<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1994
SECURITIES ACT FILE NO. 33-28248
INVESTMENT COMPANY ACT FILE NO. 811-5723
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 9 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH
DEVELOPING CAPITAL MARKETS FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET
ONE WORLD TRADE CENTER MANAGEMENT
NEW YORK, NEW YORK 10048-0557 BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NEW JERSEY 08543-9011
FRANK P. BRUNO, ESQ.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)*
[_] on (date) pursuant to paragraph (a) of Rule 485
----------------
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 AUGUST 27, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* The Registrant has requested that the Securities and Exchange Commission's
staff consider accelerating the effectiveness of this Amendment to July 1,
1994.
<PAGE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3. Condensed Financial Consolidated Financial Highlights;
Information.................. Performance Data
Item 4. General Description of Special and Risk Considerations;
Registrant................... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund........ Fee Table; Investment Objective and
Policies; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............. Not Applicable
Item 6. Capital Stock and Other
Securities................... Cover Page; Additional Information
Item 7. Purchase of Securities Being Cover Page; Fee Table; Alternative
Offered...................... Sales Arrangements; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Alternative Sales
Arrangements; 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
History...................... Not Applicable
Item 13. Investment Objectives and
Policies..................... Investment Objective and Policies
Item 14. Management of the Fund........ Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities........ Management of the Fund
Item 16. Investment Advisory and Other Management of the Fund; Purchase of
Services..................... Shares; General Information
Item 17. Brokerage Allocation and Other
Practices.................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other General Information--Description of
Securities................... Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being Determination of Net Asset Value;
Offered...................... Purchase of Shares; Redemption of
Shares; Shareholder Services;
General Information
Item 20. Tax Status.................... Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculation of Performance
Data......................... Performance Data
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
JULY 1, 1994
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
---------------
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is a non-
diversified mutual fund seeking long-term capital appreciation by investing in
securities, principally equities, of issuers in countries having smaller
capital markets. This objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. The Fund may employ
a variety of instruments and techniques to hedge against market and currency
risk. There can be no assurance that the Fund's investment objective will be
achieved. Investments on an international basis involve certain risk factors.
See "Special and Risk Considerations".
---------------
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). Prior to the date of this Prospectus, the Fund had not offered any
of its Class B shares to the public; shares of the Fund sold to the public
before such date are Class A shares. The original charges to which the Class B
shares are subject shall consist of a contingent deferred sales charge which
may be imposed on redemptions made within four years of purchase and an
ongoing account maintenance fee and distribution fee. These alternatives
permit an investor to choose the method of purchasing shares that is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales charges with
respect to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares. Investors should also understand
that over time the deferred sales charges related to Class B shares may exceed
the initial sales charge with respect to Class A shares. See "Alternative
Sales Arrangements" on page 3.
Each Class A and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay
lower dividends than Class A shares and that Class B shares have exclusive
voting rights with respect to the account maintenance fee and distribution
fee. The two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], and other securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). To permit the Fund to invest the net
proceeds from the sale of its shares in an orderly manner, the Fund may, from
time to time, suspend the sale of its shares, except for dividend
reinvestments. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee
charge. See "Purchase of Shares" and "Redemption of Shares".
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated July 1, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, 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 Class A and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES
INITIAL SALES CLASS B SHARES
CHARGE DEFERRED SALES
ALTERNATIVE CHARGE ALTERNATIVE
-------------- ------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EX-
PENSES:
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price)........... 6.50%(a) None
Sales Charge Imposed on Divi-
dend Reinvestments........... None None
Deferred Sales Charge (as a
percentage of original
purchase price or redemption None(f) 4.0% during the
proceeds, whichever is first year,
lower)....................... decreasing 1.0%
annually to
0.0% after the
fourth year(b)
Exchange Fee.................. None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS, FOR THE FISCAL YEAR
ENDED JUNE 30, 1993):+
Management Fees(c)............ 1.00% 1.00%
12b-1 Fees.................... None 1.00%(d)
Other Expenses
Custodial Fees.............. 0.30% 0.30%
Shareholder Servicing
Costs(e)................... 0.10% 0.10%
Other....................... 0.31% 0.31%
---- ----
Total Other Expenses.... 0.71% 0.71%
---- ----
TOTAL FUND OPERATING EXPENSES... 1.71% 2.71%
==== ====
</TABLE>
- --------
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for
purchases of $1,000,000 and over. Certain investors making purchases of
$1,000,000 and over may, however, pay a contingent deferred sales charge
ranging from a high of 1.00% to a low of 0.25% of amounts redeemed within
the first year after purchase in lieu of the 0.75% initial sales charge.
See "Purchase of Shares--Initial Sales Charge Alternative--Class A
Shares"--page 22.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 24.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page
19.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 25. This amount represents the 0.25%
account maintenance fee and the 0.75% distribution fee applicable to Class
B shares of the Fund.
(e) See "Management of the Fund--Transfer Agency Services"--page 20.
(f) Certain investors making purchases of $1,000,000 and over may, however,
pay a contingent deferred sales charge ranging from a high of 1.00% to a
low of 0.25% of amounts redeemed within the first year after purchase in
lieu of the 0.75% initial sales charge. See "Purchase of Shares--Initial
Sales Charge Alternative--Class A Shares"--page 22.
+ Prior to the date of this Prospectus, the Fund had not offered any of its
Class B shares to the public; therefore, the expenses for Class B shares
set forth under "Other Expenses" are based on estimated amounts through the
end of the Fund's first fiscal year during which it has Class B shares
outstanding, on an annualized basis.
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 fol-
lowing expenses on a $1,000
investment including, for
Class A shares, the maximum
$65 front-end sales charge and
assuming (1) an operating ex-
pense ratio of 1.71% for Class
A shares and 2.71% for Class B
shares, (2) a 5% annual return
throughout the periods and (3)
redemption at the end of the
period:
Class A...................... $ 81.25 $ 115.38 $ 151.78 $ 253.81
Class B...................... $ 67.41 $ 104.13 $ 143.47 $ 304.15
An investor would pay the fol-
lowing expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A...................... $ 81.25 $ 115.38 $ 151.78 $ 253.81
Class B...................... $ 27.41 $ 84.13 $ 143.47 $ 304.15
</TABLE>
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. As noted above, the expenses for Class B shares set forth under
"Other Expenses" are based on estimated amounts through the end of the Fund's
first fiscal year during which it has Class B shares outstanding, on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission 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 shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance fee or distribution fee or any sales charge when they are
redeemed. Certain purchases of Class A shares qualify for reduced initial sales
charges. See "Purchase of Shares--Initial Sales Charge Alternative--Class A
Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares provide the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
account maintenance and distribution fees paid by Class B shares will cause
such shares to have a higher expense ratio and to pay lower dividends than
Class A shares. Payment of the distribution fee is subject to certain limits as
set forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares".
3
<PAGE>
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time might also
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all their funds will be invested initially.
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred sales charge alternative. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. Certain other investors might determine it to be more advantageous to
have all their funds invested initially, although remaining subject to
continued account maintenance and distribution fees and, for a four-year period
of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge and,
in the case of the Class B shares, from the proceeds of the ongoing account
maintenance and distribution fees and the contingent deferred sales charge
incurred upon redemption within four years of purchase. Sales personnel may
receive different compensation for selling Class A or Class B shares. Investors
should understand that the purpose and function of the deferred sales charges
with respect to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B 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 Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value". Class A and Class B
shareholders of the Fund each have an exchange privilege for Class A and Class
B shares, respectively, of certain other mutual funds sponsored by Merrill
Lynch. Class A and Class B shareholders of the Fund also may exchange their
shares for shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege."
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD
OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND
OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION
FEES OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH
THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND
DISTRIBUTION FEES. TO ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE
TABLE ON PAGE 2 SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES,
AND A DISCUSSION OF FACTORS RELEVANT TO MAKING SUCH DETERMINATION IS SET
FORTH UNDER "PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 3.
4
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
The financial information in the table below, other than that for the six
month period ended December 31, 1993, which is unaudited, has been audited in
conjunction with the annual audits of the consolidated financial statements of
the Fund by Deloitte & Touche, independent auditors. Consolidated financial
statements and the independent auditors' report thereon for the fiscal year
ended June 30, 1993, are included in the Statement of Additional Information;
unaudited consolidated financial statements for the six months ended December
31, 1993, are also 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.
Prior to the date of this Prospectus, the Fund had not offered any of its
Class B shares to the public; therefore, the financial information below
relates solely to Class A shares of the Fund.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------
FOR THE PERIOD
FOR THE SIX FOR THE FOR THE FOR THE SEPTEMBER 1,
MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1989+ TO
DECEMBER 31, 1993 JUNE 30, 1993* JUNE 30, 1992 JUNE 30, 1991 JUNE 30, 1990
----------------- -------------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net Asset Value,
Beginning of Period.... $ 11.62 $ 11.92 $ 10.43 $ 11.58 $ 9.60
-------- -------- -------- -------- --------
Investment income --net
(1).................... .05 .12 .15 .24 .24
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--net
(1).................... 5.48 .42 1.59 (.75) 1.88
-------- -------- -------- -------- --------
Total from investment
operations............. 5.53 .54 1.74 (.51) 2.12
-------- -------- -------- -------- --------
LESS DIVIDENDS AND DIS-
TRIBUTIONS:
Investment income--net.. (.07) (.14) (.17) (.15) (.13)
Realized gain on invest-
ments--net............. (.28) (.70) (.08) (.49) (.01)
-------- -------- -------- -------- --------
Total dividends and dis-
tributions............. (.35) (.84) (.25) (.64) (.14)
-------- -------- -------- -------- --------
Net asset value, end of
period................. $ 16.80 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:++
Based on net asset value
per share.............. 68.96%++ 5.17% 17.02% (4.45)% 22.29%++
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.47%** 1.71% 1.64% 1.77% 1.71%**
======== ======== ======== ======== ========
Investment income
(loss)--net............ .22%** (.04)% 1.73% 1.98% 2.69%**
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $320,654 $142,285 $126,417 $111,947 $104,033
======== ======== ======== ======== ========
Portfolio turnover...... 37.27% 91.72% 71.05% 84.74% 64.53%
======== ======== ======== ======== ========
</TABLE>
- --------
+ Commencement of Operations.
++ Total investment returns exclude the effects of sales loads.
* Based on average number of shares outstanding.
** Annualized.
++Aggregate total investment return.
(1)Foreign currency transaction amounts have been reclassified to conform to
the 1993 presentation.
5
<PAGE>
SPECIAL AND RISK CONSIDERATIONS
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms than securities
of the company available for purchase by nationals.
A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act, the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for
the Fund to invest indirectly in certain smaller capital markets. Shares of
certain closed-end investment companies may at times be acquired only at market
prices representing premiums to their net asset values. If the Fund acquires
shares in closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund and, indirectly, the expenses of
such closed-end investment companies. (Under the laws of a certain state, the
Fund currently may not pay the Manager a management fee with respect to the
Fund's assets invested in the shares of another investment company on which
such other investment company is charging a management fee. The Manager has
agreed to waive its management fee to the extent necessary to comply with this
current state law requirement.) The Fund also may seek, at its own cost, to
create its own investment entities under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the Investment Company Act restricts the
Fund's investments in any equity security of an issuer which, in its most
recent fiscal year, derived more than 15% of its revenues from "securities
related activities", as defined by the rules thereunder. These provisions may
also restrict the Fund's investments in certain foreign banks and other
financial institutions.
International Investing in Countries with Smaller Capital Markets. Foreign
investments in smaller capital markets involve risks not involved in domestic
investment, including fluctuations in foreign exchange rates, future political
and economic developments, different legal systems and the existence or
possible imposition of exchange controls or other foreign or U.S. governmental
laws or restrictions applicable to such investments. These risks are often
heightened for investments in small capital markets. Because the Fund will
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates may affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments insofar as U.S. investors are concerned. Foreign currency exchange
rates are determined by forces of supply and demand in the foreign exchange
markets. These forces are, in turn, affected by international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. With respect to certain countries, there may be
the possibility of expropriation of assets, confiscatory taxation, high rates
of inflation, political or social instability or diplomatic developments which
could affect investment in those countries. In addition, certain foreign
investments may be subject to foreign withholding taxes.
6
<PAGE>
There may be less publicly available information about an issuer in a smaller
capital market than would be available about a U.S. company, and it may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
Smaller capital markets, while often growing in trading volume, typically
have substantially less volume than U.S. markets, and securities in many
smaller capital markets are less liquid and their prices may be more volatile
than securities of comparable U.S. companies. Brokerage commissions, custodial
services, and other costs relating to investment in smaller capital markets are
generally more expensive than in the United States. Such markets 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.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays 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 could result either in losses to the Fund due to subsequent declines
in value of the portfolio security or, if the Fund has entered into a contract
to sell the security, could result in possible liability to the purchaser.
There is generally less government supervision and regulation of exchanges,
brokers and issuers in countries having smaller capital markets than there is
in the United States.
As a result, management of the Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular country. The Fund may invest in countries
in which foreign investors, including management of the Fund, have had no or
limited prior experience. Due to its emphasis on securities of issuers located
in smaller capital markets 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.
Hedging Strategies. The Fund may engage in various portfolio strategies to
seek to hedge its portfolio against movements in the equity markets, interest
rates and exchange rates between currencies by the use of options, futures and
options on futures. Utilization of options and futures transactions involves
the risk of imperfect correlation in movements in the price of options and
futures and movements in the price of the securities, interest rates or
currencies which are the subject of the hedge. Options and futures transactions
in foreign markets are also subject to the risk factors associated with foreign
investments generally, as discussed above. There can be no assurance that a
liquid secondary market for options and futures contracts will exist at any
specific time.
No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it 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 are predominately
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. The Fund does
not intend to purchase debt securities that are in default or which Merrill
Lynch Asset Management, L.P., doing business as Merrill Lynch Asset Management
(the "Manager"), believes will be in default.
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Borrowing. The Fund may borrow up to 20% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.
Non-Diversified Status. 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 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.
Limitations on Share Transactions. The Fund is designed for long-term
investors. To permit the Fund to invest the net proceeds from the sale of its
shares in an orderly manner, the Fund may, from time to time, suspend the sale
of its shares, except for dividend reinvestments. The Fund also reserves the
right to limit the number of its shares that may be purchased by a person
during a specified period of time or in the aggregate.
Fees and Expenses. The management fee (at the annual rate of 1.00% of the
Fund's average daily net assets) and other operating expenses of the Fund may
be higher than the management fees and operating expenses of other mutual funds
managed by the Manager and other investment advisers. Limitations on the growth
of the Fund could adversely affect its operating expense ratio.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
investment objective of the Fund is to seek long-term capital appreciation by
investing in securities, principally equities, of issuers in countries having
smaller capital markets. Except for Temporary Investments as discussed and
defined below, all of the Fund's assets will consist of direct or indirect
investments in countries having smaller capital markets. The investment
objective of the Fund described above 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, as defined in the Investment Company Act.
It is currently expected that under normal conditions at least 65% of the
Fund's net assets will be invested in equity securities. The Fund may employ a
variety of investments and techniques to hedge against market and currency
risk. There can be no assurance that the Fund's investment objective will be
achieved.
For purposes of its investment objective, the Fund considers countries having
smaller capital markets to be all countries other than the four countries
having the largest equity market capitalizations. Currently, these four
countries are Japan, the United Kingdom, the United States and Germany. On June
30, 1993, those countries' equity market capitalizations totalled approximately
79.5% of the world's equity market capitalization according to data provided by
Morgan Stanley Capital International. The Fund will at all times, except during
defensive periods, maintain investments in at least three countries having
smaller capital markets.
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The Fund seeks to benefit from economic and other developments in smaller
capital markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having smaller capital markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly so-called "emerging" countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more market-
oriented economies, may experience relatively high rates of economic growth.
Other countries (such as France, the Netherlands and Spain), although having
relatively mature smaller capital markets, may also be in a position to benefit
from local or international developments encouraging greater market orientation
and diminishing governmental intervention in economic affairs.
Many investors, particularly individuals, lack the information, capability or
inclination to invest in countries having smaller capital markets. It also may
not be permissible for such investors to invest directly in certain such
markets. Unlike many intermediary investment vehicles, such as closed-end
investment companies that invest in a single country, the Fund intends to
diversify investment risk among the capital markets of a number of countries.
The Fund will not necessarily seek to diversify investments on a geographical
basis or on the basis of the level of economic development of any particular
country.
In its investment decision-making, the Manager will emphasize the allocation
of assets among certain countries' capital markets, rather than the selection
of particular industries or issuers. Because of the general illiquidity of the
capital markets in some countries, the Fund may invest in a relatively small
number of leading or actively traded companies in a country's capital markets
in the expectation that the investment experience of the securities of such
companies will substantially represent the investment experience of the
country's capital markets as a whole.
The Fund also may invest in debt securities of issuers in countries having
smaller capital markets. Capital appreciation in debt securities may arise as a
result of a favorable change in relative foreign exchange rates, in relative
interest rate levels, or in the creditworthiness of issuers. In accordance with
its investment objective, the Fund will not seek to benefit from anticipated
short-term fluctuations in currency exchange rates. The Fund may, from time to
time, invest in debt securities with relatively high yields (as compared to
other debt securities meeting the Fund's investment criteria), notwithstanding
that the Fund may not anticipate that such securities will experience
substantial capital appreciation. Such income can be used, however, to offset
the operating expenses of the Fund.
The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("governmental entities"), issued or guaranteed
by international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders", usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
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The Fund has established no rating criteria for the debt securities in which
it 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 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.
For purposes of the Fund's investment objective, an issuer ordinarily will be
considered to be located in the country where the primary trading market of its
securities is located. The Fund, however, may consider a company to be located
in countries having smaller capital markets, without reference to its domicile
or to the primary trading market of its securities, when at least 50% of its
non-current assets, capitalization, gross revenues or profits in any one of the
two most recent fiscal years represents (directly or indirectly through
subsidiaries) assets or activities located in such countries. The Fund also may
consider closed-end investment companies to be located in the country or
countries in which they primarily make their portfolio investments.
The Fund reserves the right, as a temporary defensive measure or to provide
for redemptions or in anticipation of investment in countries having smaller
capital markets, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and short-term securities, including money market securities
("Temporary Investments"). The Fund may invest in the securities of foreign
issuers in the form of American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities
convertible into securities of foreign issuers. The Fund may invest in
unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of such ADRs.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to hedge its portfolio
against adverse movements in equity, debt and currency markets. The Fund has
authority to purchase and write (i.e., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below and in "Risk Factors in Options
and Futures Transactions" below), the Manager believes that, because the Fund
will engage in options and futures transactions only 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. 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. Furthermore, the Fund will only engage
in hedging activities from time to time and will not necessarily engage in
hedging transactions in all the smaller capital markets in which the Fund is
invested at any given time. Also, the Fund may not necessarily be engaging in
hedging activities
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when movements in any particular equity, debt and currency markets occur.
Reference is made to the Statement of Additional Information for further
information concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. 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.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written. The Fund will not write put options if the aggregate value of
the obligations underlying puts shall exceed 50% of the Fund's net assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security 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 option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
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 costs. 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. In certain circumstances, the Fund may purchase call options on
securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. The Fund will not purchase options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. The Fund may purchase or write
put and call options on stock indices to hedge against the risks of market-wide
stock price movements in the securities in which the Fund invests. Options on
indices are similar to
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options on securities except that on exercise or assignment, the parties to the
contract pay or receive an amount of cash equal to the difference between the
closing value of the index and the exercise price of the option times a
specified multiple. The Fund may invest in stock index options based on a broad
market index or based on a narrow index representing an industry or market
segment.
The Fund may also 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 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 does not require actual delivery of
securities but results 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 connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitation as described below under "Restrictions on the Use of
Futures Transactions".
The Fund may sell 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 securities markets and anticipates a significant market
advance, it may purchase 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
futures contracts will be terminated by offsetting sales. The Manager does not
consider purchases of futures contracts to be a speculative practice under
those 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 futures
contract or the purchase of a call option or the writing of a put option on a
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 also has authority to purchase and write call and put options on
futures contracts and stock indices 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 may purchase put
options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, the Fund may purchase call
options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated
by the buyer and seller. See "Restrictions on OTC Options" below for
information as to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against
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possible variations in the foreign exchange rates among these currencies. This
is accomplished through contractual agreements to purchase or 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 foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund has no limitation on transaction hedging. The Fund will not speculate
in foreign forward exchange. The Fund may not commit more than 15% of its
assets to position hedging contracts. If the Fund enters into a position
hedging transaction, the Fund's custodian will place cash or liquid debt
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
If the value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account so that the value
of the account will equal the amount of the Fund's commitment with respect to
such contracts. 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.
The Fund is also authorized to purchase or sell listed or over-the-counter
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. Such transactions may be effected with respect to
hedges on non-U.S. dollar 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 franc denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of francs for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the franc 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 francs for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such a call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the franc to the
dollar. The Manager believes that "straddles" 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. 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 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 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. The Fund may not incur potential net
liabilities of more than 20% of its total assets from foreign currency options,
futures or related options.
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Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission ("CFTC") 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
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 and 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.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter stock index options, over-the-counter foreign currency options
and options on foreign currency futures, only with member banks of the Federal
Reserve System and 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 the Manager
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) or which can be sold at a formula price provided for in the OTC option
agreement.
The staff of the Securities and Exchange Commission (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
transaction, 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 10% 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 as
to OTC options 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.
However, the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures
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and movements in the price of the securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of the hedged securities or currencies, the Fund will experience
a gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on the Manager's ability to predict correctly price movements in the
market involved in a particular options or futures transaction. In addition,
options and futures transactions in foreign markets are subject to the risk
factors associated with foreign investments generally. See "Special and Risk
Considerations" above.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures, or in the case of over-
the-counter transactions, the Manager 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) or which can be sold at a formula
price provided for in the OTC option agreement. As a result, it is expected
that the Fund will enter into exchange traded options and futures transactions
only in the relatively mature smaller capital markets such as Australia, Hong
Kong or Sweden, which have liquid secondary markets for such instruments. There
can be no assurance, however, that a liquid secondary market will exist at any
specific time. Thus, it may not be possible to close an options or futures
position. 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 the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that 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 that 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.
OTHER INVESTMENT POLICIES AND PRACTICES
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 may invest in securities of
a single issuer. The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended. See "Additional Information--Taxes". To
qualify, the Fund must comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of the Fund's total assets will be invested
in the securities of a single issuer, and (ii) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer, and the
Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which 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 the Fund invests a relatively
high percentage of its assets in obligations of a limited number of issuers,
the Fund may be more susceptible than a more widely diversified fund to any
single economic, political or regulatory occurrence or to changes in an
issuer's financial condition or in the market's assessment of the issuers.
