<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997
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. 28
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 29
(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 LLP 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 24, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 25, 1997
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 that seeks 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 that have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000,
and the minimum subsequent purchase is $50, except that for retirement plans,
the minimum initial purchase is $100, and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85,
but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made 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 NOR HAS THE SECURITIES AND EXCHANGE 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 25, 1997 (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 1.0% for one year(f) None(d)
purchase year,
price or decreasing 1.0% annually
redemption thereafter to 0.0% after
proceeds, the
whichever is fourth year(e)
lower).......
Exchange Fee.. None None None None
ANNUAL FUND OP-
ERATING EX-
PENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS):
Management
Fees(g)...... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
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......... 0.07% 0.07% 0.07% 0.07%
Shareholder
Servicing
Costs(i)..... 0.15% 0.18% 0.19% 0.15%
Other......... 0.05% 0.05% 0.05% 0.05%
----- ----- ----- -----
Total Other 0.27% 0.30% 0.31% 0.27%
Expenses.... ----- ----- ----- -----
TOTAL FUND OP-
ERATING EX- 0.87% 1.90% 1.91% 1.12%
PENSES....... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and certain participants in fee-based programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 26 and "Shareholder Services--Fee-Based Programs"--page
38.
(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 in connection with certain fee-based 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. Such
CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 38.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"-- page 38.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 38.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
23.
(h) See "Purchase of Shares--Distribution Plans"--page 32.
(i) 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 on page 2, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period (including any
applicable CDSC for Class B and Class C
shares):
Class A..................................... $61 $79 $ 98 $154
Class B..................................... $59 $80 $103 $203*
Class C..................................... $29 $60 $103 $223
Class D..................................... $63 $86 $111 $182
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 $79 $ 98 $154
Class B..................................... $19 $60 $103 $203*
Class C..................................... $19 $60 $103 $223
Class D..................................... $63 $86 $111 $182
</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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85, but as of May 1, 1997, $5.35) for confirming purchases and repurchases.
Purchases and redemptions made 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 registered investment companies 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 that 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 CDSCs, 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 will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling
different classes of shares.
The 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 or her 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%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 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 in connection with certain fee-based 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 may be subject to a 1.0% CDSC for one year. Such
CDSC may be waived in connection with certain fee-based programs. See
"Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 participants in certain fee-based 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 of Class A shares in connection with certain fee-based
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 may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under
a right of accumulation that 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. Such CDSC may be modified in
connection with certain fee-based programs. 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
5
<PAGE>
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 "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 of 1.0% if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a 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. The maximum initial sales charge is 5.25%, which is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchase may be subject to a 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. 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 in connection with certain fee-based 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 CDSCs 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
6
<PAGE>
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.
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 table 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 fiscal year ended December 31, 1996, 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 Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 22.16 $ 21.12 $ 21.21 $ 15.80 $ 18.34 $ 16.52 $ 20.65 $ 19.11 $ 16.15 $ 34.32
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net. .11 .11 .10 .07 .05 .04 .10 .07 .20 .00
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 1.21 1.61 .50 5.37 (1.63) 2.73 (1.80) 2.57 5.02 4.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 1.32 1.72 .60 5.44 (1.58) 2.77 (1.70) 2.64 5.22 4.16
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--
net................... -- -- -- -- (.01) (.11) (.11) (.06) (.19) (.18)
In excess of
investment income--
net................... (1.22) -- (.22) (.03) -- -- -- -- -- --
Realized gain on
investments--net...... (.68) (.55) (.33) -- (.95) (.84) (2.32) (1.04) (2.07) (22.15)
In excess of realized
gain on investments--
net................... -- (.13) (.14) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (1.90) (.68) (.69) (.03) (.96) (.95) (2.43) (1.10) (2.26) (22.33)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 21.58 $ 22.16 $ 21.12 $ 21.21 $ 15.80 $ 18.34 $ 16.52 $ 20.65 $ 19.11 $ 16.15
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:*
Based on net asset
value per share........ 6.09% 8.20% 2.90% 34.41% (8.76)% 17.04% (8.39)% 14.49% 34.38% 10.77%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses............... .87% .93% .91% .90% .98% 1.02% 1.07% 1.06% 1.02% .94%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net. .47% .53% .47% .47% .40% .43% .94% .36% .95% .02%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $642,523 $607,598 $587,107 $472,322 $284,674 $304,712 $242,104 $318,613 $288,065 $283,984
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover..... 10.65% 26.73% 23.84% 13.25% 7.62% 5.91% 31.06% 18.14% 39.22% 29.41%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Average commission rate
paid ##................ $ .0104 -- -- -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Total investment returns exclude the effects of sales loads.
++ Based on average shares outstanding during the period.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996++ 1995++ 1994++ 1993++ 1992++ 1991++ 1990++ 1989 1988+
---------- ---------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <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........... $ 21.22 $ 20.27 $ 20.41 $ 15.34 $ 18.01 $ 16.30 $ 20.49 $ 19.09 $ 17.93
---------- ---------- -------- -------- -------- -------- ------- ------- -------
Investment loss--net..... (.13) (.10) (.12) (.10) (.12) (.14) (.09) (.06) (.02)
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net.. 1.17 1.53 .49 5.17 (1.60) 2.69 (1.78) 2.50 2.38
---------- ---------- -------- -------- -------- -------- ------- ------- -------
Total from investment op-
erations................. 1.04 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............. (.99) -- (.04) -- -- -- -- -- --
Realized gain on
investments--net........ (.68) (.38) (.33) -- (.95) (.84) (2.32) (1.04) (1.03)
In excess of realized
gain on investments--
net..................... -- (.10) (.14) -- -- -- -- -- --
---------- ---------- -------- -------- -------- -------- ------- ------- -------
Total dividends and dis-
tributions............... (1.67) (.48) (.51) -- (.95) (.84) (2.32) (1.04) (1.20)
---------- ---------- -------- -------- -------- -------- ------- ------- -------
Net asset value, end of
period................... $ 20.59 $ 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................ 5.00% 7.10% 1.87% 33.05% (9.72)% 15.87% (9.29)% 13.39% 13.37%#
========== ========== ======== ======== ======== ======== ======= ======= =======
RATIOS TO AVERAGE NET AS-
SETS:
Expenses................. 1.90% 1.96% 1.94% 1.92% 2.00% 2.04% 2.10% 2.10% 2.17%*
========== ========== ======== ======== ======== ======== ======= ======= =======
Investment loss--net..... (.56)% (.50)% (.56)% (.56)% (.61)% (.60)% (.05)% (.64)% (1.64)%*
========== ========== ======== ======== ======== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $1,217,549 $1,041,763 $915,351 $508,008 $165,015 $105,669 $58,013 $59,090 $ 5,952
========== ========== ======== ======== ======== ======== ======= ======= =======
Portfolio turnover....... 10.65% 26.73% 23.84% 13.25% 7.62% 5.91% 31.06% 18.14% 39.22%
========== ========== ======== ======== ======== ======== ======= ======= =======
Average commission rate
paid ##.................. $ .0104 -- -- -- -- -- -- -- --
========== ========== ======== ======== ======== ======== ======= ======= =======
</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.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------- ------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED FOR THE PERIOD ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 21, 1994+ DECEMBER 31, OCTOBER 21, 1994+
----------------- TO DECEMBER 31, ----------------- TO DECEMBER 31,
1996++ 1995++ 1994++ 1996++ 1995++ 1994++
------- ------- ----------------- -------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 20.97 $ 20.12 $21.67 $ 22.14 $ 21.11 $ 22.70
------- ------- ------ -------- ------- -------
Investment income
(loss)--net............. (.13) (.12) (.03) .04 .07 --
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 1.16 1.53 (.86) 1.23 1.60 (.91)
------- ------- ------ -------- ------- -------
Total from investment
operations.............. 1.03 1.41 (.89) 1.27 1.67 (.91)
------- ------- ------ -------- ------- -------
Less dividends and
distributions:
In excess of investment
income--net............ (1.02) -- (.19) (1.16) -- (.21)
Realized gain on
investments--net....... (.68) (.45) (.33) (.68) (.51) (.33)
In excess of realized
gain on investments--
net.................... -- (.11) (.14) -- (.13) (.14)
------- ------- ------ -------- ------- -------
Total dividends and
distributions........... (1.70) (.56) (.66) (1.84) (.64) (.68)
------- ------- ------ -------- ------- -------
Net asset value, end of
period.................. $ 20.30 $ 20.97 $20.12 $ 21.57 $ 22.14 $ 21.11
======= ======= ====== ======== ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 5.00% 7.07% (4.04)%# 5.84% 7.95% (3.93)%#
======= ======= ====== ======== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.91% 1.97% 2.17%* 1.12% 1.18% 1.42%*
======= ======= ====== ======== ======= =======
Investment income
(loss)--net............. (.58)% (.59)% (.79)%* .16% .31% .12%*
