<PAGE> 1
As filed with the Securities and Exchange Commission on October 17, 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. 8 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 10 /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 Offices) (Zip Code)
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: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
----------
Copies to:
Counsel for the Fund: Philip L. Kirstein, Esq.
BROWN & WOOD MERRILL LYNCH ASSET
One World Trade Center MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Princeton, New Jersey 08543-9011
Esq.
Frank P. Bruno, Esq.
It is proposed that this filing will become effective (check appropriate
box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)
(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
----------
The Registrant has registered an indefinite number of its shares of
common stock under the Securities Act of 1933 pursuant to Rule 24f-2 under
the Investment Company Act of 1940. The notice required by such rule for
the Registrant's most recent fiscal year was filed on August 24, 1994.
==========================================================================
<PAGE> 2
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No. Location
-------------------------------------------------------------------------------
Part A
<S> <C> <C> <C>
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; Merrill Lynch
Offered...................... Select Pricing SM System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase...... Fee Table; Merrill Lynch Select
Pricing SM System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings.... Not Applicable
Part B
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............ Back Cover Page
Item 12. General Information and
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
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.
</TABLE>
<PAGE> 3
PROSPECTUS
October 21, 1994
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
P.O. 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".
----------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing SM System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of
the purchase, the length of time the investor expects to hold the shares
and other relevant circumstances. See "Merrill Lynch Select Pricing SM
System" on page 3.
----------
Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey
08543-9011 ((609) 282-2800), 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. 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 October 21, 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> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring
and recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
Class A(a) Class B(b) Class C(c) Class D(d)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)............... 5.25%(d) None None 5.25%(d)
Sales Charge Imposed on Dividend
Reinvestments................. None None None None
Deferred Sales Charge (as a
percentage of original
purchase price or redemption
proceeds, whichever is lower). None(e) 4.0% during the 1.0% for one None(e)
first year year
decreasing 1.0%
annually thereafter
to 0.0% after
the fourth year
Exchange Fee ................... None None None None
Annual Fund Operating Expenses (as a
percentage of average net
assets(f)
Investment Advisory Fees(g) .... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(h):
Account Maintenance Fees.... None 0.25% 0.25% 0.25%
Distribution Fees........... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and
cease being subject
to distribution fees)
Other Expenses:
Custodial Fees ............. 0.20% 0.20% 0.20% 0.20%
Shareholder Servicing
Costs(i).................. 0.07% 0.07% 0.07% 0.07%
Other ...................... 0.19% 0.19% 0.19% 0.19%
----- ----- ----- --------
Total Other Expenses ... 0.46% 0.46% 0.46% 0.46%
----- ----- ----- --------
Total Fund Operating Expenses..... 1.46% 2.46% 2.46% 1.71%
===== ===== ===== ========
</TABLE>
----------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and investment
programs. See "Purchase of Shares - Initial Sales Charge Alternatives
- Class A and Class D Shares" - page 26.
(b) Class B shares convert to Class D shares automatically approximately
eight years after initial purchase. See "Purchase of Shares - Deferred
Sales Charge Alternatives - Class B and Class C Shares" - page 27.
(c) Prior to the date of this Prospectus, the Fund has not offered its
Class C and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases
of $1,000,000 or more may not be subject to an initial sales charge.
See "Purchase of Shares - Initial Sales Charge Alternatives - Class A
and Class D Shares" - page 26.
(e) Class A and Class D shares are not subject to a contingent deferred
sales charge ("CDSC"), except that purchases of $1,000,000 or more
which may not be subject to an initial sales charge may instead be
subject to a CDSC of 1.0% of amounts redeemed within the first year of
purchase.
(f) Information for Class A shares is stated for the fiscal year ended June
30, 1994. Information under "Other Expenses" for Class B, Class C and
Class D shares is estimated for the fiscal year ending June 30, 1995.
(g) See "Management of the Fund - Management and Advisory Arrangements" -
page 22.
(h) See "Purchase of Shares - Distribution Plans" - page 30.
(i) See "Management of the Fund - Transfer Agency Services" - page 23.
2
<PAGE> 5
Example:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
-------------------------------------------
1 Year 3 Years 5 Years 10 Years
-------------------------------------------
An investor would pay the following expenses on
a $1,000 investment including the maximum $52.50
initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Fund Operating
Expenses for each class set forth above; (2) a
5% annual return throughout the periods and (3)
redemption at the end of the period:
<S> <C> <C> <C> <C>
Class A .................................... $67 $ 96 $128 $218
Class B..................................... $65 $ 97 $131 $261*
Class C..................................... $35 $ 77 $131 $280
Class D..................................... $69 $104 $140 $244
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A .................................... $67 $ 96 $128 $218
Class B .................................... $25 $ 77 $131 $261*
Class C..................................... $25 $ 77 $131 $280
Class D..................................... $69 $104 $140 $244
</TABLE>
----------
*Assumes conversion to Class D shares approximately eight years after
purchase
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund will
bear directly or indirectly. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual
rate of return as mandated by 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 and Class C shareholders who hold their shares for
an extended period of time may pay more in Rule 12b-1 distribution fees
than the economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
redemptions. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of
Class A and Class D are sold to investors choosing the initial sales
charge alternatives, and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. The Merrill
Lynch Select Pricing SM System is used by more than 50 mutual funds
advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") or an affiliate of MLAM, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM are referred to herein as
"MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents
an identical interest in the investment portfolio of the Fund and has the
same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C
shares bear the expenses of the
3
<PAGE> 6
ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The deferred
sales charges and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed
on the Class D shares, will be imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund
for each class of shares will be calculated in the same manner at the same
time and will differ only to the extent that account maintenance and
distribution fees and incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Each class has
different exchange privileges. See "Shareholder Service - Exchange
Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to the Class A and Class D shares are
the same as those of the deferred sales charges with respect to the Class
B and Class C shares in that the sales charges applicable to each class
provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System, followed by a more detailed description of each class
and a discussion of the factors that investors should consider in
determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his
particular circumstances. More detailed information as to each class of
shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
Account
Maintenance Distribution Conversion
Class Sales Charge 1 Fee Fee Feature
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales
charge 2,3 No No No
B CDSC for a period of 4 0.25% 0.75% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% eight years 4
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales 0.25% No No
charge 3
</TABLE>
----------
(1) Initial sales charges are imposed at the times of purchase as a
percentage of the offering price. Contingent deferred sales charges
("CDSCs") are imposed if the redemption occurs within the applicable
CDSC time period. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares - Initial
Sales Charge Alternatives - Class A and Class D Shares - Eligible
Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See
"Class A" and "Class D" below.
4
<PAGE> 7
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten
year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked
onto the holding period of the shares acquired.
Class A: Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or account
maintenance fees. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment
of dividends on outstanding Class A shares. Investors that
currently own Class A shares in a shareholder account are
entitled to purchase additional Class A shares in that
account. Other eligible investors include certain retirement
plans and participants in certain investment programs. In
addition, Class A shares will be offered to directors and
employees of Merrill Lynch & Co., Inc. (the term
"subsidiaries", when used herein with respect to Merrill
Lynch & Co., Inc., includes MLAM, FAM and certain other
entities directly or indirectly wholly-owned and controlled
by Merrill Lynch & Co., Inc.) and its subsidiaries and to
members of the Boards of MLAM-advised mutual funds. The
maximum initial sales charge is 5.25%, which is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the
initial sales charge is waived, such purchases will be
subject to a CDSC of 1.0% if the shares are redeemed within
one year after purchase. Sales charges also are reduced under
a right of accumulation which takes into account the
investor's holdings of all classes of all MLAM-advised mutual
funds. See "Purchase of Shares - Initial Sales Charge
Alternatives - Class A and Class D Shares".