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Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Special and Risk Considerations" above. Where possible,
the Fund will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and
do not normally involve either brokerage commissions or transfer taxes.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
The Fund has no obligation to deal with any broker in the execution of
transactions in portfolio securities. Under the Investment Company Act, persons
affiliated with the Fund, including Merrill Lynch, are prohibited from dealing
with the Fund as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Affiliated persons of the Fund may serve as its broker in transactions
conducted on an exchange and in over-the-counter transactions conducted on an
agency basis. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., the Fund 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. It is expected that the majority
of the shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than with transactions
in U.S. securities, although the Fund will endeavor to achieve the best net
results in effecting such transactions.
Portfolio Turnover. The Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstance in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100%
under normal conditions, it is impossible to predict portfolio turnover rates.
The portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of 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.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such agreements only
for the purpose of investing in the security
16
<PAGE>
underlying the commitment at a yield and price which is considered advantageous
to the Fund. The Fund will not enter into a standby commitment with a remaining
term in excess of 45 days and will limit its investment in such commitments so
that the aggregate purchase price of the securities subject to such
commitments, together with the value of portfolio securities subject to legal
restrictions on resale, will not exceed 10% of its assets taken at the time of
acquisition of such commitment of security. The Fund will at all times maintain
a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. Under such agreements, the bank or primary dealer
agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period although
it may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect accrued
interest on the underlying obligation; whereas, in the case of purchase and
sale contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition
of the collateral. A purchase and sale contract differs from a repurchase
agreement in that the contract arrangements stipulate that the securities are
owned by the Fund. In the event of a default under such a repurchase agreement
or under a purchase and sale contract, instead of the contractual fixed rate,
the rate of return to the Fund shall be dependent upon intervening fluctuations
of the market value of such securities and the accrued interest on the
securities. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. Repurchase
17
<PAGE>
agreements and purchase and sale contracts maturing in more than seven days are
deemed illiquid by the Commission and are therefore subject to the Fund's
investment restriction limiting investments in securities that are not readily
marketable to 10% of the Fund's net assets. See "Investment Restrictions"
below.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
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. This limitation is a
fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Fund
receives the income on the loaned securities and receives either the income on
the collateral or other compensation, i.e., negotiated loan premium or fee, for
entering into the loan and thereby increases its yield. Such loans are
terminable at any time, and the borrower, after notice, will be required to
return borrowed securities within five business days. In the event that the
borrower defaults on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value
of the collateral falls below the market value of the borrowed securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies which are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers of any particular industry (excluding
the U.S. Government and its agencies or instrumentalities). Other fundamental
policies include policies which (i) limit investments in securities which
cannot be readily resold because of legal or contractual restrictions or which
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 10% of its net assets, taken at market value, would
be invested in such securities, (ii) limit investments in securities of other
investment companies, except in connection with certain specified transactions
and with respect to investments of up to 10% of the Fund's assets in securities
of closed-end investment companies and (iii) restrict the issuance of senior
securities and limit bank borrowings except that the Fund may borrow amounts of
up to 10% of its assets for extraordinary purposes or to meet redemptions. The
Fund will not purchase securities while borrowings exceed 5% of its total
assets, except (a) to honor prior commitments, or (b) to exercise subscription
rights where outstanding borrowings have been obtained exclusively for
settlements of other securities transactions. The purchase of securities while
borrowings are outstanding will have the effect of leveraging the Fund. Such
leveraging or borrowing increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs which will reduce net income.
Although not a fundamental policy, the Fund will include OTC options and the
securities underlying such options in calculating the amount of its total
assets subject to the limitation set forth in clause (i) above. However, as
discussed above, the Fund may treat the securities it uses as cover for written
OTC options as liquid and, therefore, will exclude such securities from this
restriction, provided it follows a specified procedure. The
18
<PAGE>
Fund will not change or modify this policy prior to the change or modification
by the Commission staff of its position regarding OTC options, as discussed
above.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch & Co., Inc.; Executive Vice President of Merrill Lynch; 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.; Adjunct Professor, Columbia University
Graduate School of Business.
Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund's investment adviser is Merrill Lynch Asset Management, L. P., which
does business as Merrill Lynch Asset Management (the "Manager"). The Manager is
owned and controlled by Merrill Lynch & Co., Inc., 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 an affiliate, Fund
Asset Management, L. P. ("FAM"), acts as the manager for more than 90 other
registered investment companies and offers portfolio management and portfolio
analysis services to individuals and institutions. As of January 31, 1994, the
Manager and FAM had a total of approximately $167.1 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management
19
<PAGE>
of the Fund's portfolio. 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 provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places transactions
accordingly. The Manager is also obligated to perform certain administrative
and management services for the Fund and is obligated to provide all of the
office space, facilities, equipment and personnel necessary to perform its
duties under the Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 1.00% of the
average daily net assets of the Fund. This fee is higher than that of most
mutual funds, including most other mutual funds managed by the Manager, but
management of the Fund believes this fee is justified by the additional
investment research and analysis required in connection with investing in
smaller capital markets. For the fiscal year ended June 30, 1993, the fee paid
by the Fund to the Manager was $1,303,056 (based upon average net assets of
approximately $130.3 million). At April 30, 1994, the net assets of the Fund
aggregated approximately $410.0 million. At this asset level, the annual
management fee would aggregate approximately $4.1 million.
Grace Pineda, Vice President of the Fund, is the Fund's Portfolio Manager.
Ms. Pineda has been a Vice President and Senior Portfolio Manager of the
Manager and its predecessor since 1989. Ms. Pineda has been primarily
responsible for the management of the Fund's portfolio since September 1989.
Ms. Pineda was an analyst and portfolio manager at Clemente Capital, Inc. from
1982 to 1989.
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; registration fees; unaffiliated Directors' fees and expenses;
custodian and transfer agency fees; accounting costs; the costs of issuing and
redeeming shares; and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided 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 June 30, 1993, the Fund reimbursed the Manager $127,749 for accounting
services. For the fiscal year ended June 30, 1993, the ratio of total expenses
to average net assets for Class A shares was 1.71%.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., 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 $7.00 per Class A shareholder account and $9.00 per
Class B shareholder account, nominal miscellaneous fees (e.g., account closing
fees) and is entitled to reimbursement for out-of-pocket expenses incurred by
it under the Transfer Agency Agreement. (Before September 15, 1993, such fee
was $8.00 per Class A shareholder account, not $7.00.) For the fiscal year
ended June 30, 1993, the Fund paid the Transfer Agent $124,719 pursuant to the
Transfer Agency Agreement for providing transfer agency services. At April 30,
1994, the Fund had 33,999 Class A shareholder accounts. At this level of Class
A shareholder accounts, the annual fee payable to the Transfer Agent would
aggregate approximately $237,993 for Class A shares, plus miscellaneous and
out-of-pocket expenses. The Fund had not yet commenced the public offering of
its Class B shares on the date of the Prospectus.
20
<PAGE>
PURCHASE OF SHARES
The Distributor, a subsidiary of the Manager, 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 at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. As to purchase orders received by securities
dealers prior to 4:15 p.m., New York time, which includes orders received after
the determination of the net asset value on the previous day, the applicable
offering price will be based on the net value determined as of 4:15 p.m., New
York time, on the day the orders are placed with the Distributor, provided the
orders are received by the Distributor prior to 4:30 p.m., New York time, on
that day. The applicable offering price for purchase orders is based on the net
asset value of the Fund next determined after receipt of the purchase orders by
the Distributor. If the purchase orders are not received by the Distributor
prior to 4:30 p.m., New York time, 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 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) 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 two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the deferred sales arrangements, any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses paid by the account maintenance fee and have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees are paid. The
two classes also have different exchange privileges. See "Shareholder
Services -- Exchange Privilege". The net income attributable to Class B shares
and the dividends payable on Class B shares will be reduced by the amount of
the account maintenance and distribution fees and incremental transfer agency
costs relating to Class B shares; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has
undistributed net income. Sales personnel may receive different compensation
for selling Class A or Class B shares. Investors are advised that only Class A
shares may be available for purchase through securities dealers, other than
Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing charges.
21
<PAGE>
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to an ongoing account
maintenance fee and distribution fee as described below. However, because
initial sales charges are deducted at the time of purchase, such investors
would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge is subject to certain limits as set forth
below under "Purchase of Shares -- Deferred Sales Charge Alternative -- Class B
Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a four-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold his investment at
least 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee to exceed the initial sales charge. This example does not take
into account the time value of money, which further reduces the impact of the
ongoing account maintenance and distribution fees on the investment,
fluctuations in net asset value, the effect of the return on the investment
over this period of time or the effect of any limits that may be imposed upon
the payment of the distribution fee and the contingent deferred sales charge.
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
state laws, will seek to assure that no such conflict arises.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE SALES CHARGE AS SELECTED DEALERS
AS PERCENTAGE OF PERCENTAGE* OF THE AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED THE OFFERING PRICE
------------------ ---------------- ------------------- ------------------
<S> <C> <C> <C>
Less than $10,000....... 6.50% 6.95% 6.25%
$10,000 but less than
$25,000................ 6.00 6.38 5.75
$25,000 but less than
$50,000................ 5.00 5.26 4.75
$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..... .75 .76 .65
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
22
<PAGE>
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement
or savings plan, such as a tax qualified retirement plan under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code"), a deferred
compensation plan under Section 403(b) and Section 457 of the Code, other
deferred compensation arrangements, VEBA plans and non-qualified After Tax
Savings and Investment programs maintained on the Merrill Lynch Group Employee
Services system, herein referred to as "Employer Sponsored Retirement or
Savings Plans"), or a purchase by a TMASM Managed Trust, of Class A shares of
the Fund. In addition, purchases of Class A shares of the Fund made in
connection with a single investment of $1 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to an initial sales
charge. Purchases described in this paragraph will be subject to a contingent
deferred sales charge if the shares are redeemed within one year after
purchase at the following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
------------------ -------------------------------
<S> <C>
$1 million up to $2.5 million............... 1.00%
Over $2.5 million up to $3.5 million........ 0.60%
Over $3.5 million up to $5 million.......... 0.40%
Over $5 million............................. 0.25%
</TABLE>
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 shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act. During the fiscal
year ended June 30, 1993, the Fund sold 2,825,803 Class A shares for aggregate
net proceeds to the Fund of $31,697,736. The gross sales charges for the sale
of Class A shares for that period were $393,637, of which $366,472 was
received by Merrill Lynch and $27,165 was received by the Distributor.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc., to directors and trustees of certain other Merrill Lynch sponsored
investment companies, to participants in certain benefit plans, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Class A shares may be offered at net asset value in connection
with the acquisition of assets of other investment companies. No initial sales
charges are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A shares of
the Fund are also offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch financial
consultant and who has invested in a mutual fund sponsored by a non-Merrill
Lynch company for which Merrill Lynch has served as a selected dealer and
where Merrill Lynch has either received or given notice that such arrangement
will be terminated if the following conditions are satisfied: first, the
investor must purchase Class A shares of the Fund with proceeds from a
redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination. Class A shares are offered with reduced sales charges and, in
certain circumstances, at net asset value, to participants in the Merrill
Lynch Blueprint SM Program. Class A shares are offered at net asset value to
(i) certain retirement plans, including eligible 401(k) plans, provided such
23
<PAGE>
plans meet the required minimum number of eligible employees or required amount
of assets advised by the Manager or any of its affiliates and (ii) certain
Employer Sponsored Retirement or Savings Plans, provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by the Manager or any of its affiliates. Class A shares of the Fund are
also offered at net asset value to shareholders of certain closed-end funds
advised by the Manager or FAM who wish to reinvest the net proceeds from a sale
of their closed-end fund shares of common stock in shares of the Fund, provided
certain conditions are met. For example, Class A shares of the Fund and certain
other mutual funds advised by the Manager or FAM are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. (formerly
known as Merrill Lynch Prime Fund, Inc.) who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock of Merrill Lynch Senior
Floating Rate Fund, Inc. in shares of such funds.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being 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 shares at the time of purchase from its own funds. The proceeds
of the contingent deferred sales charge and the ongoing distribution fee
discussed below are used to defray Merrill Lynch's expenses, including
compensating its financial consultants. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to financial consultants
for selling Class B shares. Payments by the Fund to the Distributor of the
distribution fee under the distribution plan described below also may be used
in whole or in part by the Distributor for the purpose. The combination of the
contingent deferred sales charge and the ongoing distribution fee facilitates
the ability of the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. 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 contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
24
<PAGE>
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- -------------------
<S> <C>
0-1.................................................. 4.0%
1-2.................................................. 3.0%
2-3.................................................. 2.0%
3-4.................................................. 1.0%
4 and thereafter..................................... None
</TABLE>
In determining whether a contingent deferred sales charge 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 purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12, and during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the charge because of dividend reinvestment. With
respect to the remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase).
The contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability (as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. The contingent deferred sales charge 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 contingent deferred sales charge also is
waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. Additional information concerning the waiver of the contingent
deferred sales charge is set forth in the Statement of Additional Information.
Distribution Plan. Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act,
the Fund pays the Distributor an ongoing account maintenance fee and a
distribution fee, which are accrued daily and paid monthly, at the annual
rates of 0.25% and 0.75%, respectively, of the average daily net assets of the
Class B shares of the Fund. Pursuant to a sub-agreement with the Distributor,
Merrill Lynch also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the Distributor and
Merrill Lynch for providing account maintenance services to Class B
shareholders. The ongoing distribution fee compensates the Distributor and
Merrill Lynch for providing shareholder and distribution services and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B shares of the Fund.
25
<PAGE>
The Distribution Plan was designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the distribution fee under the Distribution Plan and the contingent
deferred sales charge are the same as those of the initial sales charge with
respect to the Class A shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B shares.
The payments under the Distribution Plan are based on a percentage of average
daily net assets regardless of the amount of expenses incurred, and
accordingly, distribution-related revenues 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 Distribution Plan. 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, the distribution fees, the contingent
deferred sales charges 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, the distribution fees and contingent deferred sales charges,
and the expenses consist of financial consultant compensation.
The Fund has no obligation with respect to the distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Plan from year to year. However,
the Distributor intends to seek annual continuation of the Distribution Plan.
In their review of the Distribution Plan, the Directors will not be asked to
take into consideration expenses incurred in connection with the distribution
of Class A shares or shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and the
contingent deferred sales charge in the case of Class B shares will not be used
to subsidize the sale of Class A shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges such as the Fund's distribution fee and the contingent deferred
sales charge but not the account maintenance fee. As applicable to the Fund,
the maximum sales charge rule limits the aggregate of distribution fee payments
and contingent deferred sales charges payable by the Fund to (1) 6 1/4% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the contingent deferred sales charge). 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") 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, and any contingent
deferred sales charges 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.
26
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of the
Fund upon receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any contingent deferred sales charge
which may be applicable to Class B shares, 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 shareholders' cost, depending
on the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by tendering
the shares directly to the Transfer Agent, Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 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 term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents, such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment will be mailed
within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a U.S. bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange on the day received and that such request is received
by the Fund from such dealer not later than 4:30 p.m., New York time, on the
same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 4:30 p.m., New York time, in order to
obtain that day's closing price.
27
<PAGE>
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable contingent
deferred sales charge in the case of Class B shares). Securities firms which do
not have selected dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice of repurchase
to the Fund. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares to such customers. Redemptions
directly through the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by
the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement
privilege is a one-time privilege and may be exercised by the Class A
shareholder only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. 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 quarterly statements
from the Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
quarterly 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
Investment Account at any time by mailing a check directly to the Transfer
Agent. Shareholders may also 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 shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A shares so that the cash proceeds can
be transferred to the account at the new firm, or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those
Class A shares.
28
<PAGE>
Shareholders interested in transferring their Class B shares from Merrill
Lynch and who do not wish to have an Investment Account maintained for such
shares at the Transfer Agent may request their new brokerage firm to maintain
such shares in an account registered in the name of the brokerage firm for the
benefit of the shareholder. If the new brokerage firm is willing to accommodate
the shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
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 contingent
deferred sales charge) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. 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 Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A shares and the sales charge payable at the time
of the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the program of Class A
shares of a fund for Class A shares of the Fund will be made solely on the
basis of the relative net asset values of the shares being exchanged.
Therefore, there will not be a charge for any difference between the sales
charge previously paid on the shares of the other fund and the sales charge
payable on the shares of the Fund being acquired in the exchange under this
program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share without the payment of any
contingent deferred sales charge that might otherwise be due upon redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the contingent deferred sales charge that may be payable upon a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares.
Class A and Class B shareholders of the Fund may also exchange their shares for
shares of certain money market funds, but in the case of an exchange from Class
B shares, the period of time that shares are held in a money market fund will
not count toward satisfaction of the holding period requirement for purposes of
reducing the contingent deferred sales charge. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. For further
information, see "Shareholder Services--Exchange Privilege" in the Statement of
Additional Information.
29
<PAGE>
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Fund, without sales charge, at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or telephone call (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with 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. No contingent deferred sales charge will be imposed on redemption
of shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions. The Automatic Investment Program is not available
to shareholders whose shares are held in a brokerage account with Merrill Lynch
other than a CMA (R) account.
Systematic Withdrawals and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
in the form of payments by check or through automatic payment by direct deposit
to his bank account on either a monthly or quarterly basis. A Class A
shareholder whose shares are held within a CMA (R), CBA (R) or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject
to certain conditions. Regular additions of Class A shares may be made to an
investor's Investment Account by prearranged charges of $50 or more to his
regular bank account. Investors who maintain CMA (R) accounts may arrange to
have periodic investments made in the Fund in their CMA accounts or in certain
related accounts in amounts of $250 or more through the CMA Automatic
Investment Program. The Automatic Investment Program is not available to
shareholders whose shares are held in a brokerage account with Merrill Lynch
(other than a CMA (R) account).
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 and Class B shares in accordance with a formula
specified by the Securities and Exchange 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 the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
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 Class B shares will be borne exclusively by that
class. The Fund will include performance data for both Class A and Class B
shares of the Fund in any advertisement or information including performance
data of the Fund.
30
<PAGE>
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A shares or waiver of the
contingent deferred sales charge in the case of Class B shares (such as
investors in certain retirement plans), performance data may take into account
the reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, 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 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's 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 representative of the
Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid at least annually. All
net realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. The per share dividends and
distributions on Class B shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable to the Class B shares.
See "Additional Information--Determination of Net Asset Value". Dividends and
distributions may be reinvested automatically in shares of the Fund, at net
asset value without sales load. A shareholder whose account is maintained at
the Transfer Agent may elect in writing to receive any such dividends or
distributions or both, in cash. A shareholder whose account is maintained
through Merrill Lynch may elect
31
<PAGE>
either to have both dividends and distributions reinvested or both paid in
cash. Dividends and distributions are taxable to shareholders as described
below whether they are reinvested in shares of the Fund or received in cash.
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 a Federal income tax
requirement that certain percentages of its ordinary income and capital gains
be distributed during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments 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 dividend distributions, and (b) distributions made
before the losses were realized would be recharacterized as a return of capital
to shareholders, rather than as an ordinary dividend, reducing each
shareholder's tax basis in the Fund shares for Federal income tax purposes. For
a detailed discussion of the Federal tax considerations relevant to foreign
currency transactions, see "Additional Information--Taxes". If in any fiscal
year, the Fund has net income from certain foreign currency transactions, such
income will be distributed annually.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily as of 4:15 p.m., New York
time, following the close of the New York Stock Exchange ("NYSE") on each day
during which the NYSE is open for trading or on such other day that there is
sufficient trading in portfolio securities that the net asset value of the
Fund's shares may be materially affected. 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 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 fee payable to the Manager and the account maintenance and
distribution fees payable to the Distributor, are accrued daily. The per share
net asset value of the Class B shares generally will be lower than the per
share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares. It is expected, however,
that the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distribution which will differ by
approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the date the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid
prices obtained from one or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which are
32
<PAGE>
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. 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 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 Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A and Class B shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in 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.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% 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 in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such
33
<PAGE>
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"). 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.
The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of distributions from such company and on gain from the
disposition of the shares of such company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid
the taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under proposed regulations, the Fund might
elect to "mark to market" at the end of each taxable year all shares that it
holds in PFICs. If it made this election, the Fund would recognize as ordinary
income any increase in the value of such shares. Unrealized losses, however,
will not be recognized. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to its distributions from
PFICs, but in any particular year might be required to recognize income in
excess of the distributions it receives from PFICs and its proceeds from
dispositions of PFIC stock.
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 dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing the basis of each shareholder's
Fund shares and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's basis in Fund shares (assuming the
shares were held as a capital asset).
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase
34
<PAGE>
of the new Class A shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new Class A shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Dividend Reinvestment Plan 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 or administrative action
either prospectively or retroactively.
Ordinary income dividends 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.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 14, 1989. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes designated Class A Common Stock and Class B
Common Stock, each of which consists of 100,000,000 shares. Both Class A Common
Stock and Class B Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B shares bear
certain expenses related to the account maintenance and distribution of such
shares and have exclusive voting rights with respect to matters relating to
such account maintenance and distribution expenditures. See "Purchase of
Shares". The Fund has received an order from the Securities and Exchange
Commission permitting the issuance and sale of multiple classes of Common
Stock. The Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act 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 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 or conversion rights. Each share of Class A
Common Stock and Class B Common Stock is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund on liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, the Class B shares bear certain
expenses related to the distribution of such shares.
35
<PAGE>
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:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
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 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.
36
<PAGE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase . . . . Class A shares or . . . .
Class B shares (choose one) of Merrill Lynch Developing Capital Markets Fund,
Inc. and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000) (subsequent investments $50
or more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
1. ................................ 4. ...................................
2. ................................ 5. ...................................
3. ................................ 6. ...................................
(Please list all funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
Distribution Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options One [_] pay dividends in cash One [_] pay capital gains in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
----------------
(Please Print)
Name.............................................. [_][_][_][_][_][_][_][_][_]
First Name Initial Last Name Social Security No.
Name of Co-Owner (if any)......................... or Taxpayer
First Name Initial Last Name Identification No.
Address...........................................
.................................................. .....................,
(Zip Code) Date 19..
Occupation................ Name and address of employer .................
.........................
.........................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed in the Prospectus 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 UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner............... Signature of Co-Owner (if any)...............
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
Gentlemen: ..........., 19......
Date of Initial
Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Developing Capital Markets 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:
[_] $10,000 [_] $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 Developing Capital
Markets Fund, Inc. prospectus.
I agree to the terms and conditions of the 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 Developing Capital Markets 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.............................
- -------------------------------------------------------------------------------
37
<PAGE>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Developing Capital Markets Fund, Inc. at cost or
current offering price.
