428
<GROSS-ADVISORY-FEES> 9381493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24316177
<AVERAGE-NET-ASSETS> 22914859
<PER-SHARE-NAV-BEGIN> 20.12
<PER-SHARE-NII> (.12)
<PER-SHARE-GAIN-APPREC> 1.53
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .56
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.97
<EXPENSE-RATIO> 1.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> MERRILL LYNCH PACIFIC FUND, INC. - CLASS D
<NUMBER> 4
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1554134482
<INVESTMENTS-AT-VALUE> 1788073180
<RECEIVABLES> 10042365
<ASSETS-OTHER> 13705569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1811821114
<PAYABLE-FOR-SECURITIES> 13040586
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5381795
<TOTAL-LIABILITIES> 18422381
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1558359963
<SHARES-COMMON-STOCK> 4424454
<SHARES-COMMON-PRIOR> 1042548
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8718743
<ACCUM-APPREC-OR-DEPREC> 243757513
<NET-ASSETS> 97945663
<DIVIDEND-INCOME> 18636335
<INTEREST-INCOME> 4194289
<OTHER-INCOME> 0
<EXPENSES-NET> 24316177
<NET-INVESTMENT-INCOME> (1485553)
<REALIZED-GAINS-CURRENT> 55186276
<APPREC-INCREASE-CURRENT> 69105817
<NET-CHANGE-FROM-OPS> 122806540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2133037
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7561227
<NUMBER-OF-SHARES-REDEEMED> 4267099
<SHARES-REINVESTED> 87778
<NET-CHANGE-IN-ASSETS> 261087861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18224428
<GROSS-ADVISORY-FEES> 9381493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24316177
<AVERAGE-NET-ASSETS> 57275240
<PER-SHARE-NAV-BEGIN> 21.11
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .64
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.14
<EXPENSE-RATIO> 1.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.1(g)
MERRILL LYNCH PACIFIC FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION
MERRILL LYNCH PACIFIC FUND, INC., a Maryland corporation having its
principal Maryland office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue FOUR HUNDRED
MILLION (400,000,000) shares of capital stock. The Corporation has four classes
of capital stock consisting of ONE HUNDRED MILLION (100,000,000) shares of Class
A Common Stock, ONE HUNDRED MILLION (100,000,000) shares of Class B Common
Stock, ONE HUNDRED MILLION (100,000,000) shares of Class C Common Stock and ONE
HUNDRED MILLION (100,000,000) shares of Class D Common Stock. All shares of all
classes and series of the Corporation's capital stock have a par value of Ten
Cents ($.10) per share and an aggregate par value of FORTY MILLION Dollars
($40,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases the total number of authorized shares of Class B Common Stock of the
Corporation by ONE HUNDRED MILLION (100,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue FIVE
HUNDRED MILLION (500,000,000) shares of capital stock and the capital stock will
consist of ONE HUNDRED MILLION (100,000,000) shares of Class A Common Stock, TWO
HUNDRED MILLION (200,000,000) shares of Class B Common Stock, ONE HUNDRED
MILLION (100,000,000) shares of Class C Common Stock and ONE HUNDRED MILLION
(100,000,000) shares of Class D Common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of FIFTY MILLION Dollars ($50,000,000).
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH PACIFIC FUND, INC. has caused these
Articles Supplementary to be signed in its name and on its behalf by a duly
authorized officer and attested by its Secretary on April 15, 1996.
MERRILL LYNCH PACIFIC FUND, INC.
By /s/ Terry K. Glenn
--------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
Attest:
/s/ Robert Harris
- -------------------------
Robert Harris, Secretary
THE UNDERSIGNED officer of MERRILL LYNCH PACIFIC FUND, INC., who executed
on behalf of said Corporation the foregoing Articles Supplementary, of which
this certificate is made a part, hereby acknowledges, in the name and on behalf
of said Corporation, the foregoing Articles Supplementary to be the corporate
act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties for perjury.