Class B: Class B Shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account
maintenance fee of 0.25% and an ongoing distribution fee of
0.75% of the Fund's average net assets attributable to the
Class B shares, and a CDSC if they are redeemed within four
years of purchase. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made
convert to Class D shares automatically after approximately
ten years. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for
the shares acquired. Automatic conversion of Class B shares
into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the
two classes on the conversion date, without the imposition of
any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or
sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares and for
certain retirement plans is modified as described under
"Purchase of Shares - Deferred Sales Charge Alternatives -
Class B and Class C Shares - Conversion of Class B Shares to
Class D Shares".
Class C: Class C shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account
maintenance fee of 0.25% and an ongoing distribution fee of
0.75% of the Fund's average net assets attributable to Class
C shares. Class C shares are also subject to a
5
<PAGE> 8
CDSC if they are redeemed within one year of purchase.
Although Class C shares are subject to a 1.0% CDSC for only
one year (as compared to four years for Class B), Class C
shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for
an indefinite period subject to annual approval by the Fund's
Board of Directors and regularly limitations.
Class D: Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance
fee of 0.25% of the Fund's average net assets attributable to
Class D shares. Class D shares are not subject to an ongoing
distribution fee or any CDSC when they are redeemed.
Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is
waived such purchases will be subject to CDSC of 1.0% if the
shares are redeemed within one year after purchase. The
schedule of initial sales charges and reductions for Class D
shares is the same as the schedule for Class A shares. Class
D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase
of Shares - Initial Sales Charge Alternatives - Class A and
Class D Shares".
The following is a discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing SM System that the investor believes is most
beneficial under his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial
sales charge alternative may elect to purchase Class D shares or, if an
eligible investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares should
purchase Class A shares rather than Class D shares because of the account
maintenance fee imposed on Class D shares. Investors qualifying for
significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B and Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated
ongoing account maintenance and distribution fees on Class B or Class C
shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to
have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges
are deducted at the time of purchase, Class B and Class C shares provide
the benefit of putting all of the investor's dollars to work from the time
the investment is made. The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for a reduction in
initial sales charges. Both Class B and Class C shares are subject to
ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be
offset to the extent any return is realized on the additional funds
initially invested in Class B or Class C shares. In addition, Class B
shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors
will be subject to lower ongoing fees.
6
<PAGE> 9
Certain investors may elect to purchase Class B shares if they
determine it to be most advantageous to have all their funds invested
initially and intend to hold their shares for an extended period of time.
Investors in Class B shares should take into account whether they intend
to redeem their shares within the CDSC period and, if not, whether they
intend to remain invested until the end of the conversion period and
thereby take advantage of the reduction in ongoing fees resulting from the
conversion into Class D shares. Other investors, however, may elect to
purchase Class C shares if they determine that it is advantageous to have
all their assets invested initially and they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to shorter CDSC period at
a lower rate, they forgo the Class B conversion feature, making their
investment subject to account maintenance and distribution fees for an
indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales
charges imposed by the NASD, the Class B distribution fees are further
limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares - Limitations on the payment Charges".
7
<PAGE> 10
CONSOLIDATED FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the consolidated financial
statements of the Fund by Deloitte & Touche LLP, independent auditors.
Consolidated financial statements and the independent auditors' report
thereon for the fiscal year ended June 30, 1994, are included in the
Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling
or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
Prior to June 30, 1994, 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. Financial information is not
presented for Class C or Class D shares, since no shares of those classes
are publicly issued as of the date of this Prospectus.
The following per share data and ratios have been derived from
information provided in the consolidated financial statements.
<TABLE>
<CAPTION>
Class A Shares
-------------------------------------------------------------------------------
For the Year Ended June 30, For the Period
September 1,
1989 + to
1994 1993* 1992 1991 June 30, 1990
-------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period ..... $ 11.62 $ 11.92 $ 10.43 $ 11.58 $ 9.60
-------- -------- -------- -------- --------
Investment income - net .................. .11 .12 .15 .24 .24
Realized and unrealized gain (loss) on
investments - net ...................... 3.23 .42 1.59 (.75) 1.88
-------- -------- -------- -------- --------
Total from investment operations ......... 3.34 .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 ........... $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ========
Total Investment Return: + +
Based on net asset value per share ....... 28.73% 5.17% 17.02% (4.45)% 22.29%|P^
======== ======== ======== ======== ========
Ratios to Average Net Assets:
Expenses ................................. 1.46% 1.71% 1.64% 1.77% 1.71%**
======== ======== ======== ======== ========
Investment income (loss) - net ........... .63% (.04)% 1.73% 1.98% 2.69%**
======== ======== ======== ======== ========
Supplemental Data:
Net assets, end of period (in thousands) . $401,996 $142,285 $126,417 $111,947 $104,033
======== ======== ======== ======== ========
Portfolio turnover ....................... 66.85% 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.
|P^ Aggregate total investment return.
8
<PAGE> 11
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.
9
<PAGE> 12
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
10
<PAGE> 13
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.
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.
11
<PAGE> 14
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.
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.
12
<PAGE> 15
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.
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),
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<PAGE> 16
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 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
14
<PAGE> 17
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 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,
15
<PAGE> 18
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 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
16
<PAGE> 19
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.
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
17
<PAGE> 20
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
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
18
<PAGE> 21
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.
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
19
<PAGE> 22
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 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; Purchase and Sale Contracts. The Fund may
invest in securities pursuant to repurchase agreements or purchase and
sale contracts. Under a repurchase agreement, the seller agrees, upon
entering into the contract with the Fund, to repurchase a security
(typically a security issued or guaranteed by the U.S. government) at a
mutually agreed upon time and price, thereby determining the yield during
the term of the agreement. This results in a fixed yield for the Fund
insulated from fluctuations in the market value of the underlying security
during such period, although, to the extent the repurchase agreement is
not denominated in U.S. dollars, the Fund's return may be affected by
currency fluctuations. Repurchase agreements may be entered into only with
a member bank of the Federal Reserve System, a primary dealer in U.S.
government securities or an affiliate thereof. A purchase and sale
contract is similar to a repurchase agreement, but purchase and sale
contracts, unlike repurchase agreements, allocate interest on the
underlying security to the purchaser during the term of the agreement. In
all instances, the Fund takes possession of the underlying securities when
investing in repurchase agreements or purchase and sale contracts.
Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement or purchase and sale
contract and the market value of the underlying security at such time was
less than the Fund had paid to the seller, the Fund would realize a loss.
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, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 331/3% 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
20
<PAGE> 23
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 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.
The Board of Directors of the Fund, at a meeting held on August 4,
1994, approved certain changes to the fundamental and non-fundamental
investment restrictions of the Fund. These changes were proposed in
connection with the creation of a set of standard fundamental and
non-fundamental investment restrictions that would be adopted, subject to
shareholder approval, by all of the non-money market mutual funds advised
by MLAM or FAM. The proposed uniform investment restrictions are designed
to provide each of these funds, including the Fund, with as much
investment flexibility as possible under the Investment Company Act and
applicable state
21
<PAGE> 24
securities regulations, help promote operational efficiencies and
facilitate monitoring or compliance. The investment objective and policies
of the Fund will be unaffected by the adoption of the proposed investment
restrictions.
The full text of the proposed settlement restrictions is set forth
under "Investment Objective and Policies - Proposed Uniform Investment
Restrictions" in the Statement of Additional Information. Shareholders of
the Fund are currently considering whether to approve the proposed revised
investment restrictions. If such shareholder approval is obtained, the
Fund's current investment restrictions will be replaced by the proposed
restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of 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. ("ML & Co."); 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 ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Manager
provides the Fund with management and investment advisory services. The
Manager or an affiliate, Fund Asset Management, L. P. ("FAM"), acts as
the manager for more than 100 other registered investment companies and
offers portfolio management and portfolio analysis services to individuals
and institutions. As of August 31, 1994, the Manager and FAM had a total
of approximately $165.7 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager.