Begin systematic withdrawal on Withdrawals to be made either (check
..........................., 19.. one)[_] Monthly[_] Quarterly*
[Date]
*Quarterly withdrawals are made on the 24th
day of March, June, September and December.
Specify withdrawal amount (check one): [_] $. . . . . . . . . or [_] . . . .
. % of the current value of Class A shares in the account.
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
- -------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK (B) I HEREBY AUTHORIZE PAYMENT BY
Draw checks payable DIRECT DEPOSIT TO BANK ACCOUNT AND
(check one) (IF NECESSARY) DEBIT ENTRIES AND
ADJUSTMENTS FOR ANY CREDIT ENTRIES
MADE IN ERROR TO MY ACCOUNT.
[_] as indicated in Item 1. Specify type of account (check one):
[_] checking[_] savings
[_] to the order of................. I agree that this authorization will
remain in effect until I provide
Mail to (check one) written notification to Financial
Data Services, Inc. amending or
terminating this service.
[_] the address indicated in Item 1.
Name on your Account..................
[_] Name (Please Print)............. Bank..................................
Bank #........ Account #...............
Address............................... Bank Address..........................
Signature of Depositor.... Date........
Signature of Owner.................... Signature of Depositor (if joint
account)..............................
Signature of Co-Owner (if any)........ NOTE: If Automatic Direct Deposit is
elected, your blank, unsigned check
marked "VOID" or a deposit slip from
your savings account should accompany
this Application.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase ........ Class A shares or ........ Class B shares
(choose one) of Merrill Lynch Developing Capital Markets Fund, Inc., subject
to the terms set forth below.
- -------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR
ACH
You are hereby authorized to draw a DEBITS DRAWN BY FINANCIAL DATA
check or an ACH debit each month on SERVICES, INC.
my bank account for investment in To...............................Bank
Merrill Lynch Developing Capital (Investor's Bank)
Markets Fund, Inc. as indicated Bank Address.........................
below:
Amount of each check or ACH debit City...... State...... Zip Code......
$..................................... As a convenience to me, I hereby
Account No.......................... request and authorize you to pay and
Please date and invest checks or charge to my account checks or ACH
draw ACH debits on the 20th of each debits drawn on my account by and
month beginning....................... payable to Financial Data Services,
(Month) Inc., Transfer Agency Mutual Fund
or as soon thereafter as possible. Operations, Jacksonville, Florida
32232-5289. I agree that your rights
I agree that you are preparing in respect to each such check or
these checks or drawing these debits debit shall be the same as if it
voluntarily at my request and that were a check drawn on you and signed
you shall not be liable for any loss personally by me. This authority is
arising from any delay in preparing to remain in effect until revoked
or failure to prepare any such check personally by me in writing. Until
or debit. If I change banks or desire you receive such notice, you shall
to terminate or suspend this program, be fully protected in honoring any
I agree to notify you promptly in such check or debit. I further agree
writing. that if any such check or debit be
I further agree that if a check or dishonored, whether with or without
debit is not honored upon presenta- cause and whether intentionally or
tion, Financial Data Services, Inc. inadvertently, you shall be under no
is authorized to discontinue immedi- liability.
ately the Automatic Investment Plan
and to liquidate sufficient shares
held in my account to offset the pur-
chase made with the returned check or
dishonored debit.
......... .....................
Date Signature of
Depositor
......... .....................
Bank Signature of Depositor
............ ..................... Account (If joint account,
Date Signature of Number both must sign)
Depositor NOTE: IF AUTOMATIC INVESTMENT PLAN
..................... IS ELECTED, YOUR BLANK, UNSIGNED
Signature of Depositor CHECK MARKED "VOID" SHOULD ACCOMPANY
(If joint account, THIS APPLICATION.
both must sign)
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
We hereby authorize Merrill Lynch
- - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
- - .....................................
Dealer Name and Address
This form when completed should be By ..................................
mailed to: Authorized Signature of Dealer
Merrill Lynch Developing Capital
Markets Fund, Inc. [_][_][_] [_][_][_][_] .............
c/o Financial Data Services, Inc. Branch-Code F/C No. F/C Last Name
Transfer Agency Mutual Fund
Operations
P.O. Box 45289 [_][_][_] [_][_][_][_][_]
Jacksonville, Florida 32232-5289 Dealer's Customer A/C No.
38
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
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:
Box 9011
Princeton, New Jersey 08543-9011
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
Independent Auditors
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE 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
Alternative Sales Arrangements............................................. 3
Consolidated Financial Highlights.......................................... 5
Special and Risk Considerations............................................ 6
Investment Objective and Policies.......................................... 8
Management of the Fund..................................................... 19
Board of Directors........................................................ 19
Management and Advisory Arrangements...................................... 19
Transfer Agency Services.................................................. 20
Purchase of Shares......................................................... 21
Alternative Sales Arrangements............................................ 21
Initial Sales Charge Alternative--
Class A Shares........................................................... 22
Deferred Sales Charge Alternative--
Class B Shares........................................................... 24
Redemption of Shares....................................................... 27
Redemption................................................................ 27
Repurchase................................................................ 27
Reinstatement Privilege--Class A Shares................................... 28
Shareholder Services....................................................... 28
Performance Data........................................................... 30
Additional Information..................................................... 31
Dividends and Distributions............................................... 31
Determination of Net Asset Value.......................................... 32
Taxes..................................................................... 33
Organization of the Fund.................................................. 35
Shareholder Reports....................................................... 36
Shareholder Inquiries..................................................... 36
Authorization Form......................................................... 37
</TABLE>
Code # 10893
Prospectus
[ART]
- -------------------------------------------------------------------------------
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
July 1, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is a non-
diversified mutual fund seeking long-term capital appreciation by investing in
securities, principally equities, of issuers in countries having smaller
capital markets. This objective of the Fund reflects the belief that investment
opportunities may result from an evolving long-term international trend
favoring more market-oriented economies, a trend that may especially benefit
certain countries having smaller capital markets. The Fund may employ a variety
of instruments and techniques to hedge against market and currency risk.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares") or (ii) on a deferred basis (the "Class B shares"). These
alternatives permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales charges with
respect to the Class B shares are the same as those of the initial sales charge
with respect to the Class A shares. Each share of Class A and Class B
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the account
maintenance fee and distribution fee and certain other costs resulting from the
deferred sales charge arrangement and have exclusive voting rights with respect
to the account maintenance and distribution fees. The two classes also have
different exchange privileges.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated July 1,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is July 1, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Manager"), will effect portfolio
transactions without regard to holding period, if, in its judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or due to general market,
economic or financial conditions. Accordingly, while the Fund anticipates that
its annual turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of U.S. Government
securities and of all other securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of securities
in the portfolio during the year. For the fiscal years ended June 30, 1992, and
1993, the Fund's portfolio turnover rate was 71.05% and 91.72%, respectively.
The Fund is subject to the Federal income tax requirement that less than 30% of
the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
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 on each day the Fund determines its net asset value 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. See "Redemption of Shares". Under present
conditions, the Manager does not believe that these considerations will have
any significant effect on its portfolio strategy, although there can be no
assurance in this regard.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" 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, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio securities,
purchase put and call options on securities and engage in transactions in stock
index options, stock index futures and stock futures and financial futures, and
related options on such futures. The Fund may also deal in forward foreign
exchange transactions, foreign currency options and futures and related options
on such futures. Each of such portfolio strategies is described in the
Prospectus. Although
2
<PAGE>
certain risks are involved in options and futures transactions (as discussed in
the Prospectus and below), the Manager believes that, because the Fund will
engage in options and futures transactions only 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. 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 the Fund may
utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. 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.
Covered call options serve as a particular hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written. The Fund will not write put options if the aggregate value of
the obligations underlying the put options shall exceed 50% of the Fund's net
assets.
Options referred to herein and in the Fund's Prospectus may be options traded
on foreign securities exchanges such as the Amsterdam Stock Exchange, the Stock
Exchange of Singapore or the Sydney Stock Exchange. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. If a secondary market does not exist, it might not be
possible to effect closing transactions in particular options, with the result,
in the case of a covered call option, that the Fund will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon
3
<PAGE>
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the clearing corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into OTC options
transactions with respect to portfolio securities 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 staff of the Securities and Exchange Commission (the "Commission") has
taken the position that OTC options and the assets used as cover for written
OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity 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; 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 costs. 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. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund
may purchase either exchange-traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell 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
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relevant contract market, which varies, but is generally about 5% 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 contract more or less valuable, a
process known as "mark to 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.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act 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 a "senior security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of the
Fund will be conducted on a spot, i.e., cash basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. The Fund has authority, however, to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rates among these currencies. This is accomplished through contractual
agreements to purchase or 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 foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. 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. The Fund will enter
into such transactions only to the extent, if any, deemed appropriate by the
Manager. The Fund will not enter into a position hedging commitment if, as a
result thereof, the Fund would have more than 15% of the value of its assets
committed to such contracts. The Fund will not enter into a forward contract
with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
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. Such transactions may be effected with respect to
hedges on non-U.S. dollar 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
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to hedge the stated value in U.S. dollars of an investment in a franc
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of francs
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the francs relative to the dollar will tend
to be offset by an increase in the value of the put option. To offset, in whole
or 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 francs
for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value
of the franc to the dollar. The Manager believes that "straddles" of the type
which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
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. 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.
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 or currencies which are the subject of the hedge. If the prices of
the options and futures contract move 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. The successful use of options
and futures also depends on the Manager's ability to correctly predict price
movements in the market involved in a particular options or futures
transaction.
Prior to exercise or expiration, an exchange-traded option or futures
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. As a result, it is expected that the Fund
will enter into exchange traded options and futures transactions only in the
relatively mature smaller capital markets such as Australia, Hong Kong or
Sweden, which have liquid secondary markets for such instruments. 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) or which can be sold at a
formula price provided for in the OTC option agreement. 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
securities and currencies underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on
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the Fund's ability to hedge effectively its portfolio. There is also the risk
of loss by the Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is
theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or 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.
OTHER INVESTMENT POLICIES AND PRACTICES
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 may invest in securities of
a single issuer. The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended. See "Dividends, Distributions and Taxes--
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 which 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 yield 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.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is
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typically approximately 0.5% of the aggregate purchase price of the security
that the Fund has committed to purchase. The Fund will enter into such
agreements only for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund.
The Fund will not enter into a standby commitment with a remaining term in
excess of 45 days and will limit its investment in such commitments so that the
aggregate purchase price of the securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions
on resale, will not exceed 10% of its assets taken at the time of acquisition
of such commitment or security. The Fund will at all times maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Because the issuance of the
security underlying the commitment is at the option of the issuer, the Fund may
bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. Under such agreements, the bank or primary dealer
agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period although
it may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect the
accrued interest on the underlying obligations; whereas, in the case of
purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, often less than one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require
the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but constitute only
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the collateral. A purchase and sale contract
differs from a repurchase agreement in that the contract arrangements stipulate
that the securities are owned by the Fund. In the event of a default under such
a repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with
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respect to any losses resulting from market fluctuations following the failure
of the seller to perform. The Fund may not invest more than 10% of its net
assets in repurchase agreements or purchase and sale contracts maturing in more
than seven days. While the substance of purchase and sale contracts is similar
to repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community.
Lending of Portfolio Securities. Subject to investment restriction (8) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive collateral therefor in cash or securities issued or guaranteed by the
U.S. Government which are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The purpose of
such loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion
of the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. 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
the borrower to return the securities involved in such transactions.
No Rating Criteria for Debt Securities. 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) which are 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) which are rated below the top four rating categories
or which, in the Manager's judgment, possess similar credit characteristics
("high yield securities"). The Manager considers ratings as one of several
factors in its independent credit analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During such periods, such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
High yield securities frequently have call or redemption features which would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the 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.
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The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect 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 participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or management.
Investments by the Fund in wholly-owned investment entities created under
the laws of certain countries will not be deemed the making of investments
for the purpose of exercising control or management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of the Fund's total assets, taken at market value, would be invested in
such securities. Investments by the Fund in wholly-owned investment
entities created under the laws of certain countries will not be deemed an
investment in other investment companies.
4. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests therein.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The payment by the Fund of initial or
variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
6. Make short sales of securities or maintain a short position.
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7. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale contracts shall
not be deemed to be the making of a loan, and except further that the Fund
may lend its portfolio securities as set forth in (8) below.
8. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans may only be made in
accordance with the guidelines set forth above.
9. Issue senior securities, borrow money or pledge its assets in excess
of 20% of its total assets taken at market value (including the amount
borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings exceed 5% of total assets except (a) to honor prior
commitments or (b) to exercise subscription rights where outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions. (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, and, if applicable,
futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.)
10. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are otherwise not readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if at the time of acquisition more than 10% of its
net assets would be invested in such securities.
11. 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.
12. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral exploration or
development activities.
Additional investment restrictions adopted by the Fund, which may be changed
by the Board of Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York or American Stock Exchange. For purposes of this restriction, warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value.
(ii) Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and
currency futures contracts and related options on such futures.
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(iii) Invest in securities of corporate issuers having a record, together
with predecessors, of less than three years of continuous operation, if
more than 5% of its total assets, taken at market value, would be invested
in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus and in this Statement of Additional Information, as amended from
time to time.
(v) Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than 1/2
of 1% of the securities of such issuer own in the aggregate more than 5% of
the securities of such issuer.
Under the laws of a certain state, the Fund currently may not pay the Manager
a management fee with respect to the Fund's assets invested in the shares of
another investment company on which such other investment company is charging a
management fee. The Manager has agreed to waive its management fee to the
extent necessary to comply with this current state law requirement.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of 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 10% of the total
assets of the Fund, taken at market value, together with all other assets of
the Fund which are illiquid or are otherwise not 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 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 as to OTC options 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. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), or its affiliates except for brokerage transactions permitted under
the Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage". Without such an exemptive order,
the Fund would be prohibited from engaging in portfolio transactions with
Merrill Lynch or 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 participate as an underwriter
or dealer.
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<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director (1)(2)--President of the Manager and
its predecessor since 1977 and Chief Investment Officer since 1976; President
of Fund Asset Management, L.P. ("FAM") and its predecessor since 1977 and Chief
Investment Officer since 1976; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill
Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. since 1990; Director of
the Distributor.
Donald Cecil--Director (2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer--Director (2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly--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 since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
Richard R. West--Director (2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance since 1984, and Dean from 1984 to 1993, of 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.
Terry K. Glenn--Executive Vice President (1)(2)--Executive Vice President of
the Manager and FAM and their predecessors since 1983; Executive Vice President
and Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
Norman R. Harvey--Senior Vice President (1)(2)--Senior Vice President of the
Manager and FAM and their predecessors since 1982; Senior Vice President of
Princeton Services since 1993.
Donald C. Burke--Vice President (1)(2)--Vice President and Director of
Taxation of the Manager and its predecessor since 1990; employee of Deloitte &
Touche from 1982 to 1990.
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<PAGE>
Grace Pineda--Vice President (1)(2)--Vice President of the Manager and its
predecessor and Senior Portfolio Manager since 1989.
Gerald M. Richard--Treasurer (1)(2)--Senior Vice President and Treasurer of
the Manager and FAM and their predecessors since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
Mark B. Goldfus--Secretary (1)(2)--Vice President of the Manager and FAM and
their predecessors since 1985.
- --------
(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
additional investment companies for which the Manager or its affiliate,
FAM, acts as investment adviser or manager.
At April 30, 1994, the officers and Directors of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Manager a fee of $3,500
per year plus $500 per 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 Committee, which consists of all of the non-
affiliated Directors, at a rate of $500 per meeting attended. The Chairman of
the Audit Committee receives an additional fee of $250 per meeting attended.
For the fiscal year ended June 30, 1993, fees and expenses paid to unaffiliated
Directors aggregated $31,406.
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.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 1.00%
of the average daily net assets of the Fund. For the fiscal years ended June
30, 1991, 1992 and 1993, the management fees paid by the Fund to the Manager
aggregated $1,031,793, $1,159,827 and $1,303,056, respectively.
Under the laws of a certain state, the Fund currently may not pay the Manager
a management fee with respect to the Fund's assets invested in the shares of
another investment company on which such other
14
<PAGE>
investment company is charging a management fee. The Manager has agreed to
waive its management fee to the extent necessary to comply with this current
state law requirement.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in any amount necessary
to prevent the aggregate ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. The Manager's obligation to reimburse the Fund is
limited to the amount of the management fee. No fee payment will be made to the
Manager during any fiscal year which will cause such expenses to exceed the
expense limitations at the time of such payment.
The Fund has received an order from the State of California partially waiving
expense limitations described above. Pursuant to the terms of such order, the
expense limitations that would otherwise apply are waived to the extent the
Fund's expense for custodial services, management and auditing fees exceeds the
average of such fees of a group of funds managed by the Manager or its
subsidiary which primarily invest domestically. For the fiscal years ended June
30, 1991, 1992 and 1993, no reimbursement of expenses was required pursuant to
the applicable expense limitations discussed above.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager. The Fund pays
all other expenses incurred in its operations, including, among other things,
taxes; expenses for legal and auditing services; costs of printing proxies,
stock certificates, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor); charges
of the custodian, any sub-custodian and transfer agent; expenses of redemption
of shares; Commission fees; expenses of registering the shares under Federal,
state or foreign laws; fees and expenses of unaffiliated Directors; accounting
and pricing costs (including the daily calculation of net asset value);
insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses; and other expenses properly payable by the 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. For the
fiscal years ended June 30, 1991, 1992 and 1993, the amount of such
reimbursement was $82,059, $78,980 and $127,749, respectively. Certain expenses
in connection with the distribution of Class B shares will be financed by the
Fund pursuant to a distribution plan in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares--Distribution Plan."
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services are "controlling persons" of the Manager as defined under
the Investment Company Act because of their ownership of its voting securities
or their power to exercise a controlling influence over its management or
policies.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the shareholders of the Fund.
15
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the deferred sales arrangements, any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses of the account maintenance fee and have exclusive
voting rights with respect to the Rule 12b-1 distribution plan pursuant to
which the account maintenance and distribution fees are paid. The two classes
also have different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B 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 ALTERNATIVE--CLASS A SHARES
For the fiscal years ended June 30, 1991, 1992 and 1993, the Fund sold its
shares through the Distributor and Merrill Lynch, as a dealer. For the fiscal
year ended June 30, 1991, the Fund sold 2,865,275 Class A shares for aggregate
net proceeds to the Fund of $30,726,722. The gross sales charges for the sale
of Class A shares for that period were $1,199,151, of which $1,146,841 was
received by Merrill Lynch and $52,310 was received by MLFD. For the fiscal year
ended June 30, 1992, the Fund sold 2,054,712 Class A shares for aggregate net
proceeds to the Fund of $23,785,838. The gross sales charges for the sale of
Class A shares for that period were $867,120, of which $816,121 was received by
Merrill Lynch and $50,999 was received by MLFD. For the fiscal year ended June
30, 1993, the Fund sold 2,825,803 Class A shares for aggregate net proceeds to
the Fund of $31,697,736. The gross sales charges for the sale of Class A shares
for that period were $393,627, of which $366,472 was received by Merrill Lynch
and $27,155 was received by MLFD.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (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
16
<PAGE>
purpose other than the purchase of shares of the Fund or shares or 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.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. The Fund offers a right of accumulation under which
investors are permitted to purchase Class A shares of the Fund at the offering
price applicable to the total of (a) the public offering price of the Class A
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 the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or deferred sales charges for
which the Distributor acts as the distributor. 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.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-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 shares;
however, its execution will result in the purchaser paying a lower sales charge
at the appropriate quantity purchase level. A purchase not originally made
pursuant to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A shares of the Fund and of other investment companies with a sales
charge for which the Distributor acts as the distributor 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 $10,000), 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 shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A shares
equal to five percent of the intended amount will be held in escrow during the
thirteen-month period (while remaining registered in the name of the purchaser)
17
<PAGE>
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 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 Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government Reserves
into the Fund that creates a sales charge will count toward completing a new
or existing Letter of Intention from the Fund.
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 plus a reduced sales charge of 0.50% of the offering price,
which is 0.50% of the net amount invested.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other
deferred compensation arrangements, VEBA plans, and non-qualified After Tax
Savings and Investment programs, maintained on the Merrill Lynch Group
Employees Services system, herein referred to as "Employer Sponsored
Retirement or Savings Plans", provided the plan has $5 million or more in
existing plan assets initially invested in portfolios, mutual funds or trusts
advised by the Manager either directly or through an affiliate. Class A shares
are being offered at net asset value to Employer Sponsored Retirement or
Savings Plans, provided the plan has accumulated $5 million or more in
existing plan assets invested in mutual funds advised by the Manager charging
a front-end sales charge or contingent deferred sales charge. Assets of
Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor
or an affiliated sponsor may be aggregated. The Class A share reduced load
breakpoints also apply to these aggregated assets. Class A shares may be
offered at net asset value to multiple plans sponsored by the same sponsor or
an affiliated sponsor provided that the addition of one or more of the
multiple plans results in aggregate assets of $5 million or more invested in
portfolios, mutual funds or trusts advised by the Manager either directly or
through an affiliate. Employer Sponsored Retirement or Savings Plans are also
offered Class A shares at net asset value, provided such plan initially has
1,000 or more employees eligible to participate in the plan. Employees
eligible to participate in an Employer Sponsored Retirement or Savings Plan of
the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their
plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch Blueprint SM Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the
contingent deferred sales charge upon redemption. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
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<PAGE>
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. (formerly known as Merrill Lynch
Prime Fund, Inc.) who wish to reinvest the net proceeds from a sale of certain
of their shares of common stock of Merrill Lynch Senior Floating Rate Fund,
Inc. in shares of the Fund. In order to exercise this investment option,
Merrill Lynch Senior Floating Rate Fund, Inc. shareholders must sell their
Merrill Lynch Senior Floating Rate Fund, Inc. shares to Merrill Lynch Senior
Floating Rate Fund, Inc. in connection with a tender offer conducted by Merrill
Lynch Senior Floating Rate Fund, Inc. and reinvest the proceeds immediately in
the Fund. This investment option is available only with respect to the proceeds
of Merrill Lynch Senior Floating Rate Fund, Inc. shares as to which no Early
Withdrawal Charge (as defined in the Merrill Lynch Senior Floating Rate Fund,
Inc. prospectus) is applicable. Purchase orders from Merrill Lynch Senior
Floating Rate Fund, Inc. shareholders wishing to exercise this investment
option will be accepted only on the day that the related Merrill Lynch Senior
Floating Rate Fund, Inc. tender offer terminates and will be effected at the
net asset value of the Fund at such day.