======= ======= ====== ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $98,925 $46,092 $7,841 $136,626 $97,946 $22,012
======= ======= ====== ======== ======= =======
Portfolio turnover...... 10.65% 26.73% 23.84% 10.65% 26.73% 23.84%
======= ======= ====== ======== ======= =======
Average commission rate
paid##.................. $ .0104 -- -- $ .0104 -- --
======= ======= ====== ======== ======= =======
</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.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average commission rate paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
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 an open-end management
investment company 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 or other financial 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 or other financial 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 or other financial 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 depreciation, 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% 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 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) that 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 that 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 liquid 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 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 liquid securities or cash or cash equivalents or other assets
permitted to be so segregated by the Commission in an amount equal to or
greater than the market value of the liabilities under the swap agreement or
the amount it would 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 securities, it will be subject to the risks associated with changes in the
particular index or 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 that 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 that
cannot be readily resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
if, regarding all such securities, more than 15% of its total assets taken at
market value would be invested in such securities. Notwithstanding 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. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it
21
<PAGE>
may invest in securities 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"). See "Additional Information--Taxes." To qualify, the Fund
will 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. A Fund that
elects to be classified as "diversified" under the Investment Company Act must
satisfy the foregoing 5% and 10% requirements with respect to 75% of its total
assets. To the extent that the Fund assumes large positions in the securities
of a small number of issuers, the Fund's net asset value may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company. Foreign government securities (unlike
U.S. Government securities) are not exempt from these diversification
requirements.
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 its affiliate, FAM; President
and Director of Princeton Services, Inc.; Executive Vice President of ML&Co.;
and Director of the Distributor.
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.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
22
<PAGE>
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 registered investment companies and offers portfolio
management and portfolio analysis services to individuals and institutions. As
of March 31, 1997, the Manager and FAM had a total of approximately $247.2
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, 1996, the
management fee paid by the Fund to the Manager aggregated $13,358,223 (based
on average net assets of approximately $2.2 billion).
The Manager has also entered into a sub-advisory agreement with Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K."), a wholly-owned, indirect
subsidiary of ML & Co. and an affiliate of the Manager, pursuant to which the
Manager pays MLAM U.K. a fee computed at a rate to be determined from time to
time between the Manager and MLAM U.K. for providing investment advisory
services to the Manager with respect to the Fund. MLAM U.K. has offices at
Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
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.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services. For the
fiscal year ended December 31, 1996, the amount of such reimbursement was
$211,545. For the fiscal year ended December 31, 1996, the ratio of total
expenses to average net assets for Class A, Class B, Class C and Class D
shares was 0.87%, 1.90%, 1.91% and 1.12%, respectively.
23
<PAGE>
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 that 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 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
up to $11.00 per Class A or Class D account and up to $14.00 per Class B or
Class C account and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. The term "account" includes
a shareholder account maintained directly by the Transfer Agent and any other
account representing a beneficial interest of a person in the relevant share
class or record- keeping system, provided the record-keeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended December 31,
1996, the Fund paid $3,788,486 to the Transfer Agent pursuant to the Transfer
Agency Agreement.
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 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,
24
<PAGE>
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. 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. 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, but as of May 1, 1997, $5.35) 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 CDSCs, 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. 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 (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). 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
25
<PAGE>
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%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 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 may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based 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 may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 and on Class A purchases in connection with certain fee-
based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. 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.
The proceeds from the account maintenance fees are used to compensate Merrill
Lynch for providing continuing account maintenance activities.
For the fiscal year ended December 31, 1996, the Fund sold 10,503,252 of its
Class A shares for aggregate net proceeds to the Fund of $243,976,070. The
gross sales charges for the sale of its Class A shares for that year were
$211,777, of which $18,316 and $193,461 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended December 31, 1996, the
Distributor received no CDSCs with respect to redemptions within one year
after purchase of Class A shares purchased subject to a front-end sales charge
waiver. During the fiscal year ended December 31, 1996, the Fund sold
10,226,462 of its Class D shares for aggregate net proceeds to the Fund of
$234,370,104. The gross sales charges for the sale of its Class D shares for
that year were $1,251,336, of which $88,235 and $1,163,101 were received by
the Distributor and Merrill Lynch, respectively. During the fiscal year ended
December 31, 1996, the Distributor received no CDSCs with respect to
redemptions within one year after purchase of Class D shares purchased subject
to a front-end sales charge waiver.
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 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
27
<PAGE>
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, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and purchases
made in connection with certain fee-based programs. 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." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or D
shares are offered at net asset value to Employee Access SM Accounts available
through authorized employers. Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, subject to
certain conditions, Class A and Class D shares of the Fund are offered at net
asset value 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
which declines each year, 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." The proceeds from the account maintenance fees are used
to compensate Merrill Lynch for providing continuing account maintenance
activities.
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 that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
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, 1996, the Distributor received CDSCs of
$2,814,555 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to 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).
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
which are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption. Effective on or about May
12, 1997, the Class B CDSC also will be waived for any Class B shares
purchased within eligible Employee Access SM Accounts. 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.
30
<PAGE>
Additional information concerning the waiver of the Class B CDSC is set forth
in the Statement of Additional Information. The terms of the CDSC may be
modified in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended December 31, 1996, the Distributor
received CDSCs of $78,003 with respect to redemptions of Class C shares, all of
which were 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 also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
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 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.
32
<PAGE>
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$12,907,042 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $1.3
billion), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended December 31, 1996, the Fund paid the
Distributor $933,762 pursuant to the Class C Distribution Plan (based on
average net assets subject to such Class C Distribution Plan of approximately
$92.9 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, 1996, the Fund paid the
Distributor $391,787 pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$155.9 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
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, 1996, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $10,703,000 (0.88% of Class B net assets at that date). As of
December 31, 1996, direct cash revenues for the period since the commencement
of operations of Class B shares exceeded direct cash expenses by $23,369,033
(1.92% of Class B net assets at that date). As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues by approximately $305,000 (0.31% of Class C
net assets at that date). As of December 31, 1996, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $802,489 (0.81% 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."
33
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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)
6.25% 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 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.
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
34
<PAGE>
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, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares. 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.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
35
<PAGE>
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 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.
36
<PAGE>
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 the account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
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 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.