22
<PAGE> 25
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 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,
1994, the fee paid by the Fund to the Manager was $3,033,147 (based upon
average net assets of approximately $303.3 million). At September 30,
1994, the net assets of the Fund aggregated approximately $555.3 million.
At this asset level, the annual management fee would aggregate
approximately $5.6 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, 1994,
the Fund reimbursed the Manager $101,404 for accounting services. For the
fiscal year ended June 30, 1994, the ratio of total expenses to average
net assets for Class A shares was 1.46%; no Class B, Class C or Class D
shares had been publicly issued during that year.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML&Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant
to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives a fee of $11.00 per Class A or
Class D shareholder account and $14.00 per Class B or Class C shareholder
account, nominal miscellaneous fees (e.g., account closing fees) and is
entitled to reimbursement for out-of-pocket expenses incurred by it under
the Transfer Agency Agreement. For the fiscal year ended June 30, 1994,
the Fund paid the Transfer Agent $205,494 pursuant to the Transfer Agency
Agreement for providing transfer agency services. At August 31, 1994, the
Fund had 37,515 Class A shareholder accounts, 5,749 Class B shareholder
accounts, no Class C shareholder accounts and no Class D shareholder
accounts. At this level of
23
<PAGE> 26
Class A shareholder accounts, the annual fee payable to the Transfer Agent
would aggregate approximately $493,151 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.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an
affiliate of both the Manager and Merrill Lynch, acts as the Distributor
of the shares of the Fund. Shares of the Fund are offered continuously for
sale by the Distributor and other eligible securities dealers (including
Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is
$50, except for retirement plans, the minimum purchase is $100, and the
minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales
charges imposed either at the time of purchase or on a deferred basis
depending upon the class of shares selected by the investor under the
Merrill Lynch Select Pricing System, as described below. The applicable
offering price for purchase orders is based upon the net asset value of
the Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to
4:15 p.m., New York time, which includes orders received after the
determination of the net asset value on the previous day, the applicable
offering price will be based on the net value as of 4:15 p.m., New York
time, on the day the orders are placed with the Distributor, provided the
orders are received by the Distributor prior to 4:30 p.m., New York time,
on that day. If the purchase orders are not received prior to 4:30 p.m.,
New York time, such orders shall be deemed received on the next business
day. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to
time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a sale of shares
to such customers. Purchases directly through the Transfer Agent are not
subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold
the shares and other relevant circumstances. Share of Class A and Class D
are sold to investors choosing the initial sales charge alternatives and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund
with the investment thereafter being subject to a contingent deferred
sales charge and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System is set forth under
"Merrill Lynch Select Pricing System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. The deferred sales charges and account
maintenance fees that are imposed on Class B and
24
<PAGE> 27
Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund
for each class of shares will be calculated in the same manner at the same
time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule
12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid. See
"Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege".
Investors should understand that the purpose and function of the
initial sales charges with respect to Class A and Class D shares are the
same as those of the deferred sales charges with respect to Class B and
Class C shares in that the sales charges applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes
of shares. Investors are advised that only Class A and Class D shares may
be available for purchase through securities dealers, other than Merrill
Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution
arrangements for each class of shares under the Merrill Lynch Select
Pricing SM System.
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge Fee Fee Conversion Feature
- --------------------------------------------------------------------------------------------------------------------
Maximum 5.25% initial sales
A charge 2, 3 No No No
<S> <C> <C> <C> <C>
B CDSC for a period of 4 0.25 0.75% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing after approximately
1.0% annually to 0.0% eight years (4)
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales 0.25% No No
charge 3
</TABLE>
----------
(1) Initial sales charges are imposed at the time of purchase as a
percentage of the offering price. CDSCs may be imposed if the
redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives-Class A and Class D Shares-Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten
year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
25
<PAGE> 28
Initial Sales Charge Alternatives-Class A and Class D Shares
Investors choosing the initial sales charge alternatives who are
eligible to purchase Class A shares should purchase Class A shares rather
than Class D shares because there is an account maintenance fee imposed on
Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
Sales Load as Discount to
Sales Load as Percentage* of Selected Dealers
Percentage of the Net Amount as Percentage of
Amount of Purchase Offering Price Invested the Offering Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 ............................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000................................. 4.75 4.99 4.50
$50,000 but less than $100,000................................ 4.00 4.17 3.75
$100,000 but less than $250,000............................... 3.00 3.09 2.75
$250,000 but less than $1,000,000............................. 2.00 2.04 1.80
$1,000,000 and over**......................................... 0.00 0.00 0.00
</TABLE>
----------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases
of $1,000,000 or more made on or after October 21, 1994. If the sales
charge is waived, such purchases will be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, may be subject to a CDSC if
the shares are redeemed within one year of purchase at the following
rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001
to $5,000,000; and 0.25% on purchases of more than $5,000,000 in lieu
of paying an initial sales charge. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1 million or more of Class A or Class D shares by certain
401(k) plans.
The Distributor may reallow discounts to selected dealers and retain
the balance over such discounts. At times the Distributor may reallow the
entire sales charge to such dealers. Since securities dealers selling
Class A and Class D shares of the Fund will receive a concession equal to
most of the sales charges, they may be deemed to be underwriters under the
Securities Act. During the fiscal year ended June 30, 1994, the Fund sold
20,121,319 Class A shares for aggregate net proceeds of $316,594,559. The
gross sales charges for the sale of Class A shares of the Fund for that
year were $10,184,184, of which $589,253 and $9,594,931 were received by
the Distributor and Merrill Lynch, respectively. For the fiscal year ended
June 30 1994, the Distributor received CDSCs of $21,725, all of which were
paid to Merrill Lynch, with respect to redemption within one year after
purchase of Class A shares purchased subject to front-end sales charge
waivers.
Eligible Class A Investors. Class A shares are offered to a limited
group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares
in a shareholder account are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings
plans, including eligible 401 (k) plans, may purchase Class A shares at
net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of
its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services and certain purchases made in connection with the Merrill
26
<PAGE> 29
Lynch Mutual Fund Adviser program. In addition, Class A shares will be
offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired
shares of certain MLAM-advised closed-end funds who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock
in shares of the Fund also may purchase Class A shares of the Fund if
certain conditions set forth in the Statement of Additional Information
are met. For example, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value so shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the
net proceeds from a sale of certain of their shares of common stock of
Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. Class A and
Class D sales charges also may be reduced under a Right of Accumulation
and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible
Class A investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to
an investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored
Retirement or Savings Plans, is set forth in the Statement of Additional
Information.
Deferred Sales Charge Alternatives-Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should
consider Class B shares if they intend to hold their shares for an
extended period of time and Class C shares if they are uncertain as to the
length of time they intend to hold their assets in MLAM-advised mutual
funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time
of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On
the other hand, approximately eight years after Class B shares are issued,
such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares"
below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and a distribution fee of 0.75% of
net assets as discussed below under "Distribution Plans". The proceeds
from the account maintenance fees are used to compensate Merrill Lynch for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling
Class B and Class C shares at the time of purchase from its own funds. See
"Distribution Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray
the expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of
the Class B and Class C shares, such as the payment
27
<PAGE> 30
of compensation to financial consultants for selling Class B and Class C
shares, from its own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject
to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten years.
If Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See
"Limitations on the Payment of Deferred Sales Charges" below. The
proceeds from the ongoing account maintenance fee are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services-Exchange Privilege" will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than
the CDSC schedule relating to the Class B shares acquired as a result of
the exchange.