Class A shares of the Fund are offered at net asset value to shareholders of
certain closed-end funds advised by the Manager or FAM who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund. In order to exercise this investment option, closed-end
fund shareholders must (i) sell their closed-end fund shares through Merrill
Lynch and reinvest the proceeds immediately in the Fund, (ii) have acquired the
shares in the closed-end fund's initial public offering or through reinvestment
of dividends earned on shares purchased in such offering, (iii) have maintained
their closed-end fund shares continuously in a Merrill Lynch account, and (iv)
purchase a minimum of $250 worth of Fund shares.
Class A shares of the Fund will be 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 purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Class A shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class A shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination.
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<PAGE>
Acquisition of Assets of Certain Investment Companies. The public offering
price of Class A shares may be reduced to the net asset value per Class A 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.
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.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares -- Deferred Sales
Charge Alternative -- Class B Shares -- Distribution Plan" in the Prospectus
for certain information with respect to the distribution plan of the Fund (the
"Distribution Plan").
The payment of the account maintenance and distribution fees is subject to
the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, the Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance and distribution fees paid to the Distributor. In their
consideration of the 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 Class B shareholders. The 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 the Distribution Plan in accordance with Rule 12b-
1, the Independent Directors concluded that there is reasonable likelihood that
the Distribution Plan will benefit the Fund and its Class B shareholders. The
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding Class B voting securities of the Fund. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without Class B shareholder approval, 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 the Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of the
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of the Distribution Plan or such report, the
first two years in an easily accessible place.
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
20
<PAGE>
period (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closings or (b) during which trading on the New
York Stock Exchange 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 Securities and Exchange 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.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age 59
1/2 in the case of an IRA or other retirement plan, or any redemption resulting
from the tax-free return of an excess contribution to an IRA; or (b) any
partial or complete redemption following the death or disability (as defined in
the Code) of a Class B 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.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales charge is waived for any Eligible
401(k) Plan redeeming Class B shares. The contingent deferred sales charge is
also waived for redemptions from a 401(a) plan qualified under the Code,
provided, however, that each such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Class B shares of a mutual fund
advised by the Manager or FAM ("Eligible 401(a) Plan"). The contingent deferred
sales charge is waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above referenced Retirement
Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices" in the Prospectus.
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. 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
21
<PAGE>
facilities of the firm involved and the firm's risk in positioning a block of
securities. 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.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
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 over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of
its affiliates, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-
affiliated brokers in connection with comparable transactions. See "Investment
Objective and Policies--Investment Restrictions". For the fiscal year ended
June 30, 1993, the Fund paid total brokerage commissions of $8,448, of which
$1,440 or 17.0% was paid to Merrill Lynch for effecting 28.2% of the aggregate
amount of transactions on which the Fund paid brokerage commissions. For the
fiscal year ended June 30, 1992, the Fund paid total brokerage commissions of
$822,573, of which $38,477 or 4.68% was paid to Merrill Lynch for effecting
3.03% of the aggregate amount of transactions on which the Fund paid brokerage
commissions. For the fiscal year ended June 30, 1991, the Fund paid total
brokerage commissions of $883,141, of which $53,620 or 6.1% was paid to Merrill
Lynch for effecting 7.9% of the aggregate amount of transactions on which the
Fund paid brokerage commissions.
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, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.
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<PAGE>
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.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be offset against the advisory fee paid by the Fund. After considering
all factors deemed relevant, the Directors made a determination not to seek
such recapture. The Directors will reconsider this matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Propectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 4:15 p.m., New York time, on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is not open on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
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 the account maintenance and
distribution fees payable to the Distributor, are accrued daily. The per share
net asset value of the Class B shares generally will be lower than the per
share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares. It is expected, however,
that the per net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price on the principal market 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. Securities traded in the over-the-
counter market are valued at the last available bid prices obtained from one or
more dealers in the over-the-counter market prior to the time of valuation.
Portfolio securities which are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. When the Fund
23
<PAGE>
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 asked price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
average of the last asked price as obtained from one or more dealers. Options
purchased by the Fund are valued at their last bid price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the average of the last bid price as obtained from two or more
dealers. 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 fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services, 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 quarterly statements from the transfer
agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The quarterly 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.
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 transfer agent.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A shares so
that the cash proceeds can be transferred to the account at the new firm or
such shareholder must continue to maintain an Investment Account at the
transfer agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the transfer agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence.
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<PAGE>
AUTOMATIC INVESTMENT PLAN
A U.S. shareholder may make additions to an Investment Account at any time by
purchasing shares at the applicable public offering price either through the
shareholder's securities dealer or by mail directly to the transfer agent,
acting as agent for such securities dealer. Voluntary accumulation also can be
made through a service known as the Automatic Investment Plan whereby the Fund
is authorized through pre-authorized checks or automated clearing house debits
of $50 or more to charge the regular bank account of the shareholder on a
regular basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA (R)
account may arrange to have periodic investments made in the Fund in amounts of
$250 or more through the CMA (R) Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA (R) account.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions 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, without sales charge, at the net asset value per share next determined
after the close of the New York Stock Exchange 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 SHARES
A Class A 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
shares of the Fund having a value, based upon cost or the current offering
price, of $5,000 or more, and monthly withdrawals for shareholders with Class A
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A 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
shares. Redemptions will be made at the net asset value next determined after
the close of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the shares will be redeemed at
the net asset value next determined after the close of the New York Stock
Exchange on the preceeding business day. The check for the withdrawal payment
will be mailed, or the direct deposit of the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all shares in the
Investment Account are automatically reinvested in Fund Class A shares. A Class
A shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Fund, the transfer agent or
the Distributor.
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<PAGE>
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends and capital gains distributions, the shareholder's
original investment may be correspondingly reduced. Purchase of additional
Class A shares concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
Class A shareholder has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to 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
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
U.S. Class A or Class B shareholders of the Fund may exchange their Class A
or Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida Limited
Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund,
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 (residents of Arizona must meet investor
suitability standards), Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must
meet investor suitability standards), Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Maryland Municipal Bond
Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill
Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund,
Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch New Jersey
Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal Bond
Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, Merrill
Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond
Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon
26
<PAGE>
Municipal Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania
Municipal Bond Fund, Merrill Lynch Phoenix 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
Texas Municipal Bond Fund, Merrill Lynch Utility Income Fund, Inc., and Merrill
Lynch World Income Fund, Inc. on the basis described below. In addition, Class
A shareholders of the Fund may exchange their Class A shares for shares of
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund and Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves
Money Fund if the exchange occurs within certain retirement plans) (together,
the "Class A money market funds") and Class B shareholders of the Fund may
exchange their Class B shares for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund (together, the "Class B money market funds") on
the basis described below. Shares with a net asset value of at least $250 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. Certain
funds into which exchanges may be made may impose a redemption fee (not in
excess of 2.00% of the amount redeemed) on shares purchased through the
exchange privilege when such shares are subsequently redeemed, including
redemption through subsequent exchanges. Such redemption fee would be in
addition to any contingent deferred sales charge otherwise applicable to a
redemption of Class B shares. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the sales charges paid with respect to
such Class A shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A 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 shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally may be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds with a reduced or without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 shares, the holding period for the
outstanding Class B shares is "tacked" to the holding period of the new Class B
shares. For example, an investor may exchange Class B shares of the Fund for
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<PAGE>
those of Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural
Resources Trust) after having held the Fund's Class B shares for two and a half
years. The 2% sales charge that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Merrill Lynch Global Resources Trust and receive cash. There
will be no contingent deferred sales charge due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares
to the three year holding period for the Merrill Lynch Global Resources Trust
Class B shares, the investor will be deemed to have held the new Class B shares
for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were
acquired as a result of an exchange for Class B shares of a fund may, in turn,
be exchanged back into Class B shares of any fund offering such shares, in
which event the holding period for Class B shares of the fund will be
aggregated with previous holding periods for purposes of reducing the
contingent deferred sales charge. Thus, for example, an investor may exchange
Class B shares of the Fund for shares of Merrill Lynch 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 Merrill Lynch Institutional Fund for cash.
At the time of this redemption, the 2% contingent deferred sales charge that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Merrill Lynch 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 continues to hold for an
additional two and a half years, any subsequent redemption will not incur a
contingent deferred sales charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
Merrill Lynch Adjustable Rate
Securities Fund, Inc................ High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
Merrill Lynch Americas Income Fund, A high level of current income,
Inc................................. consistent with prudent investment
risk, by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Arizona income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Arizona
Municipal Bonds.
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<PAGE>
Merrill Lynch Arizona Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
Merrill Lynch Balanced Fund for
Investment and Retirement........... As high a level of total investment
return as is consistent with
reasonable risk by investing in common
stock and other types of securities,
including fixed income securities and
convertible securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc................................. income through investment in
securities, primarily equities, that
are undervalued and therefore
represent basic investment value.
Merrill Lynch California Insured
Municipal Bond Fund................. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide
shareholders with as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management through investment in a
portfolio consisting primarily of
insured California Municipal Bonds.
Merrill Lynch California Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide shareholders
with as high a level of income exempt
from Federal and California income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
Merrill Lynch California Municipal
Bond Fund......................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management.
Merrill Lynch Capital Fund, Inc...... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
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<PAGE>
Merrill Lynch Colorado Municipal
Bond Fund......................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Colorado income taxes as is con-
sistent with prudent investment man-
agement.
Merrill Lynch Corporate Bond Fund, Current income from three separate di-
Inc................................. versified portfolios of fixed income
securities.
Merrill Lynch Dragon Fund, Inc.......
Capital appreciation primarily through
investment in equity and debt securi-
ties of issuers domiciled in develop-
ing countries located in Asia and the
Pacific Basin, other than Japan, Aus-
tralia and New Zealand.
Merrill Lynch EuroFund............... Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal Securities High current return through investments
Trust............................... in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while serving to offer
shareholders the opportunity to own
securities exempt from Florida intan-
gible personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade
Florida Municipal Bonds.
Merrill Lynch Florida Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the op-
portunity to own securities exempt
from Florida intangible personal prop-
erty taxes.
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<PAGE>
Merrill Lynch Fund For Tomorrow,
Inc................................. Long-term growth through investment in
a portfolio of good quality
securities, primarily common stock,
potentially positioned to benefit from
demographic and cultural changes as
they affect consumer markets.
Merrill Lynch Fundamental Growth
Fund, Inc........................... Long-term growth through investment in
a diversified portfolio of equity
securities placing particular emphasis
on companies that have exhibited
above- average growth rates in
earnings.
Merrill Lynch Global Allocation
Fund, Inc........................... High total return, consistent with
prudent risk, through a fully-managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
the types of securities and markets in
response to changing market and
economic trends.
Merrill Lynch Global Bond Fund for
Investment and Retirement........... High total investment return from
investment in a global portfolio of
debt instruments denominated in
various currencies and multi-national
currency units.
Merrill Lynch Global Convertible
Fund, Inc........................... High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and "synthetic" convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
Merrill Lynch Global Holdings
(residents of Arizona must meet
investor suitability standards)..... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
Merrill Lynch Global Resources
Trust.......................... Long-term growth and protection of
capital from investment in securities
of domestic and foreign companies that
possess substantial natural resource
assets.
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<PAGE>
Merrill Lynch Global Utility Fund,
Inc. ............................... Capital appreciation and current income
through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and
foreign companies which are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Government Fund........ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
Merrill Lynch Growth Fund for
Investment and Retirement........... Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal emphasis
on those securities which management
of the Fund believes to be
undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet
investor suitability standards).....
Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in healthcare.
Merrill Lynch Institutional Fund.....
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money market
securities.
Merrill Lynch Institutional Tax-
Exempt Fund.........................
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term
high quality municipal bonds.
Merrill Lynch International Equity
Fund................................ Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
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<PAGE>
Merrill Lynch Latin America Fund,
Inc................................. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
Merrill Lynch Maryland Municipal
bond Fund...................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Maryland income taxes as is con-
sistent with prudent investment man-
agement.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund...
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is as high a level of income
exempt from Federal and Massachusetts
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund................. A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Massachusetts income taxes as is
consistent with prudent investment
management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is as high a level of income
exempt from Federal and Michigan in-
come taxes as is consistent with pru-
dent investment management through in-
vestment in a portfolio primarily of
intermediate-term grade Michigan Mu-
nicipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Michigan income taxes as is con-
sistent with prudent investment man-
agement.
33
<PAGE>
Merril Lynch Minnesota Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Minnesota income taxes as is
consistent with prudent investment
management.
Merrill Lynch Municipal Bond Fund,
Inc. ............................... Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate Currently the only portfolio of Merrill
Term Fund...................... Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent investment management through
a portfolio primarily of intermediate-
term investment grade New Jersey
Municipal Bonds.
Merrill Lynch New Jersey Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade New York
Municipal Bonds.
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<PAGE>
Merrill Lynch New York Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal,
New York State and New York City
income taxes as is consistent with
prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund................. A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
Merrill Lynch Ohio Municipal Bond A portfolio of Merrill Lynch Multi-
Fund................................ State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Ohio income taxes as is consistent
with prudent investment management.
Merrill Lynch Oregon Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Oregon income taxes as is
consistent with prudent investment
management.
Merrill Lynch Pacific Fund, Inc. .... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund... A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term
investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Phoenix Fund, Inc. ....
Long-term growth of capital by
investing in equity and fixed income
securities, including tax-exempt
securities, of issuers in weak
financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issue.
Merrill Lynch Ready Assets Trust..... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
Merrill Lynch Retirement Reserves
Money Fund (available only if the
exchange occurs within certain
retirement plans)................... Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a
series fund, whose objectives are
current income, preservation of
capital and liquidity available from
investing in a diversified portfolio
of short-term money market securities.
Merrill Lynch Short-Term Global
Income Fund, Inc. .................. As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multinational currency units and
having remaining maturities not
exceeding three years.
Merrill Lynch Special Value Fund,
Inc................................. Long-term growth of capital from
investments in securities, primarily
common stock, of relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic Dividend Long-term total return from investment
Fund................................ in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
Merrill Lynch Technology Fund, Inc... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
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<PAGE>
Merrill Lynch Texas Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management by
investing primarily in a portfolio of
long-term, investment grade
obligations issued by the State of
Texas, its political subdivisions,
agencies and instrumentalities.
Merrill Lynch Treasury Fund.......... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
Merrill Lynch U.S.A. Government
Reserves............................ Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S.
Government and repurchase agreements
relating to such securities.
Merrill Lynch U.S. Treasury Money Preservation of capital, liquidity and
Fund................................ current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
Merrill Lynch Utility Income Fund, High current income through investment
Inc............................ in equity and debt securities issued
by companies which are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch World Income Fund, High current income by investing in a
Inc................................. global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
shareholder is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes--Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or if the
exchange does not involve a money market fund,
37
<PAGE>
shareholders may write to the transfer agent requesting that the exchange be
effected. Such letter must be signed exactly as the account is registered with
signatures guaranteed by an "eligible guarantor institution" (including, for
example, Merrill Lynch branch offices and certain other financial institutions)
as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, the existence and validity of which may be verified by the transfer
agent through the use of industry publications. Shareholders of the Fund, and
shareholders of the other funds described above with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. Certain funds may suspend the continuous offering of their
shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such net investment income are paid at least annually. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired options written by
the Fund and net gains from closing purchase transactions are treated as short-
term capital gains for Federal income tax purposes. See "Shareholder Services--
Automatic Reinvestment of Dividends and Capital Gains Distributions" in the
Prospectus for information concerning the manner in which dividends and
distributions may be reinvested automatically in shares of the Fund. A
shareholder whose account is maintained through the transfer agent may elect in
writing to receive any such dividends or distributions, or both, in cash. A
shareholder whose account is maintained through Merrill Lynch may elect in
writing to receive both dividends and distributions in cash. Dividends and
distributions are taxable to shareholders as described below whether they are
invested in shares of the Fund or received in cash. The per share dividends and
distributions on Class B shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B shares. See "Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A and Class B shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in 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
38
<PAGE>
shares. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate
dividends eligible for the dividends received deduction between the Class A and
Class B shareholders according to a method (which it believes is consistent
with the Securities and Exchange Commission exemptive order permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A and Class B shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
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 United States 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
39
<PAGE>
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 between the
Class A and Class B shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to the Class A and Class B shareholders during the
taxable year or such other method as the Internal Revenue Service may
prescribe.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Dividend Reinvestment Plan or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of distributions from such company and on gain from the
disposition of the shares of such company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid
the taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under proposed regulations, the Fund would be
able to elect to "mark to market" at the end of each taxable year all shares
that it holds in PFICs. If it made this election, the Fund would recognize as
ordinary income any increase in the value of such shares. Unrealized losses,
however, will not be recognized. By making the mark-to-market election, the
Fund could avoid imposition of the interest charge with respect to its
distributions from PFICs, but in any particular year might be required to
recognize income in excess of the distributions it receives from PFICs and its
proceeds from dispositions of PFIC stock.
40
<PAGE>
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. 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 transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain 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 may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options 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
41
<PAGE>
ordinary dividend distributions, and any 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 the mark-to-market rules
described above, however, will not apply to certain transactions entered into
by the Fund solely to reduce the risk of currency fluctuations with respect to
its investments.
The 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 and Latin American 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 or administrative action
either prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
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 and Class B
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 shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B shares.
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<PAGE>
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
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 below is total return information for the Class A shares of the
Fund for the periods indicated:
<TABLE>
<CAPTION>
CLASS A SHARES*
---------------------------------------
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------------------------------------- ----------------- ------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
One Year Ended December 31, 1993............................ 57.98% $1,579.80
Inception (September 1, 1989) to December 31, 1993.......... 17.21% $1,990.40
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended December 31, 1993................................ 68.96% $1,689.60
Year Ended December 31, 1992................................ 0.85% $1,008.50
Year Ended December 31, 1991................................ 23.35% $1,233.50
Year Ended December 31, 1990................................ (5.33%) $ 946.70
Inception (September 1, 1989) to December 31, 1989.......... 6.97% $1,069.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (September 1, 1989) to December 31, 1993......... 99.04% $1,990.40
</TABLE>
- --------
*Prior to the date of this Statement of Additional Information, Class B shares
of the Fund had not yet been offered to the public.
In order to reflect the reduced sales charges in the case of Class A shares,
or the waiver of the contingent deferred sales charge 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
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
43
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 14, 1989. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and that they have
exclusive voting rights with respect to matters relating to such account
maintenance and distribution expenditures. The Fund has received an order from
the Securities and Exchange Commission permitting the issuance and sale of
multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of a management agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. 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 or conversion rights. Redemption 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.
The Manager provided the initial capital for the Fund by purchasing 10,417
shares of common stock for an aggregate of $100,003. Such shares were acquired
for investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $136,495) are being paid by
the Fund and amortized on a straight-line basis over a five year period. For
the fiscal years ended June 30, 1993, 1992 and 1991 the Fund amortized $26,165,
$28,346 and $23,985 of organization expenses, respectively. The proceeds
realized by the Manager upon redemption of any of such shares will be reduced
by the proportionate amount of the unamortized organizational expenses which
the number of shares redeemed bears to the number of shares initially
purchased.