37
<PAGE>
Exercise of the exchange privilege is treated as a purchase of the acquired
shares and a sale of the exchanged shares for Federal income tax purposes. For
further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS 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 or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. A Class A or Class D shareholder whose
shares are held within a CMA (R), CBA (R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the CMA (R) or 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 or her 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) or CBA (R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified as may the Conversation Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of shares. These programs also generally prohibit such shares
form being transferred to another account at Merrill Lynch, to another
38
<PAGE>
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
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 Conduct Rules 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.
39
<PAGE>
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 waiver of the CDSC in the case of Class B and Class C 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.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the Dow Jones Industrial Average, or performance data published by
Lipper Analytical Services, Inc., Morningstar
40
<PAGE>
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. 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 call (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. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year. 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, thereby 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 fees payable to the Manager and any account maintenance
and/or distribution fees payable to the Distributor,
41
<PAGE>
are accrued daily. The per share net asset value of 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 differentials between
the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including 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. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
42
<PAGE>
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").
43
<PAGE>
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 such 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:
[_] Reinvest SELECT ONE:
[_] 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 or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
- - -
- - -
This form when completed, should
be mailed to:
Merrill Lynch Pacific Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
.....................................
P.O. Box 45289 ----- ------- ...............
Dealer Name and Address
Jacksonville, FL 32232-5289 F/C Last Name
Branch Code F/C
No.
By: .................................
----- ---------
Authorized Signature of Dealer
----- ---------
----- -------
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
Address.......................
..............................
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
DRAWN BY MERRILL LYNCH FINANCIAL
You are hereby authorized to draw an DATA SERVICES, INC.
ACH debit each month on my bank
account for investment in Merrill
Lynch Pacific Fund, Inc. as
indicated below:
To.............................. Bank
(Investor's Bank)
Bank Address ........................
City...... State...... Zip Code......
Amount of each ACH debit $........
Account No. ...................... As a convenience to me, I hereby
request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
to Merrill Lynch Financial Data
Services, Inc. I agree that your
rights in respect to each such debit
shall be the same as if it were a
check drawn on you and signed
personally by me. This authority is
to remain in effect until revoked by
me in writing. Until you receive
such notice, you shall be fully
protected in honoring any such
debit. I further agree that if any
such debit be dishonored, whether
with or without cause and whether
intentionally or inadvertently, you
shall be under no liability.
Please date and invest ACH debits on
the 20th of each month beginning.. or
as soon thereafter as possible.
(Month)
I agree that you are drawing these
ACH debits voluntarily at my request
and that you shall not be liable for
any loss arising from any delay in
preparing or failure to prepare any
such debit. If I change banks or
desire to terminate or suspend this
program, I agree to notify you
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my
bank account or purchases of Fund
shares including liquidating shares
of the Fund and crediting my bank
account. I further agree that if a
check or debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ .....................
Date Signature of
Depositor
............ .....................
Bank Signature of Depositor
Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
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 LLP
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............................................................... 34
Repurchase............................................................... 35
Reinstatement Privilege--Class A and Class D Shares...................... 35
Shareholder Services...................................................... 36
Investment Account....................................................... 36
Exchange Privilege....................................................... 37
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 38
Systematic Withdrawal Plans.............................................. 38
Automatic Investment Plans............................................... 38
Fee-Based Programs....................................................... 38
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 #10073-0497
[LOGO] MERRILL LYNCH
Merrill Lynch
Pacific Fund, Inc.
[ART]
PROSPECTUS
April 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
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 that seeks 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 25,
1997 (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 25, 1997.
<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. 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, 1996 and 1995, the Fund's portfolio turnover
rates were 10.65% and 26.73%, 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 or other financial 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 price on or before a specified
date, in the case of an option on securities, or agrees to pay to another party
an amount based on any gain in a specified securities index beyond a specified
level on or before a specified date, in the case of an option on a securities
index. 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. When writing a covered call option the
Fund may have no control over when it is required to sell the covered
securities since, with certain types of options, it may be assigned an exercise
notice at any time prior to its termination as a writer. If an option expires
unexercised, the Fund will realize 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 Fund will realize a gain or loss from the sale of the underlying security.
3
<PAGE>
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 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 or other financial 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 prices 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.
4
<PAGE>
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 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 hedge its portfolio effectively. 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
5
<PAGE>
position hedging transaction, its custodian will place cash or liquid
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 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/high risk securities"). The
Manager considers ratings as one of several factors in its independent credit
analysis of issuers.
Issuers of high yield/high risk 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/high risk 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
6
<PAGE>
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/high risk securities because such securities may be unsecured and may be
subordinated to other creditors of the issuer.
High yield/high risk 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/high risk
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield/high risk 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/high risk 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,
7
<PAGE>
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.
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. 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.
d. 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.
8
<PAGE>
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, 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 (64)--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") since 1977.
Donald Cecil (70)--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 (70)--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 (65)--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 from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (59)--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 (62)--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 (56)--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 (63)--Executive Vice President(1)(2)--Senior Vice President
of the Manager and FAM since 1982.
10
<PAGE>
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990.
Stephen I. Silverman (46)--Vice President(1)(2)--Vice President of the
Manager and Portfolio Manager since 1983.
Gerald M. Richard (47)--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 thereof since 1984.
- --------
(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 $40,398 for the fiscal
year ended December 31, 1996.
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the year
ended December 31, 1996, 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.............. $9,000 None $268,933
Edward H. Meyer........... $7,000 None $227,933
Charles C. Reilly......... $8,000 None $293,833
Richard R. West........... $8,000 None $269,833
Edward D. Zinbarg......... $8,000 None $127,333
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. West (41 registered investment companies consisting of 54 portfolios)
and Mr. Zinbarg (18 registered investment companies consisting of 18
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, 1994, 1995 and
1996, the total management fees paid by the Fund to the Manager aggregated
$8,074,688, $9,381,493 and $13,358,223, respectively.
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-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, 1994, 1995 and 1996 the amounts of such
reimbursement were $157,585, $133,747 and $211,545, 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.
12
<PAGE>
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 (except
that Class B shareholders may vote upon any material changes to expenses
charged under the Class D Distribution Plan). Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Manager, or its affiliate, FAM. Funds
advised by the Manager or FAM that 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 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, 1994, 1995 and 1996, 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, 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
13
<PAGE>
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 A shares of
the Fund for the fiscal year ended December 31, 1996, were $211,777, of which
$18,316 and $193,461 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. The gross sales charges for the sale of Class D shares for the
fiscal year ended December 31, 1996, were $1,251,336, of which $88,235 and
$1,163,101 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended December 31, 1994, the Distributor received
contingent deferred sales charges ("CDSCs") of $26,322, with respect to
redemptions within one year after purchase of Class A shares purchased subject
to a front-end sales charge waiver, all of which were paid to Merrill Lynch.
For the fiscal year ended December 31, 1995, the Distributor received CDSCs of
$112, with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver, all of which were
paid to Merrill Lynch. For the fiscal year ended December 31, 1996, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class A shares purchased subject to a front-end sales charge
waiver. For the fiscal year ended December 31, 1995, the Distributor received
CDSCs of $999, with respect to redemptions within one year after purchase of
Class D shares purchased subject to a front-end sales charge waiver, all of
which were 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,
1996, the Distributor received no CDSCs with respect to redemptions within one
year after purchase of Class D shares purchased subject to a front-end sales
charge waiver.
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 or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account (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 reinvested immediately 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; and 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 but 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 Individual Retirement Accounts ("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.