Contingent Deferred Sales Charges-Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset value above
the initial purchase price. In addition, no CDSC will be assessed on
shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
As a Percentage
Years Since Purchase of Dollar Amount
Payment Made Subject to Charge
---------------------------------------------------------------------------
<S> <C>
0-1............................................. 4.00%
1-2............................................. 3.00
2-3............................................. 2.00
3-4............................................. 1.00
4 and thereafter................................ 0.00
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the four-year period. The charge will not be applied
to dollar amounts representing an increase in the net asset value since
the time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
To provide an example, assume an investor purchases 100 shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares through dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to the CDSC because of dividend
28
<PAGE> 31
reinvestment. With respect to the remaining 40 shares, the CDSC is applied
only to the original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600 redemption
proceeds will be charged at a rate of 2.0% (the applicable rate in the
third year after purchase).
The Class B CDSC is waived on redemption of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability
(as defined in the Internal Revenue Code of 1986, as amended) of a
shareholder. The Class B CDSC also is waived on redemption of shares by
certain eligible 401(a) and eligible 401 (k) plans. The CDSC also is
waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the
time of redemption. The Class B CDSC also is waived for any Class B shares
which are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption.
Additional information concerning the waiver of the Class B CDSC is set
forth in the Statement of Additional Information.
Contingent Deferred Sales Charges-Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no Class
C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares
held longest during the one-year period. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the
time of purchase. A transfer of shares from a shareholder's account to
another account will be assumed to be made in the same order as a
redemption.
Conversion of Class B Shares to Class D Shares. After approximately
eight years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject
to an ongoing account maintenance fee of 0.25% of net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once
each month (on the "Conversion Date") on the basis of the relative net
asset values of the shares of the two classes on the Conversion Date,
without the imposition of any sales load, fee or other charge. Conversion
of Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on
Class B shares also will convert automatically to Class D shares. The
Conversion Date for dividend reinvestment shares will be calculated taking
into account the length of time the shares underlying such dividend
reinvestment shares were outstanding. If at a Conversion Date the
conversion of Class B shares to Class D shares of the Fund in a single
account will result in less than $50 worth of Class B shares being left in
the account, all of the Class B shares of the Fund held in the account on
the Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must
be delivered to the Transfer Agent at least one week prior to the
Conversion Date applicable to those shares. In the event such certificates
are not
29
<PAGE> 32
received by the Transfer Agent at least one week prior to the Conversion
Date, the related Class B shares will convert to Class D shares on the
next scheduled Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will
convert approximately eight years after initial purchase, and Class B
shares of taxable and tax-exempt fixed income MLAM-advised mutual funds
will convert approximately ten years after initial purchase. If, during
the Conversion Period, a shareholder exchanges Class B shares with an
eight-year Conversion Period for Class B shares with a ten-year Conversion
Period, or vice versa, the Conversion Period applicable to the Class B
shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares
acquired.
The Conversion Period is modified for shareholders who purchased Class
B shares through certain retirement plans which qualified for a waiver of
the CDSC normally imposed on purchases of Class B shares ("Class B
Retirement Plans"). When the first share of any MLAM-advised mutual fund
purchased by a Class B Retirement Plan has been held for ten years (i.e.,
ten years from the date the relationship between MLAM-advised mutual funds
and the Class B Retirement Plan was established), all Class B shares of
all MLAM-advised mutual funds held in that Class B Retirement Plan will be
converted into Class D shares of the appropriate Funds. Subsequent to such
conversion, that Class B Retirement Plan will be sold Class D shares of
the appropriate funds at net asset value.
Distribution Plans
The Fund has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance
and/or distribution fees paid by the Fund to the Distributor with respect
to such classes. The Class B and Class C Distribution Plans provide for
the payment of account maintenance fees and distribution fees, and the
Class D Distribution Plan provides for the payment of account maintenance
fees.
The Distribution Plans for Class B, Class C and Class D shares each
provide that the Fund pays the Distributor an account maintenance fee
relating to the shares of the relevant class, accrued daily and paid
monthly, at the annual rate of 0.25% of the average daily net assets of
the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement)
in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide
that the Fund also pays the Distributor a distribution fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.75% of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing shareholder and distribution services, and bearing certain
distribution-related expenses of the Fund, including payments to financial
consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to
permit an investor to purchase Class B and Class C shares through dealers
without the assessment of an initial sales charge and at the same time
permit the dealer to compensate its financial consultants in connection
with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class A and
Class D shares of the Fund in that the deferred sales charges provide for
the financing of the distribution of the Fund's Class B and Class C
shares.
30
<PAGE> 33
The Fund did not publicly issue any Class B shares prior to July 1,
1994; therefore, no payments were made pursuant to the Class B
Distribution Plan during the Fund's fiscal year ended June 30, 1994.
Similarly, the Fund did not begin to offer shares of Class C or Class D
publicly until the date of this Prospectus. Accordingly, no payments have
been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the
amount of expenses incurred, and accordingly, distribution-related
revenues from the Distribution Plans may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors
for their consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans. This
information is presented annually as of December 31 of each year on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion
and marketing expenses, corporate overhead and interest expense. On the
direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs, and the expenses consist of
financial consultant compensation.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch
in connection with Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of
the Distribution Plans from year to year. However, the Distributor intends
to seek annual continuation of the Distribution Plans. In their review of
the Distribution Plans, the Directors will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the
sale of shares of another class. Payments of the distribution fee on Class
B shares will terminate upon conversion of those Class B shares into Class
D shares as set forth under "Deferred Sales Charge Alternatives-Class B
and Class C Shares-Conversion of Class B Shares to Class D Shares".
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
NASD imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but
not the account maintenance fee. The maximum sales charge rule is applied
separately to each class. . As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the
CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in
excess of 0.50% of eligible gross sales. Consequently, the maximum amount
payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
31
<PAGE> 34
Distributor; however, the Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the
NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the
net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable,
there will be no charge for redemption if the redemption request is sent
directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or
less than the 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 Department, P.O.
Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Financial Data Services, Inc.,
Transfer Agency Mutual Fund Operations Department, 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the
case of shares deposited with the Transfer Agent may be accomplished by a
written letter requesting redemption. Proper notice of redemption in the
case of shares for which certificates have been issued may be accomplished
by a written letter as noted above accompanied by certificates for the
shares to be redeemed. The notice in either event requires the signatures
of all persons in whose names the shares are registered, signed exactly as
their names appear on the Transfer Agent's register or on the
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
32
<PAGE> 35
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.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge
on the shareholder for transmitting the notice of repurchase to the Fund.
Merrill Lynch may charge its customers a processing fee (presently $4.85)
to confirm a repurchase of shares to such customers. 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 and Class D Shares
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or
Class D shares, as the case may be, of the Fund at net asset value without
a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a
check for the amount to be reinstated to the Transfer Agent within 30 days
after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset
value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by
the Class A or Class D shareholder only the first time such shareholder
makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of
the Fund. Full details as to each of such services, copies of the various
plans described below and instructions as to how to participate in the
various services or plans, or how to change options with respect thereto,
can be obtained from the Fund by calling the telephone number on the cover
page hereof or from the Distributor or Merrill Lynch. 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 statements,
at least quarterly, from the Transfer Agent. These statements will serve
as transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. These 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 also may maintain their
accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the
Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of
the Fund, a shareholder either must redeem the Class A
33
<PAGE> 36
or Class D shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for
those Class A or Class D shares. Shareholders interested in transferring
their Class B or Class C shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. Shareholders considering
transferring a tax-deferred retirement account such as an individual
retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares
of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders
may exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares
for shares of a second MLAM-advised mutual fund, and the shareholder does
not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be exchanged for
Class A shares of a second MLAM-advised mutual fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus
an amount equal to the difference, if any, between the sales charge
previously paid on the Class A or Class D shares being exchanged and the
sales charge payable at the time of the exchange on the shares being
acquired.
Class B, Class C and Class D shares will be exchangeable with shares
of the same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on
the basis of relative net asset value per share without the payment of any
CDSC that might otherwise be due upon redemption of the shares of the
Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for
the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically
designated as availabale for exchange by holders of Class A, Class B,
Class C or Class D shares. The period of time that Class A, Class B, Class
C or Class D shares are held in a money market fund, however, will not
count toward satisfaction of the holding period requirement for reduction
of any CDSC imposed on such shares, if any, and, with respect to Class B
shares, toward satisfaction of the Conversion Period.