44
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A shares
of the Fund based on the value of the Fund's net assets on December 31, 1993,
and its shares outstanding on that date is as follows:
TABLE*
<TABLE>
<S> <C>
Net Assets................................................... $320,654,341
============
Number of Shares Outstanding................................. 19,083,223
============
Net Asset Value Per Share (net assets divided by number of
shares outstanding)......................................... $ 16.80
Sales Charge (for Class A shares: 6.50% of offering price
(6.95% of net amount invested))*............................ $ 1.17
------------
Offering Price............................................... $ 17.97
============
</TABLE>
- --------
*Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable. Prior to the date of this Statement of Additional Information,
Class B shares of the Fund had not yet been offered to the public.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the Fund's shareholders. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., Global Securities Services, Chase MetroTech
Center, Brooklyn, New York 11245 (the "Custodian"), acts as the custodian of
the Fund's assets. Under its contract with the Fund, the Custodian is
authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent (the "Transfer Agent"). The Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts. See "Management of the Fund--Transfer
Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
45
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 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 Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on April 30, 1994.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Developing Capital
Markets Fund, Inc.:
We have audited the accompanying consolidated statement of assets and
liabilities, including the consolidated schedule of investments, of Merrill
Lynch Developing Capital Markets Fund, Inc. and its subsidiary as of June 30,
1993, the related consolidated 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 consolidated financial highlights for each of the years in the
three-year period then ended and the period September 1, 1989 (commencement of
operations) to June 30, 1990. These consolidated financial statements and the
consolidated financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the consolidated 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 consolidated financial statements and
the consolidated financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned at June 30, 1993 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 consolidated financial statements and consolidated
financial highlights present fairly, in all material respects, the financial
position of Merrill Lynch Developing Capital Markets Fund, Inc. and its
subsidiary as of June 30, 1993, the results of their operations, the changes in
their net assets, and the consolidated financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
July 30, 1993
47
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (In U.S. dollars)
<CAPTION>
Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
EUROPE
<S> <C> <S> <C> <C> <C>
Austria
Banking 20,500 Creditanstalt-Bankverein A.G. $ 786,450 $1,029,318 0.7%
Oil--International 8,500 Unternehmensgruppe OMV A.G. 498,374 509,141 0.4
Paper 1,300 Papierfabrik SCA Laarkirchen A.G. 298,024 295,156 0.2
Textiles 18,000 Lenzing A.G. 916,404 950,800 0.7
Transportation 26,400 Jenbacher Transportsysteme A.G. 1,588,046 640,539 0.5
Utilities 6,500 Energie-Versorgung Niederosterreich
Aktiengesellschaft A.G. (EVN) 502,879 484,625 0.3
---------- --------- ---
Total Investments in Austria 4,590,177 3,909,579 2.8
Finland
Electrical Equipment 17,200 Vaisala Oy 'A' 482,830 438,467 0.3
---------- --------- ---
Total Investments in Finland 482,830 438,467 0.3
France
Banking 40,600 Credit Commercial de France (CCF) 1,570,686 1,653,825 1.2
Building & Construction 20,800 Compagnie de Saint Gobain 1,778,328 1,839,394 1.3
Diversified 9,000 Chargeurs S.A. 2,032,987 1,551,049 1.1
Publishing & Broadcasting 5,000 Canal Plus 1,277,673 1,062,756 0.7
---------- --------- ---
Total Investments in France 6,659,674 6,107,024 4.3
Greece
Banking 14,890 Credit Bank S.A. 1,001,183 902,036 0.6
30,000 Ergo Bank (Registered) S.A. 959,811 946,724 0.7
---------- --------- ---
1,960,994 1,848,760 1.3
Beverage 52,500 Hellenic Bottling Co. S.A. (Bearer) 818,772 1,218,045 0.9
Building & Construction 63,820 Michaniki S.A. 1,568,300 2,358,118 1.7
5,800 Michaniki S.A. (Preferred) 99,678 149,517 0.1
48,830 Titan Cement S.A. 1,960,315 1,699,347 1.2
---------- --------- ---
3,628,293 4,206,982 3.0
Food 112,940 J. Boutari & Son S.A. (Bearer) 2,454,976 1,188,842 0.8
44,000 Katselis Sons S.A. 738,720 425,349 0.3
44,000 Katselis Sons S.A. (Rights)(d) 0 0 0.0
---------- --------- ---
3,193,696 1,614,191 1.1
Health & Personal Care 21,000 Athens Medical Center S.A. 331,904 205,714 0.1
---------- --------- ---
Total Investments in Greece 9,933,659 9,093,692 6.4
</TABLE>
48
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Hungary
Food 8,500 Pick Szeged
Reszvenytarsasag (GDS)(a)++++ 123,250 180,242 0.1
Retail Stores 123,000 FOTEX RT--Fotex Els Amerikai--Magyar
Fotoszolgaltatasi Reszvenytarsasag 391,211 341,955 0.2
--------- --------- ---
Total Investments in Hungary 514,461 522,197 0.3
Italy
Insurance 125,000 Unipol Compagnie Assicuratice
S.p.A.(Preferred) 502,555 588,188 0.4
--------- --------- ---
Total Investments in Italy 502,555 588,188 0.4
Netherlands
Publishing & Broadcasting 15,500 Elsevier N.V. 1,051,904 1,124,390 0.8
--------- --------- ---
Total Investments in the Netherlands 1,051,904 1,124,390 0.8
Poland
Food 40,000 International Fast Food Corp. 267,500 330,000 0.2
--------- --------- ---
Total Investments in Poland 267,500 330,000 0.2
Portugal
Banking 25,000 Banco Totta E Acores S.A. 520,258 527,048 0.4
199,012 Banco Comercial Portugues,
S.A. (Registered) 2,605,246 2,375,840 1.7
--------- --------- ---
3,125,504 2,902,888 2.1
Beverages 29,100 Uniao Cervejaria S.A. (UNICER) 790,773 766,405 0.5
Building & Construction 14,100 CINCA-Companhia Industrial de
Ceramica, S.A. 104,052 92,402 0.0
72,600 Efacec S.A. 2,453,617 2,356,414 1.6
82,300 Soares da Costa S.A. 1,477,775 1,373,787 1.0
48,600 Sociedade de Empretadas Somague, S.A. 591,603 498,770 0.4
--------- --------- ---
4,627,047 4,321,373 3.0
</TABLE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (In U.S. dollars)
<CAPTION>
EUROPE
(concluded)
Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Portugal
(concluded)
Leisure & Entertainment 13,350 Estoril-Sol S.A. $ 105,520 $ 99,042 0.1%
Mutual Funds 58,000 Portugal Fund, Inc. 495,088 558,250 0.4
Paints 17,500 CIN--Corporacao Industrial
Do Norte, S.A. 521,403 477,125 0.3
Retail 42,000 Jeronimo Martins S.A. 1,239,927 2,025,607 1.4
128,930 Sonae Investimentos S.A. 1,162,724 1,347,886 1.0
---------- --------- ---
2,402,651 3,373,493 2.4
Telecommunications 37,000 Companhia Portuguesa Radio
Marconi S.A. 929,473 908,130 0.6
---------- ---------- ---
Total Investments in Portugal 12,997,459 13,406,706 9.4
Russia
Telecommunications 27,750 Petersburg Long Distance
Inc.(ADR) (b) 201,806 190,781 0.1
---------- ---------- ---
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Investments in Russia 201,806 190,781 0.1
Spain
Telecommunications 122,000 Telefonica de Espana S.A. 1,266,327 1,306,975 0.9
Utilities 164,000 Iberdrola I S.A. 1,000,903 1,011,175 0.7
--------- --------- ---
Total Investments in Spain 2,267,230 2,318,150 1.6
Switzerland
Banking 600 Credit Suisse Holdings (Bearer) 1,039,657 1,056,366 0.8
600 Credit Suisse Holdings (Warrants)(c) 0 27,752 0.0
----------- --------- ---
1,039,657 1,084,118 0.8
--------- --------- ---
Total Investments in Switzerland 1,039,657 1,084,118 0.8
Turkey
Automotive 86,000 Otosan Otomobil Sanayi A.S. 254,654 482,498 0.4
Beverage 251,200 Ege Biracilik Ve Malt Sanayii A.S. 472,057 1,709,695 1.2
Broadcasting
& Publishing 196,800 Medya Holding A.S. 1,490,842 1,701,454 1.2
Building
& Construction 1,427,000 Adana Cimento A.S. "A" Shares 1,274,092 1,509,347 1.1
Household
Durables 1,181,880 Arcelik A.S. 542,575 1,195,731 0.8
Retail 383,000 Migros A.S. 1,210,300 2,712,420 1.9
---------- ---------- ---
Total Investments in Turkey 5,244,520 9,311,145 6.6
---------- ---------- ---
Total Investments in Europe 45,753,432 48,424,437 34.0
LATIN
AMERICA
Argentina
Banking 20,000 Banco de Galicia y Buenos
Aires S.A. 471,388 467,500 0.3
129,690 Banco Frances del Rio de
la Plata S.A. 970,061 1,427,875 1.1
--------- --------- ---
1,441,449 1,895,375 1.4
Miscellaneous--
Consumer 50,000 BAESA (Buenos Aires Embotelladora
S.A.)(ADR)(b) ++++ 987,500 1,168,750 0.8
Oil & Related 500,000 Astra Compania Argentina de
Petroleo S.A. 1,136,921 1,241,117 0.9
40,139 Compania Naviera Perez
Compac S.A.C.F.I.M.F.A. 197,865 197,260 0.1
--------- --------- ---
1,334,786 1,438,377 1.0
Telecommunications 34,472 Telefonica de Argentina
S.A.(ADR)(b)++++ 1,095,078 1,290,459 0.9
--------- --------- ---
Total Investments in Argentina 4,858,813 5,792,961 4.1
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Brazil
Banking 39,673,444 Banco Bradesco S.A. 785,681 839,657 0.6
1,000,000 Banco Itau S.A. 386,442 342,308 0.3
12,262,000 Banco Nacional S.A. 389,979 431,022 0.3
1,170,000 Uniao de Bancos Brasileiros S.A. 57,087 58,137 0.0
------- ------- ---
1,619,189 1,671,124 1.2
Beverage 5,173,850 Compania Cervejaria Brahma PN
(Preferred) 1,043,162 837,917 0.6
Food 81,780,250 Sadia Concordia S.A. Industria
e Comercio PN (Preferred) 685,295 481,618 0.3
Mining 23,892,000 Compania Vale do Rio Doce PN (CVRD)
(Preferred) 1,835,903 1,622,494 1.1
Retail 384,000 Lojas Americanas S.A. 401,903 388,784 0.3
Steel 492,500 Acos Industria Villares S.A. 123,508 110,578 0.1
2,620,500,000 Usinas Siderurgicas de Minas
Gerais--Usiminas S.A. 1,326,626 1,340,705 0.9
--------- --------- ---
1,450,134 1,451,283 1.0
Telecom-
munications 63,000,000 Telecomunicacoes Brasileiras
S.A.--Telebras PN (Preferred) 1,545,704 2,040,598 1.4
26,000,000 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Preferred)(Rights)(e) 0 0 0.0
26,000,000 Telecomunicacoes Brasileiras S.A.--
Telebras PN (Rights) (f) 0 0 0.0
--------- --------- ---
1,545,704 2,040,598 1.4
Utilities 7,085,000 Centrais Eletricas Brasileiras
S.A.--Eletrobras (Preferred) 888,834 899,691 0.6
--------- --------- ---
Total Investments in Brazil 9,470,124 9,393,509 6.5
Chile
Beverages 254,543 Vina Concha y Toro S.A. 103,340 99,544 0.1
Building &
Construction 19,476 Empresas Pizarreno (Rights)(g) 0 0 0.0
409,000 Empresas Pizarreno S.A. 786,176 799,738 0.5
------- ------- ---
786,176 799,738 0.5
Paper & Pulp 128,000 Compania Manufactura de Papeles y
Cartones S.A. (CARTONES) 1,414,658 1,070,838 0.8
Pharmaceuticals 712,111 Laboratorio Chile S.A. (LABCHILE) 430,370 431,828 0.3
Utilities 27,500 Compania de Telefonos de Chile S.A.
(ADR) (b) 409,350 1,825,313 1.3
2,532,571 Empresa Nacional de Electricidad S.A.
--ENDESA 872,848 913,310 0.6
--------- --------- ---
1,282,198 2,738,623 1.9
--------- --------- ---
Total Investments in Chile 4,016,742 5,140,571 3.6
</TABLE>
51
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (In U.S. dollars)
<CAPTION>
LATIN AMERICA
(concluded) Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Mexico
Banking 52,000 Grupo Financiero Bancomer
S.A. de C.V. (ADR)(b)++++ $1,724,375 $1,677,000 1.2%
Beverage 50,000 Fomento Economico Mexicano, S.A.
de C.V. (Femsa)(ADR) (b) 195,000 192,000 0.1
150,000 Fomento Economico Mexicano, S.A.
de C.V. (Femsa)(Ordinary) 584,707 572,574 0.4
---------- ---------- ---
779,707 764,574 0.5
Building &
Construction 373,000 Tolmex S.A. de C.V. 'B' 999,729 2,955,285 2.1
Diversified 352,000 Grupo Carso S.A. de C.V. 'A' 2,001,890 1,925,132 1.4
Food 1,600,000 Grupo Herdez S.A. de C.V. 'A' 1,450,009 1,488,372 1.1
Miscellaneous--
Consumer 520,000 El Puerto de Liverpool S.A.
de C.V. 'C'(Non-Voting) 716,558 605,485 0.4
Retail 900,000 Cifra S.A. de C.V. 'C' 831,739 1,710,505 1.2
285,000 Controladora Comercial Mexicana,
S.A. de C.V. (COMERCI) 500,238 511,949 0.4
620,000 Grupo Gigante, S.A. de C.V. 'B' 377,825 383,833 0.2
------- --------- ---
1,709,802 2,606,287 1.8
Steel 26,000 Grupo Industrial Alfa S.A. de
C.V. 'A' 155,239 147,201 0.1
Utilities 67,250 Telefonos de Mexico S.A. de C.V.
(ADR) (b) 1,819,399 3,143,938 2.2
---------- ---------- ----
Total Investments in Mexico 11,356,708 15,313,274 10.8
Peru
Banking 156,723 Banco de Credito de Peru S.A. 311,134 408,876 0.3
Mining 93,125 Southern Peru Copper Corporation
S.A. 388,390 248,948 0.2
---------- ---------- ---
Total Investments in Peru 699,524 657,824 0.5
Venezuela
Building &
Construction 178,666 Corporacion Ceramica Carabobo
CA--S.A.C.A. (Class A) 683,535 432,738 0.3
239,333 Corporacion Ceramica Carabobo
CA--S.A.C.A. (Class B) 679,509 589,671 0.4
---------- --------- ---
1,363,044 1,022,409 0.7
Cement 177,300 Venezolana de Cementos
S.A.C.A.--(VENCEMOS) 273,494 275,427 0.2
Utilities 284,014 C.A. La Electricidad de Caracas
S.A.I.C.A.--S.A.C.A. 1,247,424 1,312,537 0.9
---------- --------- ---
Total Investments in Venezuela 2,883,962 2,610,373 1.8
Total Investments in
Latin America 33,285,873 38,908,512 27.3
PACIFIC
BASIN/ASIA
Australia
Banking 435,000 Westpac Banking Corporation 994,183 1,080,618 0.8
Media/Publishing 427,500 Nine Network Australia Limited 865,580 945,254 0.6
35,300 The News Corporation Limited 1,501,118 1,407,588 1.0
--------- --------- ---
2,366,698 2,352,842 1.6
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Paper & Pulp 438,800 Spicers Paper Limited 808,666 602,016 0.4
--------- --------- ---
Total Investments in Australia 4,169,547 4,035,476 2.8
China
Miscellaneous 520,000 China Bicycle 'B' 501,114 604,339 0.4
--------- --------- ---
Total Investments in China 501,114 604,339 0.4
Hong Kong
Banking 1,100,000 J.C.G. Holdings, Ltd. 501,560 607,244 0.4
3,095,000 Winton Holdings, Ltd. 1,009,730 1,189,001 0.9
--------- --------- ---
1,511,290 1,796,245 1.3
Diversified 830,000 Hutchison Whampoa Limited 1,735,971 2,229,339 1.6
Electronics 300,000 Tomei Industrial Holdings, Ltd. 0 14,334 0.0
Food 2,990,000 C.P. Pokphand Co., Ltd.(Ordinary) 1,055,004 917,000 0.6
Publishing &
Broadcasting 1,772,000 Ming Pao Enterprise Corp., Ltd. 870,697 1,555,992 1.1
Retail 504,000 Chow Sang Sang Holdings Limited 303,573 252,195 0.2
430,000 Fu Hui Jewelry Company, Ltd. 99,136 94,396 0.1
------- ------- ---
402,709 346,591 0.3
Telecommunications 3,652,000 ABC Communications Holdings, Ltd. 988,470 1,131,818 0.8
Textiles 3,646,000 Fountain Set Holdings Limited 525,864 635,602 0.4
3,900,000 United Success International
Holdings Limited 501,455 574,122 0.4
------- --------- ---
1,027,319 1,209,724 0.8
--------- --------- ---
Total Investments in Hong Kong 7,591,460 9,201,043 6.5
Indonesia
Real Estate 297,500 P.T. Pakuwon Jati 204,362 284,962 0.2
Tobacco 1,000,000 P.T. Hanjaya Mandala Sampoerna 1,362,110 2,969,349 2.1
--------- --------- ---
Total Investments in Indonesia 1,566,472 3,254,311 2.3
Korea
Automotive 26,239 Dong Ah Tire Industries 1,248,434 1,207,879 0.9
Food 9,460 Lotte Confectionary 587,943 466,678 0.3
Pharmaceuticals 31,397 Choong Wae Pharmaceutical
Corporation 962,822 1,052,711 0.7
Retail Stores 27,700 Shinsegae Department Store 1,018,280 1,145,718 0.8
Telecommunications 6,817 Korea Mobile Telecommunications
Corporation 1,328,813 1,392,354 1.0
Utilities 441,470 Korea Electric Power Corporation 1,094,396 911,770 0.7
--------- --------- ---
Total Investments in Korea 6,240,688 6,177,110 4.4
Malaysia
Banking 2,623,000 Public Bank Berhad 2,245,075 2,842,660 2.0
Financial Services 790,000 Commerce Asset-Holdings Berhad 1,516,366 1,858,643 1.3
Steel 785,000 Maruichi Malaysia Steel Tube
Berhad 1,295,988 1,489,714 1.1
Telecommunications 228,000 Leader Universal Holdings Berhad 339,992 922,108 0.6
Tobacco 405,000 Rothmans of Pall Mall (Malaysia)
Berhad 2,013,203 2,236,438 1.6
--------- --------- ---
Total Investments in Malaysia 7,410,624 9,349,563 6.6
</TABLE>
53
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (In U.S. dollars)
<CAPTION>
PACIFIC BASIN/
ASIA (concluded) Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
New Zealand
Beverages 1,000,000 D.B. Group Limited $ 384,967 $ 354,750 0.2%
Broadcasting &
Publishing 140,000 Independent Newspapers Limited 521,928 583,188 0.4
Electronics 300,100 Transmark Corp. Limited 209,261 209,695 0.2
Utilities 458,000 Enerco New Zealand Limited 475,194 531,738 0.4
--------- --------- ---
Total Investments in
New Zealand 1,591,350 1,679,371 1.2
Philippines
Beverages 108,000 San Miguel Corporation 'B' 501,254 497,238 0.3
Electric Utilities 143,536 Manila Electric Company
(MERALCO) 'B' 806,900 1,078,503 0.8
Telecommunications 8,600 Philippine Long Distance Co.
(ADR) (b) 298,291 306,375 0.2
--------- --------- ---
Total Investments in the
Philippines 1,606,445 1,882,116 1.3
Singapore
Banking Services 1,534,000 Hai Sun Hup Group, Ltd. 1,951,245 1,983,621 1.4
648,000 United Overseas Bank Limited
(Warrants) (c) 990,575 1,484,335 1.0
--------- --------- ---
Total Investments in Singapore 2,941,820 3,467,956 2.4
Sri Lanka
Building &
Construction 262,500 Lankan Tiles 337,398 190,039 0.1
Diversified 50,000 Aitken Spence 375,008 275,781 0.2
12,500 Aitken Spence (Rights) (h) 0 0 0.0
--------- --------- ---
375,008 275,781 0.2
--------- --------- ---
Total Investments in Sri Lanka 712,406 465,820 0.3
Taiwan
Closed-End Funds 42,900 The Taiwan Fund, Inc. 820,005 809,738 0.6
--------- --------- ---
Total Investments in Taiwan 820,005 809,738 0.6
Thailand
Banking 588,700 Bangkok Bank Limited "Foreign" 2,139,890 3,408,385 2.4
Health &
Personal Care 45,580 International Cosmetics Company
Ltd. "Foreign" 1,137,327 1,565,410 1.1
Insurance 159,000 Ayudhya Insurance Company
"Foreign" 1,187,126 1,177,314 0.8
Real Estate 358,000 M.D.X. Company, Ltd. "Foreign" 1,986,153 1,677,905 1.2
---------- ---------- -----
Total Investments in Thailand 6,450,496 7,829,014 5.5
Total Investments in the
Pacific Basin/Asia 41,602,427 48,755,857 34.3
<CAPTION>
SHORT-TERM Face
SECURITIES Amount
<S> <C> <S> <C> <C> <C>
United States
Commercial
Paper<F19> US$ 4,491,000 General Electric Capital Corp.,
3.375% due 7/01/1993 4,491,000 4,491,000 3.2
Total Investments in Short-Term
Securities 4,491,000 4,491,000 3.2
Total Investments
$125,132,732 140,579,806 98.8
============
Other Assets Less Liabilities
1,704,938 1.2
----------- ------
Net Assets $142,284,744 100.0%
============ ======
</TABLE>
54
<PAGE>
<TABLE>
<FN>
(a)Global Depositary Shares (GDS).
(b)American Depositary Receipt (ADR).
(c)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 of certain conditions
until the expiration date.
(d)The rights may be excercised until 7/23/1993.
(e)The rights may be excercised until 6/21/1993.
(f)The rights may be excercised until 6/21/1993.
(g)The rights may be excercised until 7/21/1993.
(h)The rights may be excercised until 7/15/1993.
++Non-income producing securities.
++++Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $4,316,000,
representing 3.0% of net assets.
<CAPTION>
Value
Issue Acquisition Dates Cost (Note 1a)
<S> <C> <C> <C>
BAESA (Buenos Aires Embotelladora S.A.) (ADR) 12/10/92--12/17/92 $ 987,500 $1,168,750
Grupo Financiero Bancomer S.A. de C.V. (ADR) 6/17/92--12/10/92 1,724,375 1,677,000
Pick Szeged Reszvenytarsasag (GDS) 11/20/92 123,250 180,242
Telefonica de Argentina S.A. (ADS) 12/17/91--12/28/92 1,095,078 1,290,459
---------- ----------
Total $3,930,203 $4,316,451
<FN> ========== ==========
*Commercial Paper is traded on a discount basis; the interest rates shown
is the discount rate paid at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$125,132,732) (Note 1a) $140,579,806
Foreign cash 1,332,242
Cash 1,261
Receivables:
Capital shares sold $1,479,659
Securities sold 952,656
Dividends 606,581 3,038,896
----------
Deferred organization expenses (Note 1g) 30,527
Prepaid registration fees and other assets (Note 1g) 63,574
------------
Total assets 145,046,306
------------
Liabilities: Payables:
Securities purchased 2,125,724
Capital shares redeemed 300,618
Investment adviser (Note 2) 128,199 2,554,541
----------
Accrued expenses and other liabilities 207,021
------------
Total liabilities 2,761,562
------------
Net Assets: Net assets $142,284,744
============
Net Assets Common stock, $0.10 par value, 200,000,000 shares authorized $1,224,348
Consist of: Paid-in capital in excess of par 127,055,100
Overdistributed investment loss--net (221,318)
Accumulated realized capital losses--net (1,060,089)
Unrealized appreciation on investments--net 15,286,703
-------------
Net assets-Equivalent to $11.62 per share based on 12,243,485 shares of capital outstanding $142,284,744
=============
Maximum offering price per share ($11.62/.96) $ 12.10
=============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1993
<S> <S> <C>
Investment Dividends (net of $463,584 foreign withholding tax) $2,945,278
Income Interest and discount earned 834,985
(Notes 1c & 1d): ----------
Total Income 3,780,263
----------
Expenses: Investment advisory fees (Note 2) 1,303,056
Custodian fees 393,138
Accounting services (Note 2) 127,749
Transfer agent fees (Note 2) 124,719
Printing and shareholder reports 91,317
Professional fees 75,070
Registration fees (Note 1g) 44,615
Directors' fees and expenses 31,406
Amortization of organization expenses (Note 1g) 26,165
Other 16,045
----------
Total expenses 2,233,280
----------
Realized transaction loss--net (Note 1b) (1,604,330)
Investment loss--net (57,347)
Realized & Realized loss on investments--net (207,491)
Unrealized Gain Change in unrealized appreciation on investments--net 6,852,494
(Loss)on Invest- ----------
ments-Net Net Increase in Net Assets Resulting from Operations $6,587,656
(Notes 1d & 3): ==========
See Notes to Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
Operations: Investment income (loss)--net $(57,347) $2,009,560
Realized gain (loss) on investments--net (207,491) 8,850,084
Change in unrealized appreciation on investments--net 6,852,494 6,731,860
----------- -----------
Net increase in net assets resulting from operations 6,587,656 17,591,504
----------- -----------
Dividends & Investment income--net (1,572,465) (1,845,700)
Distributions Realized gain on investments--net (8,062,455) (782,185)
to Shareholders ----------- -----------
(Notes 1h): Net decrease in net assets resulting from dividends
and distributions to shareholders (9,634,920) (2,627,885)
----------- -----------
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
Capital Share
Transactions
(Note 4): Net increase in net assets derived from capital share transactions 18,914,752 (493,246)
----------- -----------
Net Assets: Total increase in net assets 15,867,488 14,470,373
Beginning of year 126,417,256 111,946,883
----------- ------------
End of year* $142,284,744 $126,417,256
<FN> ============ ============
*Undistributed (overdistributed) investment income (loss)--net $(221,318) $ 1,408,494
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from
information provided in the financial statements.