16
<PAGE>
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 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 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 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 such other mutual fund, and the shares of such
other fund were subject to a sales charge either at the time of purchase or on
a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice 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 SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. The
initial minimum 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 Conduct Rules 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,
1996 with respect to Class B and Class C shares, indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and, with respect to Class B shares, the Distributor's voluntary maximum for
the periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
----------------------------------------------------------------------------------
(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, 1996:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted. $1,413,505 $88,344 $18,153 $106,497 $36,975 $69,522 $9,132
Under Distributor's
Voluntary Waiver.......... $1,413,505 $88,344 $ 7,068 $ 95,412 $36,975 $58,437 $9,132
<CAPTION>
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO DECEMBER
31, 1996:
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As Adopted. $ 105,521 $ 6,595 $ 601 $ 7,196 $ 975 $ 6,221 $ 742
</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
New York Stock Exchange ("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
certain instances including in connection with certain post-retirement
withdrawals from an 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 in the case of such withdrawals 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, 1994, 1995 and 1996, the Distributor received CDSCs of
$1,830,114, $3,023,322 and $2,814,555, respectively, with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch. For
the period October 21, 1994 (commencement of operations) to December 31, 1994
and for the fiscal years ended December 31, 1995 and 1996, the Distributor
received CDSCs of $1, $18,089 and $78,003, respectively, with respect to
redemptions of Class C shares, all of which were 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
21
<PAGE>
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 Conduct Rules of the NASD and policies established by the
Directors of the Fund, the Manager may consider sales of shares of the Fund as
a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
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 OTC 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
22
<PAGE>
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 OTC transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared
to the fee or commission received by non-affiliated brokers in connection with
comparable transactions. See "Investment Objective and Policies--Investment
Restrictions."
The Board of Directors has considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the 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, 1996, the Fund paid total brokerage
commissions of $1,961,877, of which $91,743, or 4.7%, was paid to Merrill Lynch
for effecting 3.8% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. 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.
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,
23
<PAGE>
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 Class B,
Class C and Class D shares generally will be lower than the per share net asset
value of Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to 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 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 that 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 an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including 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.
24
<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 or her 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 or she be issued certificates for the 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 IRA 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.
25
<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 such
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
U.S. 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 the account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in
his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second 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
27
<PAGE>
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 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 certain 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
28
<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 Special Value Fund Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds 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 other MLAM-advised mutual funds,
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.
29
<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. As long as it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
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/high risk securities"), as previously described. Some
of these high yield/high risk 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/high risk securities may be treated as dividends for Federal income
tax purposes; in such case, if the issuer of such high yield/high risk
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 (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) 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 AS VALUE OF A EXPRESSED AS VALUE OF A
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END $1,000 THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
- ------ ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1996................ 0.52 % $ 1,005.20 1.12 % $1,011.20
Five Years Ended December
31, 1996................ 6.54 % $ 1,372.60 6.59 % $1,376.10
Ten Years Ended December
31, 1996................ 9.63 % $ 2,508.00 -- --
Inception (October 21,
1988) to
December 31, 1996....... -- -- 7.86 % $1,859.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31,
1996.................... 6.09 % $ 1,060.90 5.00 % $1,050.00
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 -- --
Inception (October 21,
1988) to
December 31, 1988....... 13.37 % $1,133.70
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 -- --
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (September 23,
1976) to
December 31, 1996....... 1,744.06 % $18,440.60 -- --
Inception (October 21,
1988) to
December 31, 1996....... -- -- 85.91 % $1,859.10
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
-------------------------- --------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END $1,000 THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1996................ 4.03 % $1,040.30 0.29 % $1,002.90
Inception (October 21,
1994) to
December 31, 1996....... 3.52 % $1,078.80 1.81 % $1,040.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31,
1996.................... 5.00 % $1,050.00 5.84 % $1,058.40
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, 1996....... 7.88 % $1,078.80 4.00 % $1,040.00
</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, 1996, 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............... $642,522,760 $1,217,549,379 $ 98,924,569 $136,626,089
============ ============== ============ ============
Number of Shares Out-
standing................ 29,778,805 59,144,398 4,872,374 6,333,714