34
<PAGE> 37
Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the
MLAM-advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. For further information, see "Shareholder Services-
Exchange Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser
("MFA") program. First, the initial allocation of assets is made under
the MFA program. Then, any subsequent exchange under the MFA program of
Class A or Class D shares of a MLAM-advised mutual fund for Class A or
Class D shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge
previously paid on the shares of the other MLAM-advised mutual fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and 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 by telephone (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. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will
be imposed on redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. The Automatic
Investment Program is not available to shareholders whose shares are held
in a brokerage account with Merrill Lynch other than a CMA(Reg) account.
Systematic Withdrawal Plans. A Class A or Class D shareholder may
elect to receive systematic withdrawal payments from his Investment
Account in the form of payments by check or through automatic payment by
direct deposit to his bank account on either a monthly or quarterly basis.
A Class A or Class D shareholder whose shares are held within a CMA(Reg),
CBA(Reg) 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.
Automatic Investment Plans. Regular additions of Class A, Class B,
Class C or Class D shares may be made to an investor's Investment Account
by prearranged charges of $50 or more to his regular bank account.
Investors who maintain CMA(Reg) accounts may arrange to have periodic
investments made in the Fund in their CMA(Reg) accounts or in certain
related accounts in amounts of $100 or more through the CMA(Reg) Automated
Investment Program.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total
return is computed separately for Class A, Class B, Class C and Class D
shares in accordance with a formula specified by the Commission.
35
<PAGE> 38
Average annual total return quotations for the specified periods will
be computed by finding the average annual compounded rates of return
(based on net investment income and any capital gains or losses on
portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of
each period. Average annual total return will be computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including any CDSC that
would be applicable to a complete redemption of the investment at the end
of the specified period such as in the case of Class B and Class C shares
and the maximum sales charge in the case of Class A and Class D shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time
on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of
the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of
return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return, and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of
time. In advertisements directed to investors whose purchases are subject
to reduced sales charges in the case of Class A and Class D shares or
waiver of the CDSC 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 CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or waiver of the CDSC, a lower amount of expenses
may be deducted. See "Purchase of Shares". The Fund's total return may
be expressed either as a percentage or as a dollar amount in order to
illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total
return will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The
value of an investment in the Fund will fluctuate, and an investor's
shares, when redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the Standard &
Poor's 500 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.
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<PAGE> 39
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 each class of shares will be reduced
as a result of any account maintenance, distribution and higher transfer
agency fees applicable to that class. See "Additional Information-
Determination of Net Asset Value". Dividends and distributions may be
reinvested automatically in shares of the Fund, at net asset value without
sales 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 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
The net asset value of the shares of all classes of the Fund is
determined once daily as of 4:15 p.m., New York time, 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 per share is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including
the management fees payable to the Manager and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily.
The per share net asset value of Class A
37
<PAGE> 40
shares generally will be higher than the per share net asset value of
shares of the other classes, reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect
to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of
Class B and Class C shares, reflecting the daily expense accruals of the
distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share
net asset value of the classes will tend to converge immediately after the
payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at
the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. In
cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority
of the Board of Directors as the primary market. Securities traded in the
over-the-counter market are valued at the last available bid price 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 writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued
to reflect the current market value of the option written, based upon the
last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. 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, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions
of the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in
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. Distributions by the Fund,
38
<PAGE> 41
whether from ordinary income or capital gains, generally will not be
eligible for the dividends received deduction allowed to corporations
under the Code. If the Fund pays a dividend in January which was declared
in the previous October, November or December to shareholders of record on
a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was
declared.
Ordinary income dividends paid 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 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 the
distributions from such a company and on gain from the disposition of the
shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund
as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will
allow it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular year in
excess of the distributions received from such PFICs. Alternatively, 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
39
<PAGE> 42
losses, however, would 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 received
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 income 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).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge
the shareholder would have owed upon purchase of the new shares in the
absence of the exchange privilege. Instead, such sales charge will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For
the complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and
the Treasury regulations are subject to change by legislative or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by
RICs which are derived from interest on U.S. Government obligations. State
law varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of
an investment in the Fund.
Organization of the Fund
The Fund was incorporated under Maryland law on April 14, 1989. It has
an authorized capital of 400,000,000 shares of Common Stock, par value
$0.10 per share, divided into four classes designated Class A, Class B,
Class C and Class D Common Stock, each of which consists of 100,000,000
shares. Shares of Class A,
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<PAGE> 43
Class B, Class C and Class D Common Stock represent an interest in the
same assets of the Fund and are identical in all respects except that
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance associated with such shares, and Class B and Class C
shares bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to
account maintenance and distribution expenditures, as applicable. See
"Purchase of Shares". The 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 rights. Shares have the conversion rights described in this
Prospectus. Each share of Common Stock is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets
of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except that, as noted above, the Class B, Class C
and Class D shares bear certain additional expenses.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of
the number of accounts such shareholder has. If a shareholder wishes to
receive separate copies of each report and communication for each of the
shareholder's related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch 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.
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<PAGE> 45
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.-AUTHORIZATION FORM
(PART 1)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Share Purchase Application
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch Developing Capital Markets Fund, Inc. and establish an
Investment Account as described in the Prospectus. In the event that I am
not eligible to purchase Class A shares, I understand that Class D shares
will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)
1. ................................. 4. ...................................
2. ................................. 5. ...................................
3. ................................. 6. ...................................
Name.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)..................................................
First Name Initial Last Name
Address............................................. Date....................
.............................................................................
(Zip Code)
Occupation........................ Name and Address of Employer............
........................................
........................................
.................................. ........................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will
be presumed unless otherwise specified)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends Long-term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: /
/ Check or / / Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with
the terms I have selected on the Merrill Lynch Developing Capital Markets
Fund, Inc. Authorization Form.
Specify type of account (check one) / / checking / / savings
Name on your Account.........................................................
Bank Name .............. Bank Number ............ Account Number ............
Bank Address.................................................................
I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor.......................................................
Signature of Depositor........................... Date.......................
(if joint account, both must sign)
Note: If direct deposit to bank account is selected, your blank, unsigned
check marked "VOID" or a deposit slip from your savings account should
accompany this application.
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<PAGE> 46
3. Social Security Number or Taxpayer Identification Number
----------------------------------
----------------------------------
Social Security Number or Taxpayer
Identification Number
Under penalty of perjury, I certify (1) that the number set forth above
is my correct Social Security Number or Taxpayer Identification Number and
(2) that I am not subject to backup withholding (as discussed 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).........
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4. Letter of Intention - Class A and D shares only (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam: ...................., 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:
/ / $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...............................
Account Number..................... Account Number.........................
5. For Dealer Only We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our agent in
Branch Office, Address, connection with transactions under this
Stamp authorization form and agree to notify
the Distributor of any purchases made
under a Letter of Intention or
Systematic Withdrawal Plan.
----------------------------- We guarantee the shareholder's signature.
-----------------------------
Dealer Name and Address
By.......................................
Authorized Signature of Dealer
This form, when completed, should
be mailed to: ---------------------------------------
Merrill Lynch Developing Capital ---------------------------------------
Markets Fund, Inc. Branch-CodeF/C No.
c/o Financial Data Services, Inc. ---------------------------------------
Transfer Agency Mutual Fund Operations ---------------------------------------
P.O. Box 45289 ---------------------------------------
Jacksonville, FL 32232-5289 Dealer's Customer Account No.
......................................
F/C Last Name
44
<PAGE> 47
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.-AUTHORIZATION FORM
(PART 2)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Note: This form is required to apply for the Systematic Withdrawal or
Automatic Investment Plans only.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Account Registration
Name of Owner ........................