<CAPTION>
For the
Period
Sept. 1, 1989++
For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1993++++ 1992 1991 1990
<S> <S> <C> <C> <C> <C>
Per Share Operating Net asset value beginning of period $ 11.92 $ 10.43 11.58 9.60
Performance: ---------- ---------- -------- --------
Investment income (loss)--net (.01) .18 .19 .21
Realized and unrealized gain (loss) on investments--net .55 1.56 (.70) 1.91
---------- ---------- -------- --------
Total from investment operations .54 1.74 (.51) 2.12
---------- ---------- -------- --------
Less dividends and distributions:
Investment income--net (.14) (.17) (.15) (.13)
Realized gain on investments--net (.70) (.08) (.49) (.01)
---------- ---------- -------- --------
Total dividends and distributions (.84) (.25) (.64) (.14)
---------- ---------- -------- --------
Net asset value, end of period $ 11.62 $ 11.92 $ 10.43 $ 11.58
========== ========== ======== ========
Total Investment Based on net asset value per share +5.17% +17.02% -4.45% +22.29%
Return:** ========== ========== ======== ========
Ratios to Average Expenses 1.71% 1.64% 1.77% 1.71%*
Net Assets: ========== ========== ======== ========
Investment income (loss)--net (.04)% 1.73% 1.98% 2.69%*
========== ========== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $ 142,285 $ 126,417 $111,947 $104,033
========== ========== ======== ========
Portfolio turnover 91.72% 71.05% 84.74% 64.53%
========== ========== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average number of shares outstanding.
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Developing Capital Markets Fund, Inc. (the
"Fund") is registered under the Investment Company Act of 1940
as a non-diversified, open-end investment management company. The
following is a summary of significant accounting policies
followed by the Fund:
(a) Valuation of Securities--Portfolio securities, which are
traded on stock exchanges, are valued at the last sale price on the
principal market 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. Securities traded
in the over-the-counter market are valued at the last available bid prices
obtained from one or more dealers in the over-the-counter market
prior to the time of valuation. Portfolio securities, which are
traded both in the over-the-counter market and on a stock
exchange, are valued according to the broadest and most
representative market. Options written by the Fund are valued at
the last asked price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market,
the average of the last asked price as obtained from one or more
dealers. Options purchased by the Fund are valued at their last
bid price in the case of exchange-traded options or, in the case
of options traded in the over-the-counter market, the average of
the last bid price as obtained from two or more dealers. Other
investments, including futures contracts and related options, are
stated at market value. Short-term securities are valued at
amortized cost, which approximates market. Securities and assets
for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign Currency Transactions--Transactions denominated in
foreign currencies are recorded in the Fund's records at the rate
prevailing when earned or incurred. Asset and liability accounts
that are denominated in a foreign currency are adjusted to reflect the
current exchange rate at the end of the period. Transaction gains or
losses resulting from changes in the exchange rate during the reporting
period or upon settlement of the foreign currency transactions
are reported in net investment income for the current period.
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 net investment income is recorded from the
date the Fund enters into such contracts. Premium or discount is
amortized over the life of the contracts.
(c) 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 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 interest, dividends and capital gains at
various rates.
(d) Security Transactions and Investment Income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Dividend income is recorded on
the ex-dividend date, except that the ex-dividend date has passed
certain dividends from foreign securities that are recorded as
soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(e) Options--The Fund can write covered call options and purchase
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 sold through an exercise of an option, the
related premium received (or paid) is deducted from (or added to)
the basis 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.
(f) 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.
(g) Deferred Organization Expenses and Prepaid Registration
Fees--Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration
fees are charged to expense as the related shares are issued.
(h) Dividends and Distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(i) Basis of Consolidation--The accompanying consolidated
financial statements include the accounts of Inversiones en
Mercado Accionario de Valores Chile Ltda., a wholly-owned
subsidiary, which primarily invests in Chilean securities.
Intercompany accounts and transactions have been eliminated.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name under
which Merrill Lynch Investment Management, Inc. ("MLIM") does
business. MLIM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. The Fund has also entered into a Distribution
Agreement and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of MLIM.
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 1.0%, on an
annual basis, of the average daily value of the Fund's net
assets. The Investment Advisory Agreement obligates MLAM to
reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage
fees and commissions, and extraordinary items) exceed
2.5% of the Fund's first $30 million of average daily net assets,
2.0% of the Fund's next $70 million of average daily net assets,
and 1.5% of the average daily net assets in excess thereof. MLAM's
obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to MLAM during any
fiscal year which will cause such expenses to exceed the expense
limitations at the time of such payment.
During the year ended June 30, 1993, MLFD earned underwriting
discounts of $27,155, and Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S") earned dealer concessions of $366,472 on sales
of the Fund's shares. MLPF&S also received $1,440 in commissions
on the execution of portfolio security transactions during the
year.
58
<PAGE>
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., 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 MLIM, FDS, MLFD, MLPF&S, and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended June 30, 1993 were $128,114,883
and $108,493,379, respectively. Net realized and unrealized gains
(losses) as of June 30, 1993 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ (82,943) $15,447,074
Short-term investments 155 --
Options purchased (124,703) --
Foreign currency transactions (1,604,330) (160,371)
----------- -----------
Total $(1,811,821) $15,286,703
=========== ===========
Transactions in put options purchased for the year ended June 30,
1993 were as follows:
Premiums
Par Value Paid
Outstanding put options purchased
at beginning of year -- --
Options purchased $5,000,000 $126,500
Options expired (5,000,000) (126,500)
---------- --------
Outstanding put options purchased
at end of year $ -- $ --
========== ========
As of June 30, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $14,891,828, of which $22,603,371
related to appreciated securities and $7,711,543 related to
depreciated securities. The aggregate cost of investments at June
30, 1993 for Federal income tax purposes was $125,687,978.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
June 30, 1993 Shares Amount
Shares sold 2,825,803 $31,697,736
Shares issued to shareholders in
reinvestment of dividends and distributions 744,456 7,999,187
--------- -----------
Total issued 3,570,259 39,696,923
Shares redeemed (1,927,987) (20,782,171)
---------- -----------
Net increase 1,642,272 $18,914,752
========== ===========
For the Year Ended Dollar
June 30, 1992 Shares Amount
Shares sold 2,054,712 $23,785,838
Shares issued to shareholders in
reinvestment of dividends and distributions 206,311 2,187,127
---------- ----------
Total issued 2,261,023 25,972,965
Shares redeemed (2,392,674) (26,466,211)
---------- -----------
Net decrease (131,651) $ (493,246)
========== ===========
5. Commitments:
At June 30, 1993, the Fund entered into forward exchange
contracts under which it had agreed to buy and sell foreign
currencies with values of approximately $150,000 and $358,000,
respectively.
6. Subsequent Event:
On July 20, 1993, the Board of Directors declared an ordinary
income dividend of $0.069024 per share payable on August 11, 1993
to shareholders of record on August 3, 1993.
60
<PAGE>
THE FOLLOWING SEMI-ANNUAL FINANCIAL STATEMENTS FOR THE FUND FOR THE PERIOD
ENDED DECEMBER 31, 1993, ARE UNAUDITED.
61
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
EUROPE
Austria
Banking 20,500 Creditanstalt--Bankverein AG $ 786,450 $ 1,345,365 0.4%
Building & Construction 4,000 Bau Holding AG 362,527 387,203 0.1
Oil--International 16,500 Unternehmensgruppe OMV AG 1,039,188 1,218,212 0.4
Textiles 18,000 Lenzing AG 916,404 1,557,834 0.5
Transportation 26,400 Jenbacher Transportsysteme AG 1,588,046 502,445 0.2
Utilities 12,500 Energie--Versorgung Niederosterreich AG (EVN) 989,417 1,604,799 0.5
Total Investments in Austria 5,682,032 6,615,858 2.1
France
Banking 40,600 Credit Commercial de France (CCF) 1,570,686 2,079,763 0.7
Building & Construction 21,353 Compagnie de Saint Gobain 1,832,679 2,122,665 0.7
Diversified 9,000 Chargeurs S.A. 2,032,987 2,078,445 0.6
Oil Field Equipment 60,000 Coflexip 960,000 975,000 0.3
Publishing & 5,082 Canal Plus 1,296,277 958,836 0.3
Broadcasting
Total Investments in France 7,692,629 8,214,709 2.6
Greece
Banking 7,890 Credit Bank S.A. 512,271 540,042 0.2
84,650 Ergo Bank (Registered) S.A. 3,038,469 3,092,393 1.0
------------ ------------ -----
3,550,740 3,632,435 1.2
Beverage 52,500 Hellenic Bottling Co. S.A. (Bearer) 818,772 1,843,085 0.6
Building & Construction 42,220 Michaniki S.A. 1,074,231 2,626,250 0.8
8,444 Michaniki S.A. (Preferred) 0 525,250 0.2
48,830 Titan Cement S.A. 1,960,314 1,569,186 0.5
------------ ------------ -----
3,034,545 4,720,686 1.5
Food 62,940 J. Boutari & Son S.A. (Bearer) 1,088,749 669,574 0.2
52,920 Delta Dairy S.A. (Ordinary) 1,388,025 1,882,261 0.6
8,750 Delta Dairy S.A. (Preferred) 247,584 259,936 0.1
6,600 Katselis Sons S.A. 56,182 60,674 0.0
------------ ------------ -----
2,780,540 2,872,445 0.9
Total Investments in Greece 10,184,597 13,068,651 4.2
Hungary
Food 25,500 ++Pick Szeged Reszvenytarsasag (GDS) (a) 782,102 1,055,955 0.3
Retail Stores 246,000 FOTEX RT--Fotex Elso Amerikai--Magyar
Fotoszolgaltatasi Reszvenytarsasag 716,761 1,069,565 0.3
Total Investments in Hungary 1,498,863 2,125,520 0.6
Italy
Automotive 841,666 Fiat Group S.p.A. (Preferred) 1,326,823 1,141,242 0.4
336,666 Fiat Group S.p.A. (Preferred) (Warrants) (c) 107,058 321,158 0.1
20,200 La Rinascente S.p.A. 116,905 106,896 0.0
------------ ------------ -----
1,550,786 1,569,296 0.5
Insurance 125,000 Unipol Compagnie Assicuratice S.p.A. (Preferred) 502,555 525,104 0.2
Total Investments in Italy 2,053,341 2,094,400 0.7
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Poland
Food 40,000 International Fast Food Corp. 267,500 240,000 0.1
Total Investments in Poland 267,500 240,000 0.1
Portugal
Banking 115,100 Banco Comercial Portugues, S.A. (ADR) (b) 1,621,317 1,755,275 0.5
352,212 Banco Comercial Portugues, S.A. (Registered) 4,850,549 5,300,123 1.7
77,000 Banco Totta E Acores S.A. 1,657,285 1,429,315 0.4
------------ ------------ -----
8,129,151 8,484,713 2.6
Beverages 29,100 Uniao Cervejaria S.A. (UNICER) 790,773 874,482 0.3
Building & Construction 72,600 Efacec S.A. 2,453,617 2,350,153 0.7
82,300 Soares da Costa S.A. 1,477,775 1,821,126 0.6
172,200 Sociedade de Empreitadas Somague, S.A. 1,342,194 1,637,216 0.5
------------ ------------ -----
5,273,586 5,808,495 1.8
Leisure & Entertainment 27,850 Estoril--Sol S.A. 214,326 211,200 0.1
Paints 21,875 CIN--Corporacao Industrial do Norte, S.A. 521,403 534,805 0.2
Retail 42,000 Jeronimo Martins S.A. 1,239,927 2,400,679 0.7
10,000 Sonae Investimentos S.A. 112,457 147,142 0.0
------------ ------------ -----
1,352,384 2,547,821 0.7
Total Investments in Portugal 16,281,623 18,461,516 5.7
Russia
Telecommunications 39,450 Petersburg Long Distance Inc. (ADR) (b) 301,256 443,812 0.1
Total Investments in Russia 301,256 443,812 0.1
Spain
Building & Construction 125,000 Uralita Group S.A. 956,878 1,074,799 0.3
Total Investments in Spain 956,878 1,074,799 0.3
Turkey
Banking--International 9,498,000 Yapi Kredi Bankasi A.S. 2,982,550 3,570,197 1.1
Beverage 502,400 Ege Biracilik Ve Malt Sanayii A.S. 472,057 1,450,074 0.5
Retail 231,400 Migros A.S. 791,541 3,028,796 0.9
Total Investments in Turkey 4,246,148 8,049,067 2.5
Total Investments in Europe 49,164,867 60,388,332 18.9
</TABLE>
63
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
LATIN AMERICA
Argentina
Automobiles 51,060 Compania Interamericana de Automoviles S.A. (CINA) $ 2,648,304 $ 2,711,603 0.8%
Banking 138,000 Banco de Galicia y Buenos Aires S.A. 1,408,096 2,078,066 0.7
252,148 Banco Frances del Rio de la Plata S.A. 1,426,566 3,208,697 1.0
------------ ------------ -----
2,834,662 5,286,763 1.7
Oil & Related 1,551,800 Astra Compania Argentina de Petroleo S.A. 3,240,628 3,514,096 1.1
Telecommunications 200,000 Telecom Argentina Stet--France Telecom S.A. 983,748 1,252,505 0.4
23,000 Telecom Argentina Stet--France Telecom S.A. (ADR) (b) 971,085 1,426,000 0.4
34,472 ++Telefonica de Argentina S.A. (ADR) (b) 1,095,078 2,499,220 0.8
------------ ------------ -----
3,049,911 5,177,725 1.6
Total Investments in Argentina 11,773,505 16,690,187 5.2
Brazil
Banking 77,673,444 Banco Bradesco S.A. 1,757,789 2,202,575 0.7
2,000,000 Banco Itau S.A. 386,442 380,169 0.1
19,127,979 Banco Nacional S.A. 777,477 1,162,306 0.4
------------ ------------ -----
2,921,708 3,745,050 1.2
Beverage 5,644,200 Companhia Cervejaria Brahma PN (Preferred) 1,094,100 1,213,580 0.4
574,872 Companhia Cervejaria Brahma S.A. (Warrants) (c) 14,956 5,968 0.0
------------ ------------ -----
1,109,056 1,219,548 0.4
Food 81,780,250 Sadia Concordia S.A. Industria e Comercio PN
(Preferred) 685,295 547,903 0.2
Mining 18,892,000 Companhia Vale do Rio Doce PN (CVRD) (Preferred) 1,327,142 1,618,927 0.6
Retail 3,118,200 Lojas Americanas S.A. 561,877 476,120 0.1
Steel 492,500 Acos Industria Villares S.A. 123,508 76,581 0.0
27,659,900 Companhia Siderurgica Nacional S.A.--CSN 506,674 741,252 0.2
4,639,700,000 Usinas Siderurgicas de Minas
Gerais--Usiminas S.A. 2,583,705 3,296,414 1.0
------------ ------------ -----
3,213,887 4,114,247 1.2
Telecommunications 24,000 Telecomunicacoes Brasileiras S.A.--Telebras ON (ADR) (b) 801,500 798,000 0.2
48,300,000 Telecomunicacoes Brasileiras S.A.--Telebras ON 1,477,378 1,294,382 0.4
114,000,000 Telecomunicacoes Brasileiras S.A.--Telebras PN
(Preferred) 3,276,433 3,886,323 1.2
------------ ------------ -----
5,555,311 5,978,705 1.8
Utilities 31,284,900 Centrais Eletricas Brasileiras S.A.--Eletrobras
(Preferred) 4,654,562 5,069,380 1.6
Total Investments in Brazil 20,028,838 22,769,880 7.1
Chile
Apparel 7,458,443 Bata Chile S.A. 2,103,744 2,491,956 0.8
Building & Construction 39,052 Empresas Pizarreno S.A. 72,396 70,257 0.0
Total Investments in Chile 2,176,140 2,562,213 0.8
</TABLE>
64
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Mexico
Banking 66,700 ++Grupo Financiero Bancomer, S.A. de C.V. (ADR) (b) 2,224,175 2,768,050 0.9
168,250 ++Servicios Financieros Quadrum, S.A. de C.V. (ADR) (b) 1,954,207 5,384,000 1.7
------------ ------------ -----
4,178,382 8,152,050 2.6
Beverage 50,000 ++Fomento Economico Mexicano, S.A. de C.V. (Femsa)
(ADR) (b) 195,000 322,250 0.1
447,500 Fomento Economico Mexicano, S.A. de C.V. (Femsa)
(Ordinary) 1,780,336 2,947,303 0.9
------------ ------------ -----
1,975,336 3,269,553 1.0
Building & Construction 373,000 Tolmex, S.A. de C.V. 'B' 999,729 5,195,572 1.6
Capital Goods 48,000 Cementos Mexicanos, S.A. de C.V. (Series B) 848,958 1,431,498 0.4
Diversified 491,000 Grupo Carso, S.A. de C.V. 'A' 3,005,499 5,360,676 1.7
80,000 Grupo Posadas, S.A. de C.V. (ADR) (b) 1,172,100 1,480,000 0.5
------------ ------------ ----
4,177,599 6,840,676 2.2
Electrical 250,000 Grupo Empresarial Fenix, S.A. de C.V. ELEKTRA
'L' Shares 2,051,523 2,222,222 0.7
Food 1,600,000 Grupo Herdez, S.A. de C.V. 'A' 1,450,009 1,777,778 0.6
Health & Personal Care 162,500 Kimberly-Clark de Mexico, S.A. de C.V. 2,193,490 3,045,894 0.9
Leisure 93,000 Grupo Situr, S.A. de C.V. (ADR) (b) 1,700,594 2,650,500 0.8
Metals 70,000 ++Grupo Simec, S.A. de C.V. (ADR) (b) 980,000 2,310,000 0.7
745,000 Grupo Simec, S.A. de C.V. (Ordinary) 670,192 1,204,477 0.4
------------ ------------ -----
1,650,192 3,514,477 1.1
Retail 2,375,000 Cifra, S.A. de C.V. 'C' 4,796,743 7,128,824 2.2
520,000 El Puerto de Liverpool, S.A. de C.V. 'C' (Non-Voting) 716,558 978,035 0.3
------------ ------------ -----
5,513,301 8,106,859 2.5
Telecommunications 12,500 Empresas ICA Sociedad Controladora, S.A. de C.V. 222,625 353,125 0.1
Utilities 119,250 Telefonos de Mexico, S.A. de C.V. (ADR) (b) 4,756,133 8,049,375 2.5
Total Investments in Mexico 31,717,871 54,609,579 17.0
Peru
Banking 326,140 Banco de Credito de Peru S.A. 311,134 676,495 0.2
Mining 116,879 Southern Peru Copper Corp. S.A. 388,390 352,535 0.1
Total Investments in Peru 699,524 1,029,030 0.3
Venezuela
Building & Construction 178,666 Corporacion Ceramica Carabobo CA--S.A.C.A. (Class A) 683,535 420,787 0.1
239,333 Corporacion Ceramica Carabobo CA--S.A.C.A. (Class B) 679,509 518,574 0.2
------------ ------------ -----
1,363,044 939,361 0.3
Cement 177,300 Venezolana de Cementos S.A.C.A.--(VENCEMOS) 273,494 277,266 0.1
Utilities 733,202 C.A. La Electricidad de Caracas S.A.I.C.A.--S.A.C.A. 2,360,661 2,541,859 0.8
Total Investments in Venezuela 3,997,199 3,758,486 1.2
Total Investments in Latin America 70,393,077 101,419,375 31.6
</TABLE>
65
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Value Percent of
Industries Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
PACIFIC BASIN/ASIA
Australia
Automotive 265,000 Amway Asia Pacific Ltd. $ 7,549,106 $ 9,440,625 2.9%
Media/Publishing 458,300 Nine Network Australia Ltd. 949,114 1,723,207 0.5
Paper & Pulp 438,800 Spicers Paper Ltd. 808,666 804,097 0.3
Total Investments in Australia 9,306,886 11,967,929 3.7
China
Appliances & 676,000 Shenzhen China Bicycles 'B' Co. (Holdings) Ltd. 501,114 800,906 0.2
Household Durables
Total Investments in China 501,114 800,906 0.2
Hong Kong
Apparel 3,172,000 Top Form International Ltd. 909,258 862,515 0.3
Banking 186,000 Hong Kong & Shanghai Banking Corporation Holdings PLC 2,012,703 2,769,649 0.9
3,764,000 J.C.G. Holdings, Ltd. 2,407,812 3,021,727 0.9
11,005,000 Winton Holdings, Ltd. 3,849,116 3,776,156 1.2
------------ ------------ -----
8,269,631 9,567,532 3.0
Conglomerates 1,480,000 Sime Darby (Hong Kong) Ltd. 2,470,819 2,702,059 0.9
Diversified 5,220,000 Hopewell Smart (Warrants) (c) 896,901 2,889,486 0.9
Electrical Equipment 358,000 Johnson Electric Holdings Ltd. 897,892 917,830 0.3
Finance 1,800,000 Hopewell Holdings Ltd. 1,504,191 2,354,008 0.7
Food 9,039,000 C.P. Pokphand Co., Ltd. (Ordinary) 2,895,870 3,979,360 1.3
Publishing 1,772,000 Ming Pao Enterprise Corp., Ltd. 870,697 2,225,612 0.7
& Broadcasting
Real Estate 460,000 Cheung Kong Holdings Ltd. 775,308 1,584,358 0.5
2,066,152 South Seas Development Co., Ltd. 0 339,766 0.1
5,894,000 Sun Hung Kai Properties, Ltd. 3,575,674 4,769,843 1.5
------------ ------------ -----
4,350,982 6,693,967 2.1
Steel 224,000 Linkful International Holdings Ltd. 70,546 67,435 0.0
Telecommunications 1,536,000 ABC Communications Holdings, Ltd. 446,373 775,657 0.2
Textiles 5,994,000 Fountain Set Holdings Ltd. 954,313 1,269,921 0.4
7,740,000 United Success International Holdings Ltd. 1,029,241 1,092,399 0.3
------------ ------------ -----
1,983,554 2,362,320 0.7
Utilities--Gas 700,000 Hong Kong and China Gas Co. (The) 1,545,089 2,030,299 0.6
Total Investments in Hong Kong 27,111,803 37,428,080 11.7
India
Aluminum 60,000 Hindalco Industries Ltd. (GDS) (a) 831,833 1,605,000 0.5
26,500 Hindalco Industries Ltd. (Ordinary) 496,362 582,975 0.2
30,000 Hindalco Industries Ltd. (Warrants) (c) 134,167 330,000 0.1
------------ ------------ -----
1,462,362 2,517,975 0.8
Building & Construction 22,000 The Associated Cement Co. Ltd. 1,514,678 1,999,044 0.6
Electrical Equipment 280,000 Bombay Electric Supply Co. Ltd. 1,519,270 1,571,178 0.5
Environmental 65,000 Western Paques (India) Ltd. 233,861 279,770 0.1
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Insurance 70,000 ++Grasim Industries Ltd. (ADR) (b) 1,015,000 1,575,000 0.5
Total Investments in India 5,745,171 7,942,967 2.5
Indonesia
Tobacco 420,000 P.T. Gudang Garam 2,010,276 2,009,950 0.6
936,000 P.T. Hanjaya Mandala Sampoerna 1,604,227 5,698,934 1.8
------------ ------------ -----
3,614,503 7,708,884 2.4
Total Investments in Indonesia 3,614,503 7,708,884 2.4
Korea
Automotive 26,239 Dong Ah Tire Industries 1,248,434 1,748,725 0.5
Food 9,460 Lotte Confectionary 587,944 1,164,772 0.4
Pharmaceuticals 31,397 Choong Wae Pharmaceutical Corp. 962,822 1,112,569 0.3
Retail Stores 7,700 Shinsegae Department Store 283,129 492,281 0.2
4,432 Shinsegae Department Store (New) 107,310 274,783 0.1
------------ ------------ -----
390,439 767,064 0.3
Telecommunications 6,817 Korea Mobile Telecommunications Corp. 1,328,813 3,637,394 1.1
Utilities 41,470 Korea Electric Power Corp. 1,094,397 1,125,255 0.4
Total Investments in Korea 5,612,849 9,555,779 3.0
Malaysia
Building & Construction 561,000 IJM Corp. BHD 2,018,065 2,229,415 0.7
Construction & Housing 458,000 Golden Plus Holdings BHD 2,004,616 2,772,665 0.9
Financial Services 790,000 Commerce Asset-Holdings BHD 1,516,366 4,078,366 1.3
263,333 Commerce Asset-Holdings BHD (TSRs) 88,025 83,621 0.0
493,000 Idris Hydraulic BHD 1,512,666 1,446,500 0.4
1,653,000 Public Bank BHD "Foreign" 1,642,679 3,844,664 1.2
------------ ------------ -----
4,759,736 9,453,151 2.9
Real Estate 1,219,000 Tan & Tan Developments BHD 2,003,691 1,937,723 0.6
Steel 1,251,000 Maruichi (Malaysia) Steel Tube BHD 2,501,235 3,182,674 1.0
Telecommunications 228,000 Leader Universal Holdings BHD 339,992 1,177,047 0.4
Total Investments in Malaysia 13,627,335 20,752,675 6.5
New Zealand
Beverages 1,000,000 D.B. Group Ltd. 384,967 402,480 0.1
Broadcasting 66,800 Independent Newspapers Ltd. 221,330 265,869 0.0
& Publishing
Total Investments in New Zealand 606,297 668,349 0.1
Pakistan
Banking--International 146,200 Bank of Punjab 500,391 612,205 0.2
Electrical Equipment 185,000 Karachi Electrical Supply Corp. 130,550 253,615 0.1
Total Investments in Pakistan 630,941 865,820 0.3
</TABLE>
67
<PAGE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
PACIFIC BASIN/ASIA
(concluded)
Philippines
Beverages 108,000 San Miguel Corp. 'B' $ 501,254 $ 995,255 0.3%
Electric Utilities 29,786 Manila Electric Co. (MERALCO) 'B' 165,929 538,105 0.2
Total Investments in the Philippines 667,183 1,533,360 0.5
Singapore
Banking Services 1,029,000 United Overseas Bank Ltd. (Warrants) (c) 1,988,883 5,119,403 1.6
Health Care Products 1,475,000 Parkway Holdings Ltd. 2,031,451 3,632,463 1.1
& Services
Total Investments in Singapore 4,020,334 8,751,866 2.7
Sri Lanka
Building & Construction 262,500 Lankan Tiles 337,398 376,942 0.1
Diversified 62,500 Aitken Spence 413,990 525,668 0.2
Total Investments in Sri Lanka 751,388 902,610 0.3
Thailand
Banking 317,900 Bangkok Bank Ltd. "Foreign" 1,546,650 3,137,908 1.0
Finance $2,750,000 ++Finance One PLC, 5.75% due 6/17/2003 3,388,750 7,425,000 2.3
Health & Personal Care 34,480 International Cosmetics Co. Ltd. "Foreign" 1,039,171 1,480,222 0.5
Industrial $1,305,000 Sino Land Co. Ltd., 5.00% due 10/21/2000 1,777,300 1,872,675 0.6
Insurance 159,000 Ayudhya Insurance Co. "Foreign" 1,187,126 1,992,949 0.6
Real Estate 101,800 M.D.X. Co. Ltd. "Foreign" 564,712 813,443 0.3
Steel $3,000,000 NTS Steel Groups Co. Ltd., 4.00% due 12/16/2008 3,000,000 3,127,500 1.0
Telecommunications 130,000 TelecomAsia Corp. Public Co. Ltd. 284,022 779,083 0.2
14,300 ++United Communication Industry Public Co. Ltd. 130,577 128,829 0.0
------------ ------------ -----
414,599 907,912 0.2
Total Investments in Thailand 12,918,308 20,757,609 6.5
Total Investments in the Pacific Basin/Asia 85,114,112 129,636,834 40.4
<CAPTION>
SHORT-TERM SECURITIES Face Amount
<S> <C> <S> <C> <C> <C>
United States
Commercial Paper* $8,714,000 Delaware Funding Corp., 3.30% due 1/14/1994 8,703,616 8,703,616 2.7
9,000,000 General Electric Capital Corp., 3.22% due 1/03/1994 8,998,390 8,998,390 2.8
Total Investments in Short-Term Securities 17,702,006 17,702,006 5.5
Total Investments $222,374,062 309,146,547 96.4
============
Other Assets Less Liabilities 11,507,794 3.6
------------ -----
Net Assets $320,654,341 100.0%
============ =====
</TABLE>
*Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) Global Depositary Shares (GDS).