============ ============== ============ ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............ $ 21.58 $ 20.59 $ 20.30 $ 21.57
Sales Charge (for Class A
and Class D shares:
5.25% of offering price
(5.54% of net asset
value per share))*...... 1.20 ** ** 1.20
------------ -------------- ------------ ------------
Offering Price........... $ 22.78 $ 20.59 $ 20.30 $ 22.77
============ ============== ============ ============
</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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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, 1997.
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, 1996, 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, 1996 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, 1996, 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 7, 1997
40
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Japanese Securities
Automobile 4,794,000 Suzuki Motor Corp. $ 50,657,289 $ 43,882,902 2.1%
Beverage 380,000 Chukyo Coca-Cola Bottling Co., Ltd. 5,420,506 3,445,596 0.2
424,000 Hokkaido Coca-Cola Bottling Co., Ltd. 6,399,350 5,235,924 0.2
386,000 Kinki Coca-Cola Bottling Co., Ltd. 7,430,096 4,466,667 0.2
476,000 Mikuni Coca-Cola Bottling Co., Ltd. 8,487,431 6,165,803 0.3
470,000 Sanyo Coca-Cola Bottling Co., Ltd. 7,028,799 6,291,019 0.3
-------------- -------------- ------
34,766,182 25,605,009 1.2
Capital Goods 13,543,000 Mitsubishi Heavy Industries, Ltd. 99,257,428 107,595,510 5.1
Chemicals 3,311,000 Shin-Etsu Chemical Co., Ltd. 59,267,110 60,329,965 2.9
Consumer YEN 409,000,000 Matsushita Electric Works, Ltd.--
Electronics C.E.W. #8, 2.70% due 5/31/2002
(Convertible) 4,543,868 4,104,128 0.2
Containers 1,912,000 Toyo Seikan Kaisha, Ltd. 57,600,127 46,066,321 2.2
Electric 1,715,000 Chudenko Corp. 55,422,513 49,465,458 2.4
Construction 3,365,000 Kinden Corp. 53,752,777 42,716,321 2.0
1,232,000 Taihei Dengyo Kaisha, Ltd. 24,789,475 12,234,888 0.6
-------------- -------------- ------
133,964,765 104,416,667 5.0
Electric Equipment 3,657,000 Murata Manufacturing Co., Ltd. 125,919,983 121,584,197 5.8
2,557,000 NEC Corporation 37,256,072 30,913,644 1.5
1,138,000 Rohm Co., Ltd. 51,505,961 74,687,392 3.6
169 Sumitomo Electric Industries, Ltd.,
#1 YEN (Warrants) (a) 185,351 212,345 0.0
-------------- -------------- ------
214,867,367 227,397,578 10.9
Iron & Steel 475,000 Maruichi Steel Tube, Ltd. 6,023,843 8,203,800 0.4
Office Equipment 6,250,000 Canon, Inc. 101,729,125 138,169,257 6.6
Pharmaceuticals 2,764,000 Sankyo Co., Ltd. 62,555,171 78,289,465 3.7
Property & Casualty 8,790,000 Dai-Tokyo Fire & Marine
Insurance Insurance Co., Ltd. 53,840,330 46,682,643 2.2
4,492,000 Fuji Fire & Marine Insurance
Co., Ltd. 16,261,457 16,796,511 0.8
7,539,000 Koa Fire & Marine Insurance
Co., Ltd. 45,292,612 36,588,238 1.8
8,191,000 Nichido Fire & Marine Insurance
Co., Ltd. 46,307,188 46,684,456 2.2
7,119,000 Sumitomo Marine & Fire Insurance
Co., Ltd. 61,618,176 44,263,212 2.1
4,662,000 Tokio Marine & Fire Insurance
Co., Ltd. 46,990,608 43,882,383 2.1
-------------- -------------- ------
270,310,371 234,897,443 11.2
Retailing 1,524,000 Ito-Yokado Co., Ltd. 75,480,112 66,329,534 3.2
364,000 Sangetsu Co., Ltd. 8,382,717 7,606,908 0.3
352,000 Senshukai Co., Ltd. 5,696,494 3,617,271 0.2
-------------- -------------- ------
89,559,323 77,553,713 3.7
Tires & Rubber 4,660,000 Bridgestone Corporation 79,461,992 88,531,952 4.2
Total Investments in Japan 1,264,563,961 1,245,043,710 59.4
</TABLE>
41
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<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 4,635,222 Coca-Cola Amatil, Ltd. $ 27,179,148 $ 49,513,395 2.4%
Leisure 19,143,824 Village Roadshow Ltd. 'A' (Preferred) 39,878,042 51,997,766 2.5
Property 6,088,350 Lend Lease Corp. 78,133,814 117,982,969 5.6
Total Investments in Australia 145,191,004 219,494,130 10.5
Hong Kong Securities
Banking 6,270,687 HSBC Holdings PLC 89,303,492 134,186,540 6.4
Conglomerates 8,641,035 Hutchison Whampoa Ltd. 48,780,672 67,874,693 3.2
Diversified 3,876,250 Swire Pacific Ltd. 'A' 31,942,177 36,963,206 1.8
Food & Beverage 89,268,176 C.P. Pokphand Co. Ltd. (Ordinary) 31,086,450 34,915,468 1.7
Property 9,955,000 Cheung Kong (Holdings) Ltd. 72,205,602 88,493,179 4.2
4,429,000 Henderson Land Development
Company Ltd. 44,245,009 44,667,960 2.1
Transportation 4,412,000 ++Guangshen Railway Company Ltd. 1,681,003 1,911,068 0.1
Total Investments in Hong Kong 319,244,405 409,012,114 19.5
Indian Securities
Banking 3,257,000 Industrial Development Bank of India 11,173,586 7,926,126 0.4
5,100 SCICI, Ltd. 15,309 3,745 0.0
-------------- -------------- ------
11,188,895 7,929,871 0.4
Broadcast/Media 620,000 ++BITV 3,557,823 190,769 0.0
Diversified Mutual Fund 1,929,400 Master Plus 1,146,844 680,012 0.0
Financial Services 72,000 Housing Development Finance Corp. Ltd. 5,781,901 4,534,993 0.2
Total Investments in India 21,675,463 13,335,645 0.6
Indonesian Securities
Pharmaceuticals 3,268,000 P.T. Kalbe Farma 5,525,626 3,737,230 0.2
Total Investments in Indonesia 5,525,626 3,737,230 0.2
Malaysian Securities
Conglomerates 34,564,000 Renong BHD 57,253,457 61,325,434 2.9
Transportation 3,661,000 Malaysian International Shipping BHD 12,515,710 10,874,257 0.5
Total Investments in Malaysia 69,769,167 72,199,691 3.4
</TABLE>
42
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
New Zealand Securities
Diversified 45,962,584 Guiness Peat Group PLC $ 18,582,889 $ 26,668,962 1.3%
Total Investments in New Zealand 18,582,889 26,668,962 1.3
Singaporean Securities
Food 1,949,000 Cerebos Pacific Ltd. 2,790,119 14,490,706 0.7
Transportation 300,000 Singapore Bus Co. Ltd.--
Foreign Registered 1,060,285 1,554,904 0.1
Total Investments in Singapore 3,850,404 16,045,610 0.8
South Korean Securities
Banking 540,000 Hana Bank (GDR) (b) 8,213,400 8,167,500 0.4
Textiles 3,080 Taekwang Industries Co. 716,353 1,111,359 0.0
Total Investments in South Korea 8,929,753 9,278,859 0.4
Thailand Securities
Banking US$ 18,931,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (Convertible) 21,743,755 18,457,725 0.9
US$ 19,535,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (Convertible) 25,441,125 17,239,637 0.8
Total Investments in Thailand 47,184,880 35,697,362 1.7
Nominal Value Premiums
Covered by Options Issue Paid
Currency Put Options Purchased
152,000,000 Japanese Yen, expiring July 1997
at YEN 113 2,606,800 4,795,600 0.2
381,922,622 Japanese Yen, expiring September 1997
at YEN 112 5,843,416 13,672,830 0.7
438,100,106 Japanese Yen, expiring October 1997
at YEN 114 6,440,072 12,266,803 0.6
380,000,000 Japanese Yen, expiring November 1997
at YEN 115 5,035,000 9,576,000 0.5
383,052,583 Japanese Yen, expiring November 1997
at YEN 114 5,152,057 11,089,372 0.5
Total Currency Put Options Purchased 25,077,345 51,400,605 2.5
Total Investments 1,929,594,897 2,101,913,918 100.3
</TABLE>
43
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Nominal Value Premiums Value Percent of
Covered by Options Issue Received (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Call Options Written
696,794 HSBC Holdings, expiring January
1997 at HK$174.48 $ (81,477) $ (113,519) (0.0)%
3,876,250 Swire Pacific 'A', expiring
January 1997 at HK$73.3293 (298,886) (180,432) (0.0)
Total Call Options Written (380,363) (293,951) 0.0
Total Investments, Net of Options Written $1,929,214,534 2,101,619,967 100.3
==============
Unrealized Appreciation on Forward Foreign Exchange Contracts* 1,127,299 0.0
Liabilities in Excess of Other Assets (7,124,469) (0.3)
-------------- ------
Net Assets $2,095,622,797 100.0%
============== ======
<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)Global Depositary Receipts (GDR).