Name of Co-Owner (if any) ............ Social Security Number
or Taxpayer Identification Number
Address .............................. Account Number ...................
.............................. (if existing account)
2. Systematic Withdrawal Plan-Class A and D Shares Only (See terms and
conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch
Developing Capital Markets Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) / / Monthly on the 24th day of
each month, or / / Quarterly on the 24th day of March, June, September and
December. If the 24th falls on a weekend or holiday, the next succeeding
business day will be utilized. Begin systematic withdrawal on . or as soon
as possible thereafter.
(month)
Specify how you would like your withdrawal paid to you (check one): / / $.
or / /..% of the current value of / / Class A or / / Class D shares in the
account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of......................................................
Mail to (check one)
/ / the address indicated in item 1.
/ / Name (please print)..................................................
Address ..................................................................
..................................................................
Signature of Owner..................... Date.....................
Signature of Co-Owner (if any)....................................
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agreee that this authorization will remain in effect until I
provide written notification to Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one): / / checking / / savings
Name on your account .....................................................
Bank Name.................................................................
Bank Number........................ Account Number........................
Bank Address..............................................................
..........................................................................
Signature of Depositor....................... Date.......................
Signature of Depositor....................................................
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
application.
45
<PAGE> 48
3. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below
each month to purchase (choose one)
/ / Class A shares / / Class B share / / Class C shares / / Class D shares
of Merrill Lynch Developing Capital Markets Fund, Inc. subject to the
terms set forth below. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
----------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR ACH
You are hereby authorized to draw an DEBITS
ACH debit each month on my bank DRAWN BY FINANCIAL DATA
account for investment in Merrill SERVICES, INC.
Lynch Developing Capital Markets Fund,
To..........................Bank
Inc. as indicated below:
(Investor's Bank)
Amount of each check or ACH debit $..
Bank Address ...................
Account number.......................
City.... State.... Zip Code....
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay
...................................... and charge to my account ACH
......................... (Month) debits drawn on my account by
or as soon thereafter as possible. and payable to Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such
ACH debits voluntarily at my request debit shall be the same as if it
and that you shall not be liable for were a check drawn on you and
any loss arising from any delay in signed personally by me. This
preparing or failure to prepare any authority is to remain in effect
such debit. If I change banks or until revoked by me in writing.
desire to terminate or suspend this Until you receive such notice,
program, I agree to notify you you shall be fully protected in
promptly in writing. I hereby honoring any such debit. I
authorize you to take any action to further agree that if any such
correct erroneous ACH debits of my debit be dishonored, whether
bank account or purchases of fund with or without cause and
shares including liquidating shares of whether intentionally or
the Fund and credit my bank account. I inadvertently, you shall be
further agree that if a debit is not under no liability.
honored upon presentation, Financial
Data Services, Inc. is authorized to ...................................
discontinue immediately the Automatic Date Signature of Depositor
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the ..................................
dishonored debit. Bank Account Number Signature of
Depositor
.......... ........................ (If joint account, both must sign)
Date Signature of Depositor
........................
Signature of Depositor
(If joint account, both
must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this application.
<PAGE> 49
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 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
4 Chase MetroTech Center, 18th Floor
Brooklyn, New York 11245
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE Prospectus
CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE MANAGER OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT (ART WORK APPEARS HERE)
CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
----------
TABLE OF CONTENTS
MERRILL LYNCH
DEVELOPING CAPITAL
MARKETS FUND, INC.
Page
----
<S> <C>
Fee Table................................... 2
Merrill Lynch Select Pricing SM System...... 3
Consolidated Financial Highlights........... 8
Special and Risk Considerations............. 9
Investment Objective and Policies........... 11
Management of the Fund...................... 22
Board of Directors........................ 22
Management and Advisory Arrangements...... 22
Transfer Agency Services.................. 23
Purchase of Shares.......................... 24
Initial Sales Charge Alternatives - Class
A and Class D Shares.................... 26
Deferred Sales Charge Alternatives - Class
B and Class C Shares.................... 27
Distribution Plans........................ 30
Limitations on the Payment of Deferred
Sales Charges........................... 31 October 21, 1994
Redemption of Shares........................ 32
Redemption................................ 32
Repurchase................................ 32 Distributor:
Reinstatement Privilege-Class A and Class Merrill Lynch
D Shares................................ 33 Funds Distributor, Inc.
Shareholder Services........................ 33
Performance Data ........................... 35
Additional Information...................... 37
Dividends and Distributions............... 37 This prospectus should be
Determination of Net Asset Value.......... 37 retained for future reference.
Taxes..................................... 38
Organization of the Fund.................. 40
Shareholder Reports....................... 41
Shareholder Inquiries..................... 41
Authorization Form ......................... 43
Code # 10893-1094
====================================================== ======================================================
</TABLE>
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
P.O. 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.
----------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing SM System permits an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of
the purchase, the length of time the investor expects to hold the shares
and other relevant circumstances.
----------
This Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the prospectus of the
Fund, dated October 21, 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 October 21, 1994.
<PAGE> 52
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 certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), the Manager
believes that,
2
<PAGE> 53
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 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
3
<PAGE> 54
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
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
4
<PAGE> 55
"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. If the Fund enters into a position hedging transaction,
its custodian bank will place cash or liquid securities in a separate
account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account so that the
value of the account will equal the amount of the Fund's commitment with
respect to such contracts. The Fund will not 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 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
5
<PAGE> 56
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 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
6
<PAGE> 57
(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 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
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<PAGE> 58
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 or an affiliate thereof.
Under such agreements, the bank or primary dealer or an affiliate thereof
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 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
then 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.
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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.
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
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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.
Current 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.
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 331/3% 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
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"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.
(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.
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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.
Proposed Uniform Investment Restrictions
As discussed in the Prospectus under "Investment Objective and
Policies - Investment Restrictions", the Board of Directors of the Fund
has approved the replacement of the Fund's existing investment
restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have
been proposed for adoption by all of the non-money market mutual funds
advised by Fund Asset Management, L.P. ("FAM") or its affiliate, Merrill
Lynch Asset Management, L.P. ("MLAM" or the "Manager"). The investment
objective and policies of the Fund will be unaffected by the adoption of
the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve
the proposed revised investment restrictions. If such shareholder approval
is obtained, the Fund's current investment restrictions will be replaced by
the proposed restrictions, and the Fund's Prospectus and Statement of
Additional Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may
not:
1. Invest more than 25% of its assets, taken at market value, in
the securities of issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities).
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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 or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in securities
directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a
loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be
made only in accordance with applicable law and the guidelines set
forth in the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would
violate applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks
(as defined in the Investment Company Act) in amounts up to 331/3% of
its total assets (including the amount borrowed), (ii) the Fund may
borrow up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Fund may purchase securities on margin to the
extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by
the Fund's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time
to time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies.
7. Underwrite securities of other issuers except insofar as the
Fund technically may be deemed an underwriter under the Securities Act
of 1933, as amended (the "Securities Act"), in selling portfolio
securities.
8. Purchase or sell commodities or contracts on commodities,
except to the extent that the Fund may do so in accordance with
applicable law and the Fund's Prospectus and Statement of Additional
Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange
Act.