(b) American Depositary Receipt (ADR).
++Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $23,468,000, representing 7.3% of net
assets.
68
<PAGE>
<TABLE>
<CAPTION>
Value
Issue Acquisition Dates Cost (Note 1a)
<S> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
Grasim Industries Ltd. (ADR) 8/24/93 $ 1,015,000 $ 1,575,000
Grupo Financiero Bancomer, S.A. de C.V. (ADR) 6/17/92-12/10/92 2,224,175 2,768,050
Grupo Simec, S.A. de C.V. (ADR) 7/01/93 980,000 2,310,000
Finance One PLC, 5.75% due 6/17/2003 9/17/93 3,388,750 7,425,000
Fomento Economico Mexicano, S.A. de C.V. (Femsa) (ADR) 6/21/93 195,000 322,250
Pick Szeged Reszvenytarsasag (GDS) 11/20/92 782,102 1,055,955
Servicios Financieros Quadrum, S.A. de C.V. (ADR) 7/28/93 1,954,207 5,384,000
Telefonica de Argentina S.A. (ADR) 12/17/91-12/28/92 1,095,078 2,499,220
United Communication Industry Public Co. Ltd. 12/03/93 130,577 128,829
Total $11,764,889 $23,468,304
=========== ===========
See Notes to Financial Statements.
</TABLE>
(c) 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
of certain conditions until the expiration date.
69
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$222,374,062) (Note 1a) $309,146,547
Foreign cash 2,345,717
Cash 62,023
Receivables:
Capital shares sold $12,896,975
Securities sold 9,006,327
Dividends 287,075
Interest 104,429 22,294,806
-----------
Deferred organization expenses (Note 1g) 30,527
Prepaid registration fees and other assets (Note 1g) 63,573
------------
Total assets 333,943,193
------------
Liabilities: Payables:
Securities purchased 11,913,004
Capital shares redeemed 751,150
Investment adviser (Note 2) 233,509 12,897,663
-----------
Accrued expenses and other liabilities 391,189
------------
Total liabilities 13,288,852
------------
Net Assets: Net assets $320,654,341
============
Net Assets Common Stock, $0.10 par value, 200,000,000 shares authorized $ 1,908,322
Consist of: Paid-in capital in excess of par 222,800,916
Accumulated investment loss--net (894,865)
Undistributed realized capital gains from investment and foreign currency transactions--net 9,992,527
Unrealized appreciation on investments and foreign currency transactions--net 86,847,441
------------
Net assets--Equivalent to $16.80 per share based on 19,083,223 shares of capital outstanding $320,654,341
============
Maximum offering price per share ($16.80/.935) $ 17.97
============
See Notes to Financial Statements.
</TABLE>
70
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended December 31, 1993
<S> <S> <C> <C>
Investment Dividends (net of $118,607 foreign withholding tax) $ 1,538,602
Income Interest and discount earned 192,120
(Notes 1c & 1d): ------------
Total income 1,730,722
------------
Expenses: Investment advisory fees (Note 2) 1,020,345
Custodian fees 219,938
Transfer agent fees (Note 2) 67,678
Accounting services (Note 2) 48,791
Printing and shareholder reports 46,751
Professional fees 36,052
Registration fees (Note 1g) 23,722
Directors' fees and expenses 15,215
Amortization of organization expenses (Note 1g) 12,779
Other 10,502
------------
Total expenses 1,501,773
------------
Investment income--net 228,949
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $16,346,632
(Loss) on Foreign currency transactions (485,576) 15,861,056
Investments & -----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 71,325,411
(Notes 1b,1d & 3): Foreign currency transactions 235,328 71,560,739
----------- ------------
Net realized and unrealized gain on investments and foreign currency
transactions 87,421,795
------------
Net Increase in Net Assets Resulting from Operations $ 87,650,744
============
See Notes to Financial Statements.
</TABLE>
71
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 1993 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 228,949 $ 1,546,983
Realized gain (loss) on investments and foreign currency transactions--net 15,861,056 (1,811,821)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 71,560,739 6,852,494
------------ ------------
Net increase in net assets resulting from operations 87,650,744 6,587,656
------------ ------------
Dividends & Investment income--net (902,496) (1,572,465)
Distributions Realized gain on investments--net (4,808,440) (8,062,455)
To Shareholders ------------ ------------
(Note 1h): Net decrease in net assets resulting from dividends and distributions to
shareholders (5,710,936) (9,634,920)
------------ ------------
Capital Share Net increase in net assets derived from capital share transactions 96,429,789 18,914,752
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase in net assets 178,369,597 15,867,488
Beginning of period 142,284,744 126,417,256
------------ ------------
End of period* $320,654,341 $142,284,744
============ ============
<FN>
*Accumulated investment loss--net $ (894,865) $ (221,318)
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have been derived For the Six Period
from information provided in the financial statements. Months Ended For the Year Ended Sept. 1, 1989++
December 31, June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1993 1993++++ 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.62 $ 11.92 $ 10.43 $ 11.58 $ 9.60
Operating -------- -------- -------- -------- --------
Performance: Investment income--net (1) .05 .12 .15 .24 .24
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) 5.48 .42 1.59 (.75) 1.88
-------- -------- -------- -------- --------
Total from investment operations 5.53 .54 1.74 (.51) 2.12
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.07) (.14) (.17) (.15) (.13)
Realized gain on investments--net (.28) (.70) (.08) (.49) (.01)
-------- -------- -------- -------- --------
Total dividends and distributions (.35) (.84) (.25) (.64) (.14)
-------- -------- -------- -------- --------
Net asset value, end of period $ 16.80 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ========
</TABLE>
72
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Total Investment Based on net asset value per share 68.96%+++ 5.17% 17.02% (4.45%) 22.29%+++
Return:** ======== ======== ======== ======== ========
Ratios to Expenses 1.47%* 1.71% 1.64% 1.77% 1.71%
Average ======== ======== ======== ======== ========
Net Assets: Investment income (loss)--net .22%* (.04%) 1.73% 1.98% 2.69%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $320,654 $142,285 $126,417 $111,947 $104,033
Data: ======== ======== ======== ======== ========
Portfolio turnover 37.27% 91.72% 71.05% 84.74% 64.53%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average number of shares outstanding.
+++Aggregate total investment return.
(1) Foreign currency transaction amounts have been reclassified
to conform to the 1993 presentation.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund")
is registered under the Investment Company Act of 1940 as a non-
diversified, open-end investment management company. The
following is a summary of significant accounting policies followed
by the Fund:
(a) Valuation of Securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the principal
market 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. Securities traded in the over-
the-counter market are valued at the last available bid prices obtained
from one or more dealers in the over-the-counter market prior to the
time of valuation. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued accord-
ing to the broadest and most representative market. Options written
by the Fund are valued at the last asked price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last asked price as
obtained from one or more dealers. Options purchased by the Fund
are valued at their last bid price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter
market, the average of the last bid price as obtained from two or
more dealers. Other investments, including futures contracts and
related options, are stated at market value. Short-term securities
are valued at amortized cost, which approximates market. Securities
and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) 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) such transactions expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the Fund
enters into such contracts. Premium or discount is amortized over
the life of the contracts.
73
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(c) 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 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 interest, dividends and capital gains at
various rates.
(d) Security Transactions and Investment Income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that the ex-dividend date has passed, certain dividends
from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date. Interest income (including amortization
of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(e) Options--The Fund can write covered call options and purchase
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 sold through an exercise of an option, the
related premium received (or paid) is deducted from (or added to)
the basis 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.
(f) 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.
(g) Deferred Organization Expenses and Prepaid Registration Fees--
Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration fees
are charged to expense as the related shares are issued.
(h) Dividends and Distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(i) Basis of Consolidation--The accompanying consolidated financial
statements include the accounts of Inversiones en Mercado
Accionario de Valores Chile Ltda., a wholly-owned subsidiary, which
primarily invests in Chilean securities. Intercompany accounts and
transactions have been eliminated.
(j) Reclassifications--Certain 1992 amounts have been reclassified
to conform to the 1993 presentations.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management ("MLAM"). MLAM is the
name under which Merrill Lynch Investment Management, Inc.
("MLIM") does business. MLIM is an indirect wholly-owned sub-
sidiary of Merrill Lynch & Co., Inc. The Fund has also entered
into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of MLIM.
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 1.0%, on an annual
basis, of the average daily value of the Fund's net assets. The
Investment Advisory Agreement obligates MLAM to reimburse the
Fund to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily
net assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
No fee payment will be made to MLAM during any fiscal year which
will cause such expenses to exceed the expense limitations at the
time of such payment.
Effective January 1, 1994, the investment advisory business of
MLAM reorganized from a corporation to a limited partnership.
The general partner of MLAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of Merrill Lynch & Co.
During the six months ended December 31, 1993, MLFD earned
underwriting discounts of $201,542, and Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S") earned dealer concessions of
$3,001,177 on sales of the Fund's shares. MLPF&S also received
$45,499 in commissions on the execution of portfolio security
transactions during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., 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 MLIM, FDS, MLFD, MLPF&S, and/or Merrill Lynch &
Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended December 31, 1993 were $141,166,055 and
$72,290,164, respectively.
Net realized and unrealized gains (losses) as of December 31, 1993
were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 16,346,632 $ 86,772,485
Foreign currency transactions (485,576) 74,956
------------ ------------
Total $ 15,861,056 $ 86,847,441
============ ============
As of December 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $86,772,485, of which $90,905,518
74
<PAGE>
related to appreciated securities and $4,133,033 related to depreci-
ated securities. The aggregate cost of investments at December 31,
1993 for Federal income tax purposes was $222,374,062.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Six Months Ended Dollar
December 31, 1993 Shares Amount
Shares sold 7,590,664 $106,715,802
Shares issued to shareholders in
reinvestment of dividends and
distributions 332,847 4,929,176
------------ ------------
Total issued 7,923,511 111,644,978
Shares redeemed (1,083,773) (15,215,189)
------------ ------------
Net increase 6,839,738 $ 96,429,789
============ ============
For the Year Ended Dollar
June 30, 1993 Shares Amount
Shares sold 2,825,803 $ 31,697,736
Shares issued to shareholders in
reinvestment of dividends and
distributions 744,456 7,999,187
------------ ------------
Total issued 3,570,259 39,696,923
Shares redeemed (1,927,987) (20,782,171)
------------ ------------
Net increase 1,642,272 $ 18,914,752
============ ============
5. Commitments:
At December 31, 1993, the Fund entered into forward exchange
contracts under which it had agreed to buy and sell foreign
currencies with values of approximately $496,000 and $6,203,000,
respectively.
75
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Management of the Fund..................................................... 13
Directors and Officers.................................................... 13
Management and Advisory Arrangements...................................... 14
Purchase of Shares......................................................... 16
Redemption of Shares....................................................... 20
Portfolio Transactions and Brokerage....................................... 21
Determination of Net Asset Value........................................... 23
Shareholder Services....................................................... 24
Dividends, Distributions and Taxes......................................... 38
Performance Data........................................................... 42
General Information........................................................ 44
Description of Shares..................................................... 44
Computation of Offering Price per Share................................... 45
Independent Auditors...................................................... 45
Custodian................................................................. 45
Transfer Agent............................................................ 45
Legal Counsel............................................................. 45
Reports to Shareholders................................................... 46
Additional Information.................................................... 46
Security Ownership of Certain Beneficial Owners........................... 46
Independent Auditors' Report............................................... 47
Consolidated Financial Statements.......................................... 48
Consolidated Financial Statements
(unaudited)............................................................... 61
</TABLE>
Code #10894
Statement of Additional Information
[ART]
- -------------------------------------------------------------------------------
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
July 1, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Consolidated Financial Highlights for the six months ended December
31, 1993 (unaudited) and for the three years ended June 30, 1993
and for the fiscal period September 1, 1989 (commencement of
operations) to June 30, 1990 (audited).
Contained in Part B:
Consolidated Schedules of Investments as of June 30, 1993 (audited)
and December 31, 1993 (unaudited).
Consolidated Statements of Assets and Liabilities as of June 30,
1993 (audited) and as of December 31, 1993 (unaudited).
Consolidated Statements of Operations for the fiscal year ended June
30, 1993 (audited) and for the six months ended December 31, 1993
(unaudited).
Consolidated Statements of Changes in Net Assets for the fiscal
years ended June 30, 1992 and 1993 (audited) and for the six months
ended December 31, 1993 (unaudited).
Consolidated Financial Highlights for the six months ended December
31, 1993 (unaudited) and for the three years ended June 30, 1993
and for the period September 1, 1989 (commencement of operations)
to June 30, 1990 (audited).
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) -- Articles of Incorporation of the Registrant.
(b) -- Articles of Amendment to Articles of Incorporation of the
Registrant.
(c) -- Articles of Amendment to Articles of Incorporation of the
Registrant.
(d) -- Form of Articles Supplementary to Articles of Incorporation of the
Registrant.
2 -- By-Laws of the Registrant.(a)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(c)
5(a) -- Management Agreement between the Registrant and Merrill Lynch
Asset Management, Inc.(a)
(b) -- Supplement to Management Agreement between Registrant and Merrill
Lynch Asset Management, L.P. dated January 3, 1994.
6(a) -- Class A Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(a)
(b) -- Class B Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser program.(d)
7 -- None.
8 -- Custodian Agreement between the Registrant and The Chase Manhattan
Bank, N.A.(a)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial
Data Services, Inc.(a)
(b) -- Agreement relating to use of name between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
10 -- None.
11 -- Consent of Deloitte & Touche, independent auditors for the
Registrant.
12 -- None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(a)
14 --None.
15 --Class B Distribution Plan of the Registrant and Distribution Plan
Sub-Agreement.
16 --Schedule of computation of each performance quotation provided in
the registration statement in response to Item 22.(b)
17 --Power of Attorney.(d)
</TABLE>
- --------
(a) Filed as an Exhibit to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1A.
(b) Filed as an Exhibit to Post-Effective Amendment No. 1 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1A.
(c) Reference is made to Article V, Article VI, Article VII, Article VIII and
Article X of the Registrant's Articles of Incorporation, previously filed
as Exhibit (1)(a) to the Registration Statement; and to Article II, Article
III (Sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XIII and
Article XIV of the Registrant's By-Laws previously filed as Exhibit (2) to
the Registration Statement.
(d) Filed as an Exhibit to Post-Effective Amendment No. 6 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
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. The Registrant owns all of the stock of Merrill Lynch DCM, Inc., a
Delaware corporation formed specifically to facilitate investment in accordance
with the applicable investment restrictions of a particular foreign country.
Such subsidiary is included in the Registrant's consolidated financial
statements.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS MARCH 31, 1994
-------------- ----------------
<S> <C>
Class A Common Stock, par value $0.10 per share................ 393
Class B Common Stock, par value $0.10 per share................ 0
</TABLE>
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Distribution Agreement.
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.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
C-3
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER.
Merrill Lynch Asset Management, L.P., doing business as Merrill Lynch Asset
Management ("MLAM" or the "Manager"), acts as investment adviser for the
following investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch 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 Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., and Merrill Lynch Senior
Floating Rate Fund, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of
MLAM, acts as the investment adviser for the following investment companies:
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund,
Inc., Financial Institutions Series Trust, Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds
for Institutions Series, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill
Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield
C-4
<PAGE>
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Qualify Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. The
address of each of these investment companies is Box 9011, Princeton, New
Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager and FAM is also Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281.
Set forth below is a list of each executive officer and director 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
June 30, 1991, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, Kirstein, and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGERS PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Merrill Lynch Investment
Management, Inc. ...... Limited Partner Investment Advisory Services, Limited Partner of FAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and Director of
Princeton Services; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD"); Executive Vice
President of ML & Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive Vice
President President and Director of Princeton Services;
President and Director of MLFD; Director of
Financial Data Services, Inc. ("FDS"); President of
Princeton Administrators
Bernard J. Durnin....... Senior Vice President Senior Vice President of FAM; Senior Vice President
of Princeton Services
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; Senior Vice President
of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGERS PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<S> <C> <C>
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary
of Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller FAM; Senior Vice President and Controller
of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and Treasurer
of Princeton Services; Vice President and
Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Vice President of MLFD; Senior Vice
President of Princeton Services
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 Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund, II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona
Fund, MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio
II, Inc., Senior Strategic Income
C-6
<PAGE>
Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings,
Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
NAME MLFD 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
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and None
Assistant Treasurer
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Richard L. Rufener...... Vice President None
Sal Venezia............. Vice President None
William Wasel........... Assistant Vice President None
Robert Harris........... Secretary None
</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 will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and Financial Data Services, Inc.,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's annual report to shareholders, upon
request and without charge.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO ITS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE
12TH DAY OF MAY 1994.
Merrill Lynch Developing Capital
Markets Fund, Inc.
(REGISTRANT)
/s/ Arthur Zeikel
By ____________________________
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE(S) INDICATED.