*Forward foreign exchange contracts as of December 31, 1996 were as
follows:
Unrealized
Appreciation
Expiration (Depreciation)
Foreign Currency Purchased Date (Note 1b)
YEN 7,957,445,461 April 1997 $(6,596,125)
Total (US$ Commitment--$76,133,940) (6,596,125)
===========
Foreign Currency Sold
YEN 7,957,445,461 April 1997 $ 7,723,424
Total (US$ Commitment--$77,261,239) 7,723,424
-----------
Total Unrealized Appreciation--Net on
Forward Foreign Exchange Contracts $ 1,127,299
===========
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
44
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,904,517,552)
(Note 1a) $2,050,513,313
Options purchased, at value (premiums paid--$25,077,345)
(Notes 1a & 1b) 51,400,605
Unrealized appreciation on forward foreign exchange contracts
(Note 1b) 1,127,299
Foreign cash (Note 1c) 7,984,813
Receivables:
Securities sold $ 8,822,176
Capital shares sold 3,831,931
Interest 1,114,579
Dividends 883,265 14,651,951
--------------
Prepaid registration fees and other assets (Note 1f) 102,602
--------------
Total assets 2,125,780,583
--------------
Liabilities: Options written, at value (premiums received--$380,363)
(Notes 1a & 1b) 293,951
Payables:
Capital shares redeemed 16,215,708
Distributor (Note 2) 1,215,063
Investment adviser (Note 2) 1,134,370 18,565,141
--------------
Accrued expenses and other liabilities 11,298,694
--------------
Total liabilities 30,157,786
--------------
Net Assets: Net assets $2,095,622,797
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 2,977,881
Class B Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized 5,914,440
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 487,237
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 633,371
Paid-in capital in excess of par 1,914,308,850
Accumulated realized capital losses on investments
and foreign currency transactions--net (1,695,543)
Unrealized appreciation on investments and foreign currency
transactions--net 172,996,561
--------------
Net assets $2,095,622,797
==============
Net Asset Value: Class A--Based on net assets of $642,522,760 and 29,778,805
shares outstanding $ 21.58
==============
Class B--Based on net assets of $1,217,549,379 and 59,144,398
shares outstanding $ 20.59
==============
Class C--Based on net assets of $98,924,569 and 4,872,374
shares outstanding $ 20.30
==============
Class D--Based on net assets of $136,626,089 and 6,333,714
shares outstanding $ 21.57
==============
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Dividends (net of $1,581,063 foreign withholding tax) $ 23,685,611
Income Interest and discount earned (net of $10,245 foreign
(Notes 1d & 1e): withholding tax) 6,054,339
--------------
Total income 29,739,950
--------------
Expenses: Investment advisory fees (Note 2) $ 13,358,223
Account maintenance and distribution fees--Class B (Note 2) 12,907,042
Transfer agent fees--Class B (Note 2) 2,328,675
Custodian fees 1,597,190
Transfer agent fees--Class A (Note 2) 1,043,663
Account maintenance and distribution fees--Class C (Note 2) 933,762
Account maintenance fees--Class D (Note 2) 391,787
Registration fees (Note 1f) 336,777
Printing and shareholder reports 286,206
Transfer agent fees--Class D (Note 2) 239,946
Accounting services (Note 2) 211,545
Transfer agent fees--Class C (Note 2) 176,202
Professional fees 155,438
Directors' fees and expenses 40,398
Pricing fees 2,474
Other 49,618
--------------
Total expenses 34,058,946
--------------
Investment loss--net (4,318,996)
--------------
Realized & Realized gain from:
Unrealized Gain Investments--net 76,777,085
(Loss) on Foreign currency transactions--net 101,392,679 178,169,764
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (64,248,496)
(Notes 1b, 1c, Foreign currency transactions--net (6,512,457) (70,760,953)
1d & 3): -------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions 107,408,811
--------------
Net Increase in Net Assets Resulting from Operations $ 103,089,815
==============
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: 1996 1995
<S> <S> <C> <C>
Operations: Investment loss--net $ (4,318,996) $ (1,485,553)
Realized gain on investments and foreign currency
transactions--net 178,169,764 55,186,276
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (70,760,953) 69,105,817
-------------- --------------
Net increase in net assets resulting from operations 103,089,815 122,806,540
-------------- --------------
Dividends & In excess of investment income--net:
Distributions to Class A (34,551,177) --
Shareholders Class B (55,727,358) --
(Note 1g): Class C (4,707,430) --
Class D (6,918,235) --
Realized gain on investments--net:
Class A (19,254,820) (14,499,563)
Class B (38,434,097) (18,356,327)
Class C (3,161,360) (910,272)
Class D (4,073,091) (1,710,133)
In excess of realized gain on investments--net:
Class A -- (3,585,642)
Class B -- (4,539,392)
Class C -- (225,104)
Class D -- (422,904)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (166,827,568) (44,249,337)
-------------- --------------
Capital Share Net increase in net assets derived from capital
Transactions share transactions 365,961,817 182,530,658
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 302,224,064 261,087,861
Beginning of year 1,793,398,733 1,532,310,872
-------------- --------------
End of year $2,095,622,797 $1,793,398,733
============== ==============
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: 1996++ 1995++ 1994++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of year $ 22.16 $ 21.12 $ 21.21 $ 15.80 $ 18.34
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .11 .11 .10 .07 .05
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions --net 1.21 1.61 .50 5.37 (1.63)
---------- ---------- ---------- ---------- ----------
Total from investment
operations 1.32 1.72 .60 5.44 (1.58)
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net -- -- -- -- (.01)
In excess of investment
income--net (1.22) -- (.22) (.03) --
Realized gain on
investments--net (.68) (.55) (.33) -- (.95)
In excess of realized
gain on investments--net -- (.13) (.14) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (1.90) (.68) (.69) (.03) (.96)
---------- ---------- ---------- ---------- ----------
Net asset value, end
of year $ 21.58 $ 22.16 $ 21.12 $ 21.21 $ 15.80
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 6.09% 8.20% 2.90% 34.41% (8.76%)
========== ========== ========== ========== ==========
Ratios to Average Expenses .87% .93% .91% .90% .98%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .47% .53% .47% .47% .40%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 642,523 $ 607,598 $ 587,107 $ 472,322 $ 284,674
========== ========== ========== ========== ==========
Portfolio turnover 10.65% 26.73% 23.84% 13.25% 7.62%
========== ========== ========== ========== ==========
Average commission
rate paid++++ $ .0104 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
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: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 21.22 $ 20.27 $ 20.41 $ 15.34 $ 18.01
Performance: ---------- ---------- ---------- ---------- ----------
Investment loss--net (.13) (.10) (.12) (.10) (.12)
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net 1.17 1.53 .49 5.17 (1.60)
---------- ---------- ---------- ---------- ----------
Total from investment
operations 1.04 1.43 .37 5.07 (1.72)
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
In excess of investment
income--net (.99) -- (.04) -- --
Realized gain on
investments--net (.68) (.38) (.33) -- (.95)
In excess of realized
gain on investments--net -- (.10) (.14) -- --
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (1.67) (.48) (.51) -- (.95)
---------- ---------- ---------- ---------- ----------
Net asset value, end
of year $ 20.59 $ 21.22 $ 20.27 $ 20.41 $ 15.34
========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:* per share 5.00% 7.10% 1.87% 33.05% (9.72%)
========== ========== ========== ========== ==========
Ratios to Average Expenses 1.90% 1.96% 1.94% 1.92% 2.00%
Net Assets: ========== ========== ========== ========== ==========
Investment loss--net (.56%) (.50%) (.56%) (.56%) (.61%)
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $1,217,549 $1,041,763 $ 915,351 $ 508,008 $ 165,015
========== ========== ========== ========== ==========
Portfolio turnover 10.65% 26.73% 23.84% 13.25% 7.62%
========== ========== ========== ========== ==========
Average commission rate
paid++++ $ .0104 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C++++ Class D++++
For the For the
The following per share data and Period Period
ratios have been derived from information Oct. 21, Oct. 21,
provided in the financial statements. For the Year Ended 1994++ to For the Year Ended 1994++ to
December 31, Dec. 31, December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of
Performance: period $ 20.97 $ 20.12 $ 21.67 $ 22.14 $ 21.11 $ 22.70
-------- -------- -------- -------- -------- --------
Investmentincome
(loss)--net (.13) (.12) (.03) .04 .07 --
Realized and
unrealized gain
(loss) on invest-
ments and foreign
currency trans-
actions--net 1.16 1.53 (.86) 1.23 1.60 (.91)
-------- -------- -------- -------- -------- --------
Total from
investment
operations 1.03 1.41 (.89) 1.27 1.67 (.91)
-------- -------- -------- -------- -------- --------
Less dividends
and distributions:
In excess of
investment income
--net (1.02) -- (.19) (1.16) -- (.21)
Realized gain on
investments--net (.68) (.45) (.33) (.68) (.51) (.33)
In excess of
realized gain on
investments--net -- (.11) (.14) -- (.13) (.14)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (1.70) (.56) (.66) (1.84) (.64) (.68)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period $ 20.30 $ 20.97 $ 20.12 $ 21.57 $ 22.14 $ 21.11
======== ======== ======== ======== ======== ========
Total Investment Based on net asset
Return:** value per share 5.00% 7.07% (4.04%)+++ 5.84% 7.95% (3.93%)+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.91% 1.97% 2.17%* 1.12% 1.18% 1.42%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income
(loss)--net (.58%) (.59%) (.79%)* .16% .31% .12%*
======== ======== ======== ======== ======== ========
Supplemental Net assets,
Data: end of period
(in thousands) $ 98,925 $ 46,092 $ 7,841 $136,626 $ 97,946 $ 22,012
======== ======== ======== ======== ======== ========
Portfolio turnover 10.65% 26.73% 23.84% 10.65% 26.73% 23.84%
======== ======== ======== ======== ======== ========
Average
commission
rate paid+++++ $ .0104 -- -- $ .0104 -- --
======== ======== ======== ======== ======== ========
<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.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
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 is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
51
<PAGE>
* 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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(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. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for post-October losses and
foreign currency transactions.