/s/ Terry K. Glenn
---------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
2
<PAGE>
EXHIBIT 99.2
Adopted October 14, 1994
BY-LAWS
OF
MERRILL LYNCH PACIFIC FUND, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of 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 none of the following
is required to be acted on by the holders of the capital stock under the
Investment Company Act of 1940, as amended: (a) election of directors, (b)
approval of the Corporation's investment advisory agreement; (c) ratification of
the selection of independent public accountants; and (d)
<PAGE>
approval of the Corporation's distribution agreement. In the event that the
Corporation shall be required to hold an annual meeting of stockholders by the
Investment Company Act of 1940, as amended, such meeting shall be held: (a) at
a date and time set by the Board of Directors in accordance with the Investment
Company Act of 1940, as amended, if the purpose of the meeting is to elect
directors or to approve an investment advisory agreement or distribution
agreement; and (b) on a date fixed by the board of directors during the month of
June (i) in the fiscal year immediately following the fiscal year in which
independent accountants were appointed if the purpose of the meeting is to
ratify the selection of such independent accountants, or (ii) in any fiscal year
if an annual meeting is to be held for any reason other than as specified in the
foregoing. Any stockholders' meeting held in accordance with the preceding
sentence shall for all purposes constitute the annual meeting of stockholders
for the fiscal year of the Corporation in which the meeting is held. At any
such meeting, the stockholders shall elect directors to hold the offices of any
directors who have held office for more than one year or who have been elected
by the board of directors to fill vacancies which result from any cause.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the President,
or on the
- 2 -
<PAGE>
written request of the holders of the outstanding capital stock of the
Corporation entitled to vote at such meeting to the extent permitted by Maryland
law and the Investment Company Act of 1940, as amended.
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 meeting, shall be given
personally or by mail, not less than ten nor more than ninety days before the
date of such meeting, to each stockholder entitled to vote at such meeting and
to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is
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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 a
------
majority of the shares of stock of the Corporation entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum for the
transaction of any business, except as otherwise provided by statute or by the
Articles of Incorporation. In the absence of a quorum no business may be
transacted, except that the holders of a majority of the shares of stock present
in person or by proxy and entitled to vote may adjourn the meeting from time to
time, without notice other than announcement thereat except as otherwise
required by these By-Laws, until the holders of the requisite amount of shares
of stock shall be so present. At any such adjourned meeting at which a quorum
may be present any business may be transacted which might have been transacted
at the meeting as originally called. The absence from any meeting, in person or
by proxy, of holders of the number of shares of stock of the Corporation in
excess of a majority thereof which may be required by the laws of the State of
Maryland, the Investment Company Act of 1940, as amended, or other applicable
statute, the Articles of Incorporation, or these By-Laws, for action upon any
given matter shall not prevent action at such meeting upon any other matter or
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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.
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
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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 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
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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 no 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 stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, shall 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
shall determine the number of shares outstanding and the voting power 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
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the meeting or any stockholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, request or matter determine 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 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
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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 Directors then in office; provided, however, that the number of directors
shall in no event be less than three nor more than fifteen except that the
Corporation may have two directors if there is no stock outstanding, or so long
as there are less than three stockholders. Any vacancy created by an increase
in Directors may be filled in accordance with Section 6 of this Article III. No
reduction in the number of directors shall have the effect of removing any
director from office prior to the expiration of his term unless such director is
specifically removed pursuant to Section 5 of this Article III at the time of
such decrease. Directors need not be stockholders.
Section 3. 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
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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
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.
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, shall 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
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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. Any directors elected or appointed to fill a
vacancy shall hold office only until the next meeting of stockholders of the
Corporation and until a successor shall have been chosen and qualifies or until
his earlier resignation or removal.
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.
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,
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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 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
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<PAGE>
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 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
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<PAGE>
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 writing or writings 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 ensure that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus and Statement of Additional Information of the Corporation
included in the Registration Statement 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
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<PAGE>
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;
(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,
manager 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
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<PAGE>
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 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
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majority present shall be the act of such committee. The Board may designate a
chairman of any committee and such chairman or any two members of any committee
may fix the time and place of its meetings unless the Board shall otherwise
provide. In the absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all vacancies, to
designate alternate members to replace any absent or disqualified member, or to
dissolve any such committee. Nothing herein shall be deemed to prevent the
Board from appointing one or more committees consisting in whole or in part of
persons who are not directors of the Corporation; provided, however, that no
such committee shall have or may exercise any authority or power of the Board in
the management of the business or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 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
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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 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. The President shall also have the power to
appoint such assistant officers (including one or more Assistant Vice
Presidents, one or more Assistant Treasurers and one or more Assistant
Secretaries) as may be necessary or appropriate to facilitate the management of
the Corporation's affairs. 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.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of his
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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 not 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 this power may be
delegated to any officer in respect of other officers under his control.