Under the proposed non-fundamental investment restrictions, the Fund
may not:
a. Purchase securities of other investment companies, except to
the extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Fund currently
does not intend to engage in short sales, except short sales "against
the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be
marketed, redeemed or put to the issuer or a third party, if at the
time of acquisition more than 15% of its total assets would be
invested in such securities. This restriction shall not apply to
securities which mature within seven days or securities which the
Board of Directors of the Fund
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<PAGE> 64
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of
any state in which the Fund's shares are registered or qualified for
sale require a lower limitation, the Fund will observe such
limitation. As of the date hereof, therefore, the Fund will not invest
more than 10% of its total assets in securities which are subject to
this investment restriction (c). Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A security") and
determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction
(c). Notwithstanding the fact that the Board may determine that a Rule
144A security is liquid and not subject to limitations set forth in
this investment restriction (c), the State of Ohio does not recognize
Rule 144A securities as securities that are free of restrictions as to
resale. To the extent required by Ohio law, the Fund will not invest
more than 5% of its total assets in securities of issuers that are
restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its
investments in warrants, valued at the lower of cost or market value
would exceed 5% of the Fund's 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 Stock Exchange or
American Stock Exchange or a major foreign exchange. For purposes of
this restriction, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together
with predecessors, of less than three years of continuous operation,
if more than 5% of the Fund's total assets would be invested in such
securities. This restriction shall not apply to mortgage-backed
securities, asset-backed securites or obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and
general partner of the Manager, the directors of such general partner
or the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of
such issuer own in the aggregate more than 5% of the securities of
such issuer.
g. Invest in real estate limited partnership interests or
interests in oil, gas or other mineral leases, or exploration or
development programs, except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral
exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be
amended from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 20% of its total assets, taken at market
value, and then only from banks as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions or
to settle securities transactions. In addition, the Fund will not
purchase securities while borrowings exceeed 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.
----------
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 involv-
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ing 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.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL-President and Director (1)(2)-President of the Manager
(which term as used herein includes its corporate predecessors) since 1977
and Chief Investment Officer since 1976; President of Fund Asset
Management, L.P. ("FAM") (which term as used herein includes its
corporate predecessors) 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. ("ML & Co.") 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, New
York University Leonard N. Stern School of Business Administration;
Director of Re Capital Corp. (reinsurance holding company), Bowne & Co.,
Inc. (financial printers), Vornado, Inc. (real estate holding company),
Smith-Corona Corporation (manufacturer of typewriters and word
processors), and Alexander's Inc. (real estate company)
TERRY K. GLENN-Executive Vice President (1)(2)-Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
NORMAN R. HARVEY-Senior Vice President (1)(2)-Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
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DONALD C. BURKE-Vice President (1)(2)-Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from
1982 to 1990.
GRACE PINEDA-Vice President (1)(2)-Vice President of the Manager and
Senior Portfolio Manager since 1989.
GERALD M. RICHARD-Treasurer (1)(2)-Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since
1981 and Treasurer since 1984.
MARK B. GOLDFUS-Secretary (1)(2)-Vice President of the Manager and FAM
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.
On September 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 ML & Co.
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 and Nominating
Committee (the "Committee"), which consists of all of the non-affiliated
Directors, at a rate of $500 per meeting attended. The Chairman of the
Committee receives an additional fee of $250 per meeting attended. For the
fiscal year ended June 30, 1993, fees and expenses paid to unaffiliated
Directors aggregated $30,870.
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, 1992, 1993 and 1994, the management fees paid by the
Fund to the Manager aggregated $1,159,827, $1,303,056 and $3,033,147,
respectively.
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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.
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, 1992, 1993 and 1994, 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, 1992, 1993 and 1994, the
amount of such reimbursement was $78,980, $127,749 and $101,404,
respectively. Certain expenses in connection with the offering of shares
will be financed by the Fund pursuant to distribution plans in compliance
with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares-Distribution Plans".
ML & Co., 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
herein, 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.
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<PAGE> 68
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for
certain information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred
sales charge arrangements. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services-Exchange Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50
mutual funds advised by the Manager or its affiliate, FAM. Funds advised
by the Manager or FAM are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of
shares of the Fund (the "Distribution Agreements"). The Distribution
Agreements obligate the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports
have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used
in connection with the offering to dealers and investors. The Distributor
also pays for other supplementary sales literature and advertising costs.
The Distribution Agreements are subject to the same renewal requirements
and termination provisions as the Management Agreement described above.
Initial Sales Charge Alternatives-Class A and Class D Shares
For the fiscal years ended June 30, 1992, 1993 and 1994, the Fund sold
its shares through the Distributor and Merrill Lynch, as a dealer. 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. For the fiscal year ended June 30, 1994, the Fund sold
20,121,319 Class A shares for aggregate net proceeds to the Fund of
$316,594,559. The gross sales charges for the sale of Class A shares for
that period were $10,184,184, of which $9,594,931 was received by Merrill
Lynch and $589,253 was received by the Distributor.
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"))
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<PAGE> 69
although more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company", as that term is defined in the
Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares 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.
Closed-End Fund Investment Option. Class A shares of the Fund and
other MLAM-advised mutual funds ("Eligible Class A Shares") are offered
at net asset value to shareholders of certain closed-end funds advised by
the Manager or FAM who purchased such closed-end fund shares prior to
October 21, 1994, and wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in Eligibile Class A shares,
if the conditions set forth below are satisfied. Alternatively, closed-end
fund shareholders who purchased such shares on or after October 21, 1994,
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares are offered Class A shares (if eligible to buy Class A shares) or
Class D shares of the Fund and other MLAM-advised mutual funds ("Eligible
Class D Shares"), if the following conditions are met. First, the sale of
the closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third,
the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase
of $250 to be eligible for the investment option. Class A shares of the
Fund are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. (Senior Floating Rate Fund) who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders
must sell their Senior Floating Rate Fund shares to Senior Floating Rate
Fund in connection with a tender offer conducted by Senior Floating Rate
Fund and reinvest the proceeds immediately in the Fund. This investment
option is available only with respect to the proceeds of Senior Floating
Rate Fund shares as to which no Early Withdrawal Charge (as defined in the
Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating
Rate Fund tender offer terminates and will be effected at the net asset
value of the Fund at such day.
Reduced Initial Sales Charges
Right of Accumulation. The Fund offers a right of accumulation under
which investors are permitted to purchase shares of the Fund subject to an
initial sales charge at the offering price applicable to the total of (a)
the public offering price of the shares then being purchased plus (b) an
amount equal to the then current net asset value or cost, whichever is
higher, of the purchaser's combined holdings of all classes of shares of
the Fund and of other MLAM-advised mutual funds. For any such right of
accumulation to be made available, the Distributor
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<PAGE> 70
(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 $25,000 or more of Class A or Class D shares of the Fund or
any other MLAM-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form
provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's transfer agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan-participant record-keeping services. The
Letter of Intention is not a binding obligation to purchase any amount of
Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90
days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. The value of Class A and Class D shares
of the Fund and of other MLAM-advised mutual funds presently held, at cost
or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If
the total amount of shares does not equal the amount stated in the Letter
of Intention (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to five
percent of the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales
charge which would be applicable to a single purchase equal to the total
dollar value of the Class A shares then being purchased under such Letter,
but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed
of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised mutual fund 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.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
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,
Voluntary Employee Benefits Association ("VEBA") plans, and
non-qualified After Tax Savings and Investment programs, maintained on the
Merrill Lynch Group Employee Services system, herein referred to as
"Employer Sponsored Retirement or Savings Plans", provided the plan has
accumulated $20 million or more in
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<PAGE> 71
MLAM-advised mutual funds (in the case of Class A shares) or $5 million or
more in MLAM-advised mutual funds (in the case of Class D shares). Class D
shares may be offered at net asset value to new Employer Sponsored
Retirement or Savings Plans, provided the plan has $3 million or more
initially invested in MLAM-advised mutual funds. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. Class A shares and Class D shares
also are offered at net asset value to Employer Sponsored Retirement or
Savings Plans that have at least 1,000 employees eligible to participate
in the plan (in the case of Class A shares) or between 500 and 999
employees eligible to participate in the plan (in the case of Class D
shares). Employees eligible to participate in Employer Sponsored
Retirement or Savings Plans of the same sponsoring employer or its
affiliates may be aggregated. Any Employer Sponsored Retirement or Savings
Plan which does not meet the above described qualifications to purchase
Class A shares at net asset value has the option of (i) purchasing Class A
shares at the initial sales charge schedule and possible CDSC schedule
disclosed in the Prospectus if it is otherwise eligible to purchase Class
A shares, (ii) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, (iii) if the Employer
Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or if
the Employer Sponsored Retirement or Savings Plan does not qualify to
purchase Class B shares with a waiver of the CDSC upon redemption,
purchasing Class C shares at the CDSC schedule disclosed in the
Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members
of the Boards of other MLAM-advised investment companies, directors and
employees of ML&Co. and its subsidiaries (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc. includes MLAM, FAM
and certain other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co., Inc.) and any trust, pension,
profit-sharing or other benefit plan for such persons may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
a sales charge, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase by such investor if the
following conditions are satisfied. First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from a redemption of a mutual fund that was sponsored by the
financial consultant's previous firm and was subject to a sales charge
either at the time of purchase or on a deferred basis. Second, the
investor also must establish that such redemption had been made within 60
days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value,
without sales charge, to an investor who has a business relationship with
a Merrill Lynch financial consultant and who has invested in a mutual fund
sponsored by a non-Merrill Lynch company for which Merrill Lynch has
served as a selected dealer and where Merrill Lynch has either received or
given notice that such arrangement will be terminated, if the following
conditions are satisfied: first, the investor must purchase Class D shares
of the Fund with proceeds from a redemption of shares of such other mutual
fund and such fund was subject to a sales charge either at the time of
purchase or on a deferred basis, and second, such purchase of Class D
shares must be made within 90 days after such notice.