(h) Reclassification--Generally accepted accouning principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting for
foreign exchange transactions. Accordingly, current year's permanent
book/tax differences of $106,223,196 have been reclassified between
accumulated net realized capital losses and undistributed net
investment income. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch 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.
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% --
52
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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, 1996, MLFD earned underwriting
discounts 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 $18,316 $ 193,461
Class D $88,235 $1,163,101
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $2,814,555 and $78,003 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $91,743 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1996.
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 year ended December 31, 1996 were $622,673,418 and $214,201,708,
respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ 77,422,054 $145,995,761
Options purchased (681,139) --
Options written 36,170 86,412
------------ ------------
Total investments 76,777,085 146,082,173
------------ ------------
Currency transactions:
Options purchased 50,966,544 26,323,260
Foreign currency
transactions 54,958,688 (536,171)
Forward foreign exchange
contracts (4,532,553) 1,127,299
------------ ------------
Total currency transactions 101,392,679 26,914,388
------------ ------------
Total $178,169,764 $172,996,561
============ ============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $146,063,403, of which $285,883,577
related to appreciated securities and $139,820,174 related to
depreciated securities. At December 31, 1996, the aggregate cost of
investments, net of options written, for Federal income tax purposes
was $1,904,155,959.
Transactions in call options written for the year ended December 31,
1996, were as follows:
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options
written, beginning of year $ 2,557,932 $ 314,458
Options written 83,207,253 3,372,758
Options closed (25,806,305) (1,732,269)
Options exercised (5,981,538) (656,625)
Options expired (49,404,298) (917,959)
------------ ------------
Outstanding call options
written, end of year $ 4,573,044 $ 380,363
============ ============
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $365,961,817 and $182,530,658 for the years ended December 31,
1996 and December 31, 1995, respectively.
53
<PAGE>
Transactions in capital shares for each class were
as follows:
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 10,503,252 $243,976,070
Shares issued to share-
holders in reinvestment of
dividends & distributions 2,231,131 47,590,033
------------ ------------
Total issued 12,734,383 291,566,103
Shares redeemed (10,379,092) (241,055,211)
------------ ------------
Net increase 2,355,291 $ 50,510,892
============ ============
Class A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 8,478,331 $178,519,975
Shares issued to share-
holders in reinvestment of
dividends 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 B Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 22,731,772 $504,265,222
Shares issued to share-
holders in reinvestment of
dividends & distributions 3,942,177 80,262,723
------------ ------------
Total issued 26,673,949 584,527,945
Shares redeemed (16,434,419) (365,153,210)
Automatic conversion of
shares (198,470) (4,412,958)
------------ ------------
Net increase 10,041,060 $214,961,777
============ ============
Class B Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 19,257,866 $389,172,718
Shares issued to share-
holders in reinvestment of
dividends 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 C Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 4,757,784 $104,489,958
Shares issued to share-
holders in reinvestment of
dividends & distributions 332,904 6,684,703
------------ ------------
Total issued 5,090,688 111,174,661
Shares redeemed (2,416,196) (53,314,914)
------------ ------------
Net increase 2,674,492 $ 57,859,747
============ ============
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 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 D Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 10,226,462 $234,370,104
Shares issued to share-
holders in reinvestment of
dividends & distributions 454,781 9,695,929
Automatic conversion of shares 190,840 4,412,958
------------ ------------
Total issued 10,872,083 248,478,991
Shares redeemed (8,962,823) (205,849,590)
------------ ------------
Net increase 1,909,260 $ 42,629,401
============ ============
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 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
============ ============
5. Commitments:
At December 31, 1996, 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 sell various foreign
currencies with approximate values of $14,305,000.
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............ 13
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 # 10241-0497
[LOGO] MERRILL LYNCH
Merrill Lynch
Pacific Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
April 25, 1997
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, 1996.
Contained in Part B:
Schedule of Investments as of December 31, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the two-
year period ended December 31, 1996.
Financial Highlights for each of the years in the five-year period
ended December 31, 1996.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
--Articles of Incorporation of the Registrant, as amended, dated
1(a) August 5, 1976.(a)
(b) --Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 14, 1986.(a)
(c) --Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 3, 1988.(a)
(d) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated February 1, 1994.(a)
(e) --Articles of Amendment to the Articles of Incorporation of the
Registrant, dated October 21, 1994.(b)
(f) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated October 21, 1994.(b)
(g) --Articles Supplementary to the Articles of Incorporation of the
Registrant, dated April 15, 1996.(c)
2 --By-Laws of the Registrant, as amended.(c)
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.(d)
5(a) --Management Agreement between the Registrant and Merrill Lynch Asset
Management, Inc.(b)
(b) --Supplement to Management Agreement between the Registrant and
Merrill Lynch Asset Management, L.P., dated January 3, 1994.(a)
(c) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.
6(a) --Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
(b) --Class B Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
(c) --Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser Program.(a)
(d) --Class C Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
(e) --Class D Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
7 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
8(a) --Form of Custodian Agreement between the Registrant and Brown
Brothers Harriman & Co.(b)
(b) --Form of Master Subcustodian Agreement of Brown Brothers Harriman &
Co.(b)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(b)
(b) --Form of License Agreement relating to the use of name between the
Registrant and Merrill Lynch & Co.(c)
10 --None.
--Consent of Deloitte & Touche LLP, independent auditors for the
11 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.(a)
(b) --Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(b)
(c) --Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(b)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(c)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(c)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
shares.(b)
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
shares.(b)
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.
--Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
18 3.(e)
</TABLE>
- --------
(a) Filed on April 29, 1994, as an Exhibit to Post-Effective Amendment No. 24
to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File No. 2-56978) (the "Registration
Statement").
(b) Filed on April 28, 1995, as an Exhibit to Post-Effective Amendment No. 26
to the Registration Statement.
(c) Filed on April 26, 1996, as an Exhibit to Post-Effective Amendment No. 27
to the Registration Statement.
(d) 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 Exhibits 1(a), 1(b), 1(c), 1(d), 1(e), 1(f) and l(g) to the Registration
Statement; 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 Registration Statement.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
-------------- --------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per
share................................................... 60,811
Class B Shares of Common Stock, par value $0.10 per
share................................................... 101,397
Class C Shares of Common Stock, par value $0.10 per
share................................................... 10,323
Class D Shares of Common Stock, par value $0.10 per
share................................................... 11,368
</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 the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the 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, as amended (the
"1933 Act"), against certain types of civil liabilities in connection with the
Registration Statement or the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) 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
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Intermediate Government Bond 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 the Manager, 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 Emerging Tigers 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., 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,
C-4
<PAGE>
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey 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 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 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 is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of MLAM, 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, 1995 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 28
and Messrs. Giordano, Harvey, 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;
Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------------- ----------------------------------
<C> <C> <S>
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.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice
President of Merrill Lynch,
Pierce, Fenner & Smith
Incorporated from 1989 to
1995
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>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, 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 Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers 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 Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
C-6
<PAGE>
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since January 1, 1995, for
his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Harvey, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Director of MLFD;
Executive Vice President of ML & Co.