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<PAGE>
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 is
none), the President shall preside at meetings of the stockholders and the Board
of Directors. The President 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)
pursuant to a written agreement designating such bank or trust company or
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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
hereinafter provided) and affix and attest the seal to all other
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<PAGE>
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 General Laws of the State of
Maryland, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification
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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 counsel or 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.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify 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.
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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 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.
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
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<PAGE>
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 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
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<PAGE>
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 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
- 26 -
<PAGE>
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.
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.
- 27 -
<PAGE>
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of December.
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 safe keeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safe keeping 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
- 28 -
<PAGE>
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.
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.
- 29 -
<PAGE>
ARTICLE XIV
Amendments
-----------
These By-Laws or any of them may be amended, altered or repealed at
any regular meeting of the stockholders or at any special meeting of the
stockholders at which a quorum is present or represented, provided that notice
of the proposed amendment, alteration or repeal be contained in the notice of
such special meeting. These By-Laws, except Article XIV hereof, may also be
amended, altered or repealed by the affirmative vote of a majority of the Board
of Directors at any regular or special meeting of the Board of Directors. The
By-Laws, or any of them,
- 30 -
<PAGE>
set forth in Article XIV of these By-Laws, may be amended, altered or repealed
only by the affirmative vote of a majority (as defined below) of the outstanding
shares of capital stock of the Corporation at a regular meeting or special
meeting of the stockholders, the notice of which contains the proposed
amendment, alteration or repeal. For the purpose of amending Article XIV of
these By-Laws, a majority shall be the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares. A certified copy
of these By-Laws, as they may be amended from time to time, shall be kept at the
principal office of the Corporation in the State of Maryland.
- 31 -
<PAGE>
EXHIBIT 99.9(b)
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the day of , by and between
MERRILL LYNCH & CO., INC., a Delaware corporation ("ML&Co."), and MERRILL LYNCH
PACIFIC FUND, INC., a Maryland corporation (the "Fund");
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, ML&Co. was incorporated under the laws of the State of
Delaware on March 27, 1973 under the corporate name "Merrill Lynch & Co., Inc."
and has used such name at all times thereafter;
WHEREAS, ML&Co. was duly qualified as a foreign corporation under the
laws of the State of New York on April 25, 1973 and has remained so qualified at
all times thereafter;
WHEREAS, the Fund was incorporated under the laws of the State of
Maryland on August 5, 1976; and
WHEREAS, the Fund desires to qualify as a foreign corporation under
the laws of the State of New York and has requested ML&Co. to give its consent
to the use of the name "Merrill Lynch" in the Fund's corporate name.
NOW, THEREFORE, in consideration of the premises and of the covenants
hereinafter contained, ML&Co. and the Fund hereby agree as follows:
1. ML&Co. hereby grants the Fund a non-exclusive license to use
the words "Merrill Lynch" in its corporate name.
<PAGE>
2. ML&Co. hereby consents to the qualification of the Fund as a
foreign corporation under the laws of the State of New York with the words
"Merrill Lynch" in its corporate name and agrees to execute such formal consents
as may be necessary in connection with such filing.
3. The non-exclusive license hereinabove referred to has been given
and is given by ML&Co. on the condition that it may at any time, in its sole and
absolute discretion, withdraw the non-exclusive license to the use of the words
"Merrill Lynch" in the name of the Fund; and, as soon as practicable after
receipt by the Fund of written notice of the withdrawal of such non-exclusive
license, and in no event later than ninety days thereafter, the Fund will change
its name so that such name will not thereafter include the words "Merrill Lynch"
or any variation thereof.
4. ML&Co. reserves and shall have the right to grant to any other
company, including without limitation, any other investment company, the right
to use the words "Merrill Lynch" or variations thereof in its name and no
consent or permission of the Fund shall be necessary; but, if required by an
applicable law of any state, the Fund will forthwith grant all requisite
consents.