SIGNATURES TITLE DATE(S)
/s/ Arthur Zeikel President and May 12, 1994
- ------------------------------------- Director (Principal
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard Treasurer (Principal May 12, 1994
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
Donald Cecil* Director May 12, 1994
- -------------------------------------
(DONALD CECIL)
Edward H. Meyer* Director May 12, 1994
- -------------------------------------
(EDWARD H. MEYER)
Charles C. Reilly* Director May 12, 1994
- -------------------------------------
(CHARLES C. REILLY)
Richard R. West* Director May 12, 1994
- -------------------------------------
(RICHARD R. WEST)
*By /s/ Arthur Zeikel May 12, 1994
----------------------------------
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<C> <S> <C>
1(a) -- Articles of Incorporation of the Registrant.
-- Articles of Amendment to Articles of Incorporation of the
(b) Registrant.
-- Articles of Amendment to Articles of Incorporation of the
(c) Registrant.
-- Form of Articles Supplementary to Articles of
(d) Incorporation of the Registrant.
2 -- By-Laws of the Registrant.(a)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws
of the Registrant defining the rights of holders of shares
of the Registrant.(c)
5(a) -- Management Agreement between the Registrant and Merrill
Lynch Asset Management, Inc.(a)
(b) -- Supplement to Management Agreement between Registrant and
Merrill Lynch Asset Management, L.P. dated January 3,
1994.
6(a) -- Class A Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(a)
(b) -- Class B Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.
(c) -- Letter Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc. with respect to the Merrill Lynch
Mutual Fund Adviser program.(d)
7 -- None.
-- Custodian Agreement between the Registrant and The Chase
8 Manhattan Bank, N.A.(a)
9(a) -- Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between the
Registrant and Financial Data Services, Inc.(a)
(b) -- Agreement relating to use of name between the Registrant
and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
10 -- None.
-- Consent of Deloitte & Touche, independent auditors for
11 the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, Inc.(a)
14 -- None.
-- Class B Distribution Plan of the Registrant and
15 Distribution Plan Sub-Agreement.
16 -- Schedule of computation of each performance quotation
provided in the registration statement in response to Item
22.(b)
17 -- Power of Attorney.(d)
</TABLE>
- --------
(a) Filed as an Exhibit to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1A.
<PAGE>
(b) Filed as an Exhibit to Post-Effective Amendment No. 1 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1A.
(c) Reference is made to Article V, Article VI, Article VII, Article VIII and
Article X of the Registrant's Articles of Incorporation, previously filed
as Exhibit (1)(a) to the Registration Statement; and to Article II, Article
III (Sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XIII and
Article XIV of the Registrant's By-Laws previously filed as Exhibit (2) to
the Registration Statement.
(d) Filed as an Exhibit to Post-Effective Amendment No. 6 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
<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
---------------------- -------------------
Illustration of ship, dockside
with cargo............................ Back cover of Prospectus and
back cover of Statement of
Additional Information.
<PAGE>
EXHIBIT 99.1A
ARTICLES OF INCORPORATION
OF
THE DEVELOPING CAPITALISM FUND, INC.
* * * *
ARTICLE I
THE UNDERSIGNED, THOMAS C. MANDIA, whose post-office address is One World
Trade Center, New York, New York 10048, being at least eighteen years of age,
does hereby act as an incorporator, under and by virtue of the General Laws of
the State of Maryland authorizing the formation of corporations and with the
intention of forming a corporation.
ARTICLE II
NAME
----
The name of the corporation is
THE DEVELOPING CAPITALISM FUND, INC.
ARTICLE III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
(1) To conduct and carry on the business of an investment company of the
management type.
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its capital stock, in any manner and to the extent
now or hereafter permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment carrying out or
attainment of all or any of the foregoing purposes or objects.
2
<PAGE>
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Million (200,000,000) shares, all
of one class called Common Stock, of the par value of Ten Cents ($.l0) per share
and of the aggregate par value of Twenty Million Dollars ($20,000,000).
3
<PAGE>
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series. In the event the Board of
Directors classifies or reclassifies any unissued shares of capital stock into
one or more additional classes of common stock, all shares of Common Stock of
the Corporation issued prior to the filing of Articles Supplementary relating to
such classification or reclassification shall without further act be designated
and considered Class A Common Stock.
(3) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series.
4
<PAGE>
Expenses related to the distribution of, and other identified expenses that
should properly be allocated to, the shares of a particular class or series of
capital stock may be charged to and borne solely by such class or series and the
bearing of expenses solely by a class or series of capital stock may be
appropriately reflected (in a manner determined by the Board of Directors) and
cause differences in the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the shares of each class or series of
capital stock.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued thereunder, or by the
Maryland General Corporation Law, such requirement as to a separate vote by that
class or series shall apply in lieu of a general vote of all classes and series
as described above, (b) in the event that the separate vote
5
<PAGE>
requirements referred to in (a) above apply with respect to one or more classes
or series, then, subject to paragraph (c) below, the shares of all other classes
and series not entitled to a separate class vote shall vote as a single class,
and (c) as to any matter which does not affect the interest of a particular
class or series, such class or series shall not be entitled to any vote and
only the holders of shares of the one or more affected classes and series shall
be entitled to vote.
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements of the
Investment Company Act of 1940, as amended, and in effect from time to time, and
any rules, regulations and orders issued thereunder) to take such action upon
the concurrence of a majority of the aggregate number of shares of capital stock
of the Corporation entitled to vote thereon (or a majority of the aggregate
number of shares of a class or series entitled to vote thereon as a separate
class or series).
(6) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation,
6
<PAGE>
whether voluntary or involuntary, the holders of all classes and series of
capital stock of the Corporation shall be entitled, after payment or provision
for payment of the debts and other liabilities of the Corporation, to share
ratably in the remaining net assets of the Corporation.
(7) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the charter and By-Laws of the
Corporation. As used in the charter of the Corporation, the terms "charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF
THE CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
------------------------------------
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3). The
7
<PAGE>
names of the directors who shall act until the first annual meeting or until
their successors are duly elected and qualify are:
Philip L. Kirstein
Mark B. Goldfus
Susan B. Baker
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the General
Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended.
8
<PAGE>
No amendment of these Articles of Incorporation or repeal of any provision
hereof shall limit or eliminate the benefits provided to directors and officers
under this provision in connection with any act or omission that occurred prior
to such amendment or repeal.
(5) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the Investment Company Act of 1940, as
amended, no director or officer of the Corporation shall be personally liable to
the Corporation or its security holders for money damages. No amendment of
these Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment or
repeal.
(6) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the By-Laws of the Corporation except any particular
By-Law which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940, as
amended.
9
<PAGE>
ARTICLE VII
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of such holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the redemption
price of such shares as in effect from time to time as may be determined by the
Board of Directors of the Corporation in accordance with the provisions hereof,
subject to the right of the Board of Directors of the Corporation to suspend the
right of redemption of shares of capital stock of the Corporation or postpone
the date of payment of such redemption price in accordance with provisions of
applicable law. The redemption price of shares of capital stock of the
Corporation shall be the net asset value thereof as determined by the Board of
Directors of the Corporation from time to time in accordance with the provisions
of applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the Corporation. Payment of
the redemption price shall be made in cash by the Corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the Corporation.
10
<PAGE>
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety thereof, as to the time of or purpose for
creating reserves or as to the use, alteration or cancellation of any reserves
or charges (whether or not any obligation or liability for which such reserves
or charges shall have been created, shall have been paid or discharged or shall
be then or thereafter required to be paid or discharged), as to the price of any
security owned by the Corporation or as to any other matters relating to the
issuance, sale, redemption or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable determination
made in good faith by the Board of Directors as to whether any transaction
constitutes a purchase of securities on "margin," a sale of securities "short,"
or an underwriting of the sale of, or a participation in any underwriting or
selling group in connection with the public distribution of, any securities,
shall be final and conclusive,
11
<PAGE>
and shall be binding upon the Corporation and all holders of its capital stock,
past, present and future, and shares of the capital stock of the Corporation are
issued and sold on the condition and understanding, evidenced by the purchase of
shares of capital stock or acceptance of share certificates, that any and all
such determinations shall be binding as aforesaid. No provision of these
Articles of Incorporation shall be effective to (a) require a waiver of
compliance with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he 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.
ARTICLE IX
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of
12
<PAGE>
Incorporation, in any manner now or hereafter prescribed by statute, including
any amendment which alters the contract rights, as expressly set forth in the
charter, of any outstanding stock and substantially adversely affects the
stockholder's rights, and all rights conferred upon stockholders herein are
granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of THE DEVELOPING
CAPITALISM FUND, INC. hereby executes the foregoing Articles of Incorporation
and acknowledges the same to be his act and further acknowledges that, to the
best of his knowledge, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 13th day of April, 1989.
/s/ Thomas C. Mandia
----------------------------
Thomas C. Mandia
13
<PAGE>
EXHIBIT 99.1B
THE DEVELOPING CAPITALISM FUND, INC.
ARTICLES OF AMENDMENT
THE DEVELOPING CAPITALISM FUND, INC., a Maryland corporation having its
principal office c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 (hereinafter called the Corporation), hereby certifies
to the State Department of Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
ARTICLE II
NAME
----
The name of the Corporation is
MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC.
SECOND: The amendment to the charter of the Corporation herein made was
duly approved by unanimous written consent of the board of directors on May 17,
1989; and that at the time of the approval by the directors there were no shares
of stock of the Corporation entitled to vote on the matter either outstanding or
subscribed for.
<PAGE>
IN WITNESS WHEREOF, The Developing Capitalism Fund, Inc. has caused these
articles to be signed in its name and on its behalf by its President and
attested by its Secretary on May 17, 1989.
THE DEVELOPING CAPITALISM FUND, INC.
By /s/ Philip L. Kirstein
-----------------------------
Philip L. Kirstein, President
Attest:
/s/ Mark B. Goldfus
- --------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of THE DEVELOPING CAPITALISM FUND, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
By /s/ Philip L. Kirstein
---------------------------
Philip L. Kirstein
2
<PAGE>
EXHIBIT 99.1C
MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC., a Maryland corporation
having its principal office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202 (hereinafter called the Corporation), hereby
certifies to the State Department of Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
ARTICLE II
NAME
----
The name of the Corporation is
Merrill Lynch Developing Capital Markets Fund, Inc.
SECOND: The amendment to the charter of the Corporation herein made was
duly approved by unanimous written consent of the board of directors on June 16,
1989; and that at the time of the approval by the directors there were no shares
of stock of the Corporation entitled to vote on the matter either outstanding or
subscribed for.
<PAGE>
IN WITNESS WHEREOF, Merrill Lynch Economic Development Fund, Inc. has
caused these articles to be signed in its name and on its behalf by its
President and attested by its Secretary on June 16, 1989.
MERRILL LYNCH ECONOMIC DEVELOPMENT FUND, INC.
By /s/ Arthur Zeikel
------------------------
Arthur Zeikel, President
Attest:
/s/ Mark B. Goldfus
- --------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH ECONOMIC DEVELOPMENT FUND,
INC., who executed on behalf of said corporation the foregoing Articles of
Amendment, of which this certificate is made a part, hereby acknowledges, in the
name and on behalf of said corporation, the foregoing Articles of Amendment to
be the corporate act of said corporation and further certifies that, to the best
of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Arthur Zeikel
---------------------
Arthur Zeikel
2
<PAGE>
EXHIBIT 99.1D
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of
Maryland, that:
FIRST: The Board of Directors of the Corporation, at a meeting duly
convened and held on April 19, 1994, adopted a resolution reclassifying One
Hundred Million (100,000,000) unissued shares, of the par value of Ten Cents
($.10) per share and of the aggregate par value of Ten Million Dollars
($10,000,000) of the Common Stock of the Corporation as Class B Common Stock by
setting the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption as hereinafter set forth. As specified in Article V(2) of the
Corporation's charter, the remaining One Hundred Million (100,000,000) shares of
Common Stock, of the par value of Ten Cents ($.10) per share and of the
aggregate par value of Ten Million Dollars ($10,000,000), including the shares
currently issued and outstanding, shall hereby be designated and considered
Class A Common Stock.
SECOND: The Class B Common Stock of the Corporation shall represent the
same interest in the Corporation and have identical preferences, conversion or
other rights, voting powers,
<PAGE>
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption as the Class A Common Stock, except that:
(i) Expenses related to the distribution of the Class B Common Stock shall
be borne solely by such class and such class will have exclusive voting rights
with respect to matters relating to the expenses being borne solely by such
class;
(ii) Such distribution expenses borne solely by Class B Common Stock shall
be appropriately reflected (in the manner determined by the Board of Directors)
in the net asset value, dividends, distribution and liquidation rights of the
shares of such class; and
(iii) The Board of Directors of the Corporation is vested with the sole
power to change the designation of, convert or rename shares of its issued or
unissued Class B Common Stock (all without the vote or consent of the
stockholders of the Corporation).
THIRD: The shares aforesaid have been duly reclassified by the Board of
Directors pursuant to authority and power contained in Article V(2) of the
Corporation's charter.
2
<PAGE>
IN WITNESS WHEREOF, Merrill Lynch Developing Capital Markets Fund, Inc. has
caused these Articles Supplementary to be signed in its name and on its behalf
by its President and attested by its Secretary on _______, 1994.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
By______________________________
Arthur Zeikel, President
Attest:
_______________________________
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of Merrill Lynch Developing Capital Markets
Fund, Inc., who executed on behalf of said Corporation the foregoing Articles
Supplementary to the Articles of Incorporation, of which this certificate is
made a part, hereby acknowledges, in the name and on behalf of said Corporation,
the foregoing Articles Supplementary to the Articles of Incorporation to be the
corporate act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties of perjury.
_______________________________
Arthur Zeikel
3
<PAGE>
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
MERRILL LYNCH ASSET MANAGEMENT
As of January 1, 1994 Merrill Lynch Investment Management, Inc. d/b/a Merrill
Lynch Asset Management was reorganized as a limited partnership, formally known
as Merrill Lynch Asset Management, L.P. and continuing to do business under the
name Merrill Lynch Asset Management ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. and the limited partners are Merrill Lynch Investment
Management, Inc. and Merrill Lynch & Co., Inc. Pursuant to Rule 202(a)(1)-1
under the Investment Advisers Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change of control or
management of the investment adviser. Pursuant to the requirements of Section
205 of the Investment Advisers Act of 1940, however, Merrill Lynch Asset
Management hereby supplements this investment advisory agreement by undertaking
to advise you of any change in the membership of the partnership within a
reasonable time after any such change occurs.
By /s/ Arthur Zeikel
-----------------------
Dated: January 3, 1994
<PAGE>
EXHIBIT 99.6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 19th day of April 1994, between MERRILL LYNCH
DEVELOPING CAPITAL MARKETS FUND, INC., a Maryland corporation (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
-------------------
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Fund to offer its shares for
sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Fund's Class B shares
in order to promote the growth of the Fund and facilitate the distribution of
its Class B shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Fund to sell
Class B shares of common stock of the Fund (sometimes herein referred to as
"Class B shares") to the public and hereby agrees during the term of this
Agreement to
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sell shares of the Fund to the Distributor upon the terms and conditions herein
set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class B shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class B shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class B shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class B
shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class B
shares of any such company by the Fund.
2
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(c) Such exclusive right also shall not apply to Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class B shares issued by
the Fund pursuant to any reinstatement privilege afforded redeeming
shareholders.
Section 3. Purchase of Class B Shares from the Fund.
-----------------------------------------
(a) Commencing on a date agreed upon by the Fund and the Distributor, the
Fund will commence an offering of its Class B shares, and thereafter the
Distributor shall have the right to buy from the Fund the Class B shares needed,
but not more than the Class B shares needed (except for clerical errors in
transmission) to fill unconditional orders for Class B shares of the Fund placed
with the Distributor by investors or securities dealers. The price which the
Distributor shall pay for the Class B shares so purchased from the Fund shall be
the net asset value, determined as set forth in Section 3(c) hereof.
(b) The Class B shares are to be resold by the Distributor to investors at
net asset value, as set forth in Section 3(c) hereof, or to securities dealers
having agreements with the Distributor upon the terms and conditions set forth
in Section 7 hereof.
(c) The net asset value of Class B shares of the Fund shall be determined
by the Fund or any agent of the Fund in accordance with the method set forth in
the currently effective prospectus
3
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and statement of additional information of the Fund (the "prospectus" and
"statement of additional information", respectively) under the Securities Act of
1933, as amended (the "Securities Act"), and guidelines established by the Board
of Directors.
(d) The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class B shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
shares.
(e) The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class B shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class B shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class B shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New
4
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York Clearing House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Fund.
--------------------------------------------- ---------
(a) Any of the outstanding Class B shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class B shares so
tendered in accordance with its obligations as set forth in Article VII of its
Articles of Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information of the Fund. The price to be paid to redeem or
repurchase the Class B shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(c) hereof, less the redemption
fee or other charge, if any, set forth in the prospectus and statement of
additional information of the Fund. All payments by the Fund hereunder shall
be made in the manner set forth below.
The Fund shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor on or before
the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable contingent deferred sales charge
shall be paid to the Distributor, and (ii) the balance
5
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shall be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class B shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor such number of
copies of its prospectus and statement of additional information as the
Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any necessary
approval of the shareholders, all necessary action to fix the number of
authorized shares and such steps as may be
6
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necessary to register the same under the Securities Act to the end that there
will be available for sale such number of Class B shares as the Distributor
reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class B shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
7
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(b) In selling the Class B shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Fund, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.
Section 7. Selected Dealer Agreements.
--------------------------
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class B shares; provided, that the Fund shall approve the forms of
agreements with dealers. Class B shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
8
<PAGE>
Section 3(d) hereof. The initial form of agreement with selected dealers to be
used in the continuous offering of the shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class B
shares only to such selected dealers that are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including fees
and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class B
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof
9
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which are to be used in connection with the offering of Class B shares to
selected dealers or investors pursuant to this Agreement. The Distributor shall
bear the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by selected
dealers in connection with the offering of the Class B shares for sale to the
public and any expenses of advertising incurred by the Distributor in
connection with such offering. It is understood and agreed that so long as the
Fund's Class B Shares Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act remains in effect, any expenses incurred by the
Distributor hereunder may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class B shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5(c)
hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor
10
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against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith), as
incurred, arising by reason of any person acquiring any Class B shares, which
may be based upon the Securities Act, or on any other statute or at common law,
on the ground that the registration statement or related prospectus and
statement of additional information, as from time to time amended and
supplemented, or an annual or interim report to Class B shareholders of the
Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Fund in
connection therewith by or on behalf of the Distributor; provided, however, that
in no case (i) is the indemnity of the Fund in favor of the Distributor and any
such controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement
11
<PAGE>
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Fund elects to assume the defense of any such suit
and retain such counsel, the Distributor or such controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or
12
<PAGE>
persons, defendant or defendants in the suit, for the reasonable fees and
expenses, as incurred, of any counsel retained by them. The Fund shall promptly
notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or Directors in connection with the issuance
or sale of any of the Class B shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each of
its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Fund, and the Fund and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first
13
<PAGE>
above written and shall remain in force until April 19, 1996 and thereafter, but
only for so long as such continuance is specifically approved at least annually
by (i) the Directors or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) by the vote of a majority of those Directors who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be amended
----------------------------
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
14
<PAGE>
person at a meeting called for the purpose of voting on such approval.
Section 12. Governing Law. The provisions of this Agreement shall be
-------------
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control. IN WITNESS WHEREOF, the parties
hereto have executed this Agreement as of the day and year first above written.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
By /s/ Arthur Zeikel
-------------------------------------
Title: President
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------------------------
Title: Vice President
15
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EXHIBIT A
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
CLASS B SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Developing Capital Markets Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
B shares of common stock, par value $0.10 per share (herein referred to as the
"Class B shares"), of the Fund and as such has the right to distribute Class B
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class B
shares being offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class B Shares Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution Agreement.
The terms "Prospectus" and "Statement of Additional Information" as used herein
refer to the prospectus and statement of additional information, respectively,
on file with the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the Securities Act of 1933,
as amended. As principal, we offer to sell to you, as a member of the Selected
Dealers Group, Class B shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class B shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional Information of the Fund. The procedure relating to
the handling of orders shall be subject to Section 4 hereof and instructions
which we or the Fund shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Fund in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.
1
<PAGE>
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class B shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class B shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not furnish to any
person any information relating to the Class B shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class B shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and (ii) to tender
Class B shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: e.g., by a change in
- -
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning Class B
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class B shares
through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if
2
<PAGE>
requested, the Statement of Additional Information at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers copies
of the annual and interim reports and proxy solicitation materials of the Fund.
You further agree to endeavor to obtain proxies from such purchasers.
Additional copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the Fund will be
supplied to you in reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class B shares entirely. Each party hereto has the
right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the states in which we
believe the Class B shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class B shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class B shares, if necessary.
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
3
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13. Your first order placed pursuant to this Agreement for the purchase of
Class B shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
-------------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill, Lynch, Pierce, Fenner & Smith Incorporated
---------------------------------------------------
By: /s/ Arthur Zeikel, Executive Vice President
-------------------------------------------
Address: 800 Scudders Mill Road
----------------------
Plainsboro, NJ 08536
----------------------
Date: April 19, 1994
--------------
4
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EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 7 to Registration
Statement No. 33-28248 of our report dated July 30, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Consolidated Financial
Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
Deloitte & Touche
Princeton, New Jersey
May 10, 1994
<PAGE>
EXHIBIT 99.15
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 19th day of April 1994, by and between
Merrill Lynch Developing Capital Markets Fund, Inc., a Maryland corporation (the
"Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Fund engages in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class B
shares of common stock, par value $0.10 per share (the "Class B shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class B Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class B shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
<PAGE>
Agreements") for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end of
each month at the annual rate of 0.75% of average daily net assets of the Fund
relating to Class B shares to compensate MLFD and securities firms with which
MLFD enters into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will relate to the sale,
promotion and marketing of the Class B shares of the Fund. Such expenditures
may consist of sales commissions to financial consultants for selling Class B
shares of the Fund, compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its sales and
promotional activities, including advertising expenditures related to the Fund
and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those
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Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Investment Company Act, and have no direct or indirect financial interest
in the operation of this Plan or any agreements related to it (the "Rule 12b-1
Directors"), cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class B voting
securities of the Fund, and by the Directors of the Fund in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomina-tion of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.
By /s/ Arthur Zeikel
----------------------------------
Title: President
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------------------
Title: Vice President
3
<PAGE>
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 19th day of April 1994, by and between Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Developing
Capital Markets Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class B shares of
common stock, par value $0.10 per share (the "Class B shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class B Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class B shares for account maintenance activities
related to Class B shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.75% of average daily net assets of the Fund relating to
Class B shares for providing sales and promotional activities and services
related to the distribution of Class B shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class B shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities with
respect to the Class B shares of the Fund of the types referred to in Paragraph
1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class B shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end
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of each calendar month in an amount agreed upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------------------
Title: Vice President
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ Arthur Zeikel
-----------------------------------
Title: Executive Vice President
5