Alan J. Albert.......... Senior Managing Vice President of the Manager
Director
Terry K. Glenn.......... Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of MLFDS; President
of Princeton Administrators, L.P.
Adrian Holmes........... Managing Director Director of Merrill Lynch Global
Asset Management
Andrew John Bascand..... Director Director of Merrill Lynch Global
Asset Management
Edward Gobora........... Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer
of the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Stephen J. Yardley...... Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company None
Secretary
</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
C-7
<PAGE>
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 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<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
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
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, the 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-8
<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 the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its 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 24th day of
April 1997.
Merrill Lynch Pacific Fund, Inc.
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATES
Arthur Zeikel* President and
- ------------------------------------- Director (Principal
(ARTHUR ZEIKEL) Executive Officer)
Gerald M. Richard* Treasurer (Principal
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
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/ Gerald M. Richard April 24, 1997
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
5(c) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
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>
<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>
<NUMBER> 1
<NAME> Merrill Lynch Pacfic Fund, Inc CLASS- A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1929214534
<INVESTMENTS-AT-VALUE> 2101619967
<RECEIVABLES> 14651951
<ASSETS-OTHER> 9214714
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2125486632
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29863835
<TOTAL-LIABILITIES> 29863835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1924321779
<SHARES-COMMON-STOCK> 29778805
<SHARES-COMMON-PRIOR> 27423514
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1695543)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 172996561
<NET-ASSETS> 642522760
<DIVIDEND-INCOME> 23685611
<INTEREST-INCOME> 6054339
<OTHER-INCOME> 0
<EXPENSES-NET> (34058946)
<NET-INVESTMENT-INCOME> (4318996)
<REALIZED-GAINS-CURRENT> 178169764
<APPREC-INCREASE-CURRENT> (70760953)
<NET-CHANGE-FROM-OPS> 103089815
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (34551177)
<DISTRIBUTIONS-OF-GAINS> (19254820)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10503252
<NUMBER-OF-SHARES-REDEEMED> (10379092)
<SHARES-REINVESTED> 2231131
<NET-CHANGE-IN-ASSETS> 302224064
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (8718743)
<GROSS-ADVISORY-FEES> 13358223
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 34058946
<AVERAGE-NET-ASSETS> 681849534
<PER-SHARE-NAV-BEGIN> 22.16
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 1.21
<PER-SHARE-DIVIDEND> (1.22)
<PER-SHARE-DISTRIBUTIONS> (.68)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.58
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Merrill Lynch Pacific Fund, Inc - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1929214534
<INVESTMENTS-AT-VALUE> 2101619967
<RECEIVABLES> 14651951
<ASSETS-OTHER> 9214714
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2125486632
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29863835
<TOTAL-LIABILITIES> 29863835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1924321779
<SHARES-COMMON-STOCK> 59144398
<SHARES-COMMON-PRIOR> 49103338
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1695543)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 172996561
<NET-ASSETS> 1217549379
<DIVIDEND-INCOME> 23685611
<INTEREST-INCOME> 6054339
<OTHER-INCOME> 0
<EXPENSES-NET> (34058946)
<NET-INVESTMENT-INCOME> (4318996)
<REALIZED-GAINS-CURRENT> 178169764
<APPREC-INCREASE-CURRENT> (70760953)
<NET-CHANGE-FROM-OPS> 103089815
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (55727358)
<DISTRIBUTIONS-OF-GAINS> (38434097)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22731772
<NUMBER-OF-SHARES-REDEEMED> (16632889)
<SHARES-REINVESTED> 3942177
<NET-CHANGE-IN-ASSETS> 302224064
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (8718743)
<GROSS-ADVISORY-FEES> 13358223
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 34058946
<AVERAGE-NET-ASSETS> 1283689560
<PER-SHARE-NAV-BEGIN> 21.22
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> (.99)
<PER-SHARE-DISTRIBUTIONS> (.68)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.59
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Merril Lynch Pacific Fund, Inc - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1929214534
<INVESTMENTS-AT-VALUE> 2101619967
<RECEIVABLES> 14651951
<ASSETS-OTHER> 9214714
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2125486632
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29863835
<TOTAL-LIABILITIES> 29863835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1924321779
<SHARES-COMMON-STOCK> 4872374
<SHARES-COMMON-PRIOR> 2197882
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1695543)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 172996561
<NET-ASSETS> 98924569
<DIVIDEND-INCOME> 23685611
<INTEREST-INCOME> 6054339
<OTHER-INCOME> 0
<EXPENSES-NET> (34058946)
<NET-INVESTMENT-INCOME> (4318996)
<REALIZED-GAINS-CURRENT> 178169764
<APPREC-INCREASE-CURRENT> (70760953)
<NET-CHANGE-FROM-OPS> 103089815
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4707430)
<DISTRIBUTIONS-OF-GAINS> (3161360)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4757784
<NUMBER-OF-SHARES-REDEEMED> (2416196)
<SHARES-REINVESTED> 332904
<NET-CHANGE-IN-ASSETS> 302224064
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (8718743)
<GROSS-ADVISORY-FEES> 13358223
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 34058946
<AVERAGE-NET-ASSETS> 92868702
<PER-SHARE-NAV-BEGIN> 20.97
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 1.16
<PER-SHARE-DIVIDEND> (1.02)
<PER-SHARE-DISTRIBUTIONS> (.68)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.30
<EXPENSE-RATIO> 1.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Merrill Lynch Pacific Fund, Inc - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1929214534
<INVESTMENTS-AT-VALUE> 2101619967
<RECEIVABLES> 14651951
<ASSETS-OTHER> 9214714
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2125486632
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29863835
<TOTAL-LIABILITIES> 29863835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1924321779
<SHARES-COMMON-STOCK> 6333714
<SHARES-COMMON-PRIOR> 4424454
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1695543)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 172996561
<NET-ASSETS> 136626089
<DIVIDEND-INCOME> 23685611
<INTEREST-INCOME> 6054339
<OTHER-INCOME> 0
<EXPENSES-NET> (34058946)
<NET-INVESTMENT-INCOME> (4318996)
<REALIZED-GAINS-CURRENT> 178169764
<APPREC-INCREASE-CURRENT> (70760953)
<NET-CHANGE-FROM-OPS> 103089815
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6918235)
<DISTRIBUTIONS-OF-GAINS> (4073091)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10417302
<NUMBER-OF-SHARES-REDEEMED> (8962823)
<SHARES-REINVESTED> 454781
<NET-CHANGE-IN-ASSETS> 302224064
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (8718743)
<GROSS-ADVISORY-FEES> 13358223
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 34058946
<AVERAGE-NET-ASSETS> 155862931
<PER-SHARE-NAV-BEGIN> 22.14
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.23
<PER-SHARE-DIVIDEND> (1.16)
<PER-SHARE-DISTRIBUTIONS> (.68)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.57
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(C)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the day of , 199 , by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH PACIFIC FUND, INC. (the "Fund") is a Maryland
corporation engaged in business as a non-diversified, open-end investment
company registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated July 29, 1985, pursuant to which MLAM provides management and
investment and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice
2
<PAGE>
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE>
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of MLAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory
4
<PAGE>
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K.
5
<PAGE>
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until the date of termination of the Management
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Directors of the Fund or by the vote of a majority of the
6
<PAGE>
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by MLAM or by vote of a majority of the outstanding voting securities
of the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Management Agreement. Any termination
shall be without prejudice to the completion of transactions already initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE>
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By ________________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By ________________________________________
Title:
9
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Pacific Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 28 to Registration
Statement No. 2-56978 of our report dated February 7, 1997 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