5. The Fund will not grant to any other company the right to use a
name similar to that of the Fund or ML&Co. without the written consent of ML&Co.
6. Regardless of whether the Fund should hereafter change its name
and eliminate the words "Merrill Lynch" or any variation
2
<PAGE>
thereof from such name, the Fund hereby grants to ML&Co. the right to cause the
incorporation of other corporations or the organization of voluntary
associations which may have names similar to that of the Fund or to that to
which the Fund may change its name and to own all or any portion of the shares
of such other corporations or associations and to enter into contractual
relationships with such other corporations or associations, subject to any
requisite approval of a majority of the Fund's shareholders and the Securities
and Exchange Commission and subject to the payment of a reasonable amount to be
determined at the time of use, and the Fund agrees to give and execute any such
formal consents or agreements as may be necessary in connection therewith.
7. This Agreement may be amended at any time by a writing signed by
the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
MERRILL LYNCH & CO., INC.
By________________________
MERRILL LYNCH PACIFIC FUND, INC.
By___________________________
3
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Pacific Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 27 to Registration
Statement No. 2-56978 of our report dated February 2, 1996 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
April 23, 1996
<PAGE>
EXHIBIT 99.16(a)
PACIFIC FUND
TOTAL RETURN
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
----------- ---------- ----------
<S> <C> <C> <C>
Initial Investment $ 1,000.00 $1,000.00 $1,000.00
Divided by Maximum
Offering Price 36.71 12.91 9.84
---------- --------- ---------
Equals Shares
Purchased 27.241 77.459 101.626
Plus Shares Acquired
through Dividend
Reinvestment 36.889 151.668 372.529
---------- --------- ---------
Equals Shares Held at
12/31/87 64.130 229.127 474.155
Multiplied by Net
Asset Value at
12/31/87 16.15 16.15 16.15
---------- --------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV)
12/31/87 $1,035.709 $3,700.40 $7,657.60
Divided by $1,000 (P) 1.0357 3.7004 7.6576
Subtract 1 .0357 2.7004 6.6576
Expressed as a
percentage equals the
Aggregate Total Return
for the Period 3.57% 270.04% 665.76%
---------- --------- ---------
ERV divided by P 1.0357 3.7004 7.6576
Raise to the power of 1 5 1/10
Subtract 1 .0357 .2991 .2258
Expressed as a
percentage equals the
Average Annualized
Total Return 3.57% 29.91% 22.58%
========== ========= =========
</TABLE>
<PAGE>
EXHIBIT 99.16(b)
MERRILL LYNCH PACIFIC FUND
CLASS B
TOTAL RETURN
<TABLE>
<CAPTION>
ANNUAL
TOTAL
1 YEAR SI RETURN*
---------- ----------- ---------
<S> <C> <C> <C>
Initial Investment $1,000.00 $ 1,000.00 $1,000.00
Divided by Net Asset Value 19.09 17.30 19.09
--------- ---------- ---------
Equals Shares Purchased 52.38 57.80 52.38
Plus Shares Acquired through
Dividend Reinvestment 2.98 7.22 2.99
--------- ---------- ---------
Equals Shares Held at 12/31/89 55.36 65.02 55.37
Multiplied by Net Asset Value
at 12/31/89 20.49 20.49 20.49
--------- ---------- ---------
Equals Ending Value before
deduction for contingent
deferred sales charge 1,134.40 1,332.20 1,134.60
Less deferred sales charge (40.00) (30.00) 0.00
--------- ---------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $1,094.40 $ 1,302.20 $1,134.60
--------- ---------- ---------
Divided by $1,000 (P) 1.0944 1.3022 1.1346
Subtract 1 0.0944 0.3022 0.1346
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 9.44% 30.22%
========= ==========
Expressed as a percentage
equals the Aggregate Total 13.46%
Return for the Period =========
ERV divided by P 1.0944 1.3022
Raise to the power of 1 1/1.19178
Equals 1.0944 1.2480
Subtract 1 0.0944 0.2480
Expressed as a percentage
equals the Average Annualized
Total Return 9.44% 24.80%
========= ==========
</TABLE>
* Does not include sales charge for the period.