Class D shares of the Fund will be offered at net asset value, without
a sales charge, to an investor who has a business relationship with a
Merrill Lynch financial consultant and who has invested in a mutual fund
for which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: First, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the
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<PAGE> 72
redemption of such shares of other mutual funds and that such shares have
been outstanding for a period of no less than six months. Second, such
purchase of Class D shares must be made within 60 days after the
redemption and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.
Acquisition of Assets of Certain Investment Companies. The public
offering price of Class D shares may be reduced to the net asset value per
Class D share in connection with the acquisition of the assets of or
merger or consolidation with a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may in
appropriate cases be adjusted to reduce possible adverse tax consequences
to the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to
bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies
of the Fund; (ii) are acquired for investment and not for resale (subject
to the understanding that the disposition of the Fund's portfolio
securities shall at all times remain within its control); and (iii) are
liquid securities, the value of which is readily ascertainable, which are
not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are
due to the nature of the investors and/or the reduced sales efforts that
will be needed in obtaining such investments.
Distribution Plans
Reference is made to "Purchase of Shares - Distribution Plans" in
the Prospectus for certain information with respect to the separate
distribution plans for Class B, Class C and Class D shares pursuant to
Rule 12b-1 under the Investment Company Act (each a "Distribution Plan")
with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintennce fees and/or distribution fees paid
to the Distributor. In their consideration of each Distribution Plan, the
Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and
its related class of shareholder. Each Distribution Plan further provides
that, so long as the Distribution Plan remains in effect, the selection
and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent
Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there
is a reasonable likelihood that such Distribution Plan will benefit the
Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by
the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of the
Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such
22
<PAGE> 73
Distribution Plan, cast in person at a meeting called for that purpose.
Rule 12b-1 further requires that the Fund preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period
of not less than six years from the date of such Distribution Plan or such
report, the first two years in an easily accessible place.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD") imposes a
limitation on certain asset-based sales charges such as the distribution
fee and the CDSC borne by the Class B and Class C shares but not the
account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on
the unpaid balance for the respective class, computed separately, at the
prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the
CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in
excess of 0.50% of eligible gross sales. Consequently, the maximum amount
payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor, however, the Fund will continue to make payments of the
account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the
NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for
certain information as to the redemption and repurchase of Fund shares.
The right to receive payment with respect to any redemption of shares
may be suspended by the Fund for a period of up to seven days. Suspensions
of more than seven days may not be made except (1) for any period (a)
during which the New York Stock Exchange 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.
Deferred Sales Charges-Class B Shares
As discussed in the Prospectus under "Purchase of Shares-Deferred
Sales Charge Alternatives-Class B and Class C Shares", while Class B
shares redeemed within four years of purchase are subject to a CDSC under
most circumstances, the charge is waived on redemptions of Class B shares
in connection with certain post-
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<PAGE> 74
retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or on redemptions of Class B shares following the
death or disability of a Class B shareholder. Redemptions for which the
waiver applies are: (a) any partial or complete redemption in connection
with a distribution following retirement under a tax-deferred retirement
plan or attaining age 591/2 in the case of an IRA or other retirement
plan, or part of a series of equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or
(b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns
the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial
determination of disability.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value
has the option of purchasing Class A or Class D shares at the sales charge
schedule disclosed in the Prospectus, or if the Retirement Plan meets the
following requirements, then it may purchase Class B shares with a waiver
of the CDSC upon redemption. The CDSC is waived for any Eligible 401(k)
Plan redeeming Class B shares. "Eligible 401(k) Plan" is defined as a
retirement plan qualified under Section 401(k) of the Code with a salary
reduction feature offering a menu of investments to plan participants. The
CDSC is also waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that each such plan has the same or an affiliated
sponsoring emloyer as an Eligible 401(k) Plan purchasing Class B shares of
MLAM-advised mutual funds ("Eligible 401(a) Plan"). Other tax qualified
retirement plans within the meaning of Section 401(a) and 403(b) of the
Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a
menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of
the CDSC. The CDSC also is waived for any Class B or Class C shares which
are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied
IRA and held in such account at the time of redemption. The Class B CDSC
also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k)
plan managed by the MLAM Private Portfolio Group and held in such account
at the time of redemption. 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 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
compa-
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<PAGE> 75
nies 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-Current
Investment Restrictions". For the fiscal year ended June 30, 1994, the
Fund paid total brokerage commissions of $2,504,656, of which $116,527 or
4.7% was paid to Merrill Lynch for effecting 7.3% of the aggregate amount
of transactions on which the Fund paid brokerage commissions. 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.
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.
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.
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<PAGE> 76
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/or distribution fees, are accrued daily. The per share net
asset value of the Class B, Class C and Class D shares generally will be
lower than the per share net asset value of the Class A shares reflecting
the daily expense accruals of the account maintenance, distribution and
higher transfer agency fees applicable with respect to the Class B and
Class C shares and the daily expense accruals of the the account
maintenance fees applicable with respect to the Class D shares; moreover,
the per share net asset value of the Class B and Class C shares generally
will be lower than the per share net asset value of its Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with respect to the Class B and Class C
shares of the Fund. It is expected, however, that the per net asset value
of the four classes will tend to converge immediately after the payment of
dividends or distributions, which will differ by approximately the amount
of the expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at
the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors
as the primary market. Securities traded in the over-the-counter market are
valued at the last available bid price 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 writes an option, the
amount of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option
written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. 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.
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<PAGE> 77
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 statements, at least quarterly,
from the transfer agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the
previous statement. Shareholders also will receive separate 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.
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.
Automatic Investment Plans
A U.S. shareholder may make additions to an Investment Account at any
time by purchasing Class A shares (if he or she is an eligible Class A
investor or as described in the Prospectus) or Class B, Class C or Class D
shares at the applicable public offering price either through the
shareholder's securities dealer or by mail directly to the transfer agent,
acting as agent for such securities dealer. Voluntary accumulation also
can be made through a service known as the Automatic Investment Plan
whereby the Fund is authorized through pre-authorized checks or automated
clearing house debits of $50 or more to charge the regular bank account of
the shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. Investors who maintain CMA(Reg)
accounts may arrange to have periodic investments made in the Fund in
their CMA(Reg) accounts or in certain related accounts in amounts of $100
or more ($1 for retirement accounts) through the CMA(Reg) Automated
Investment Program.
Automatic Reinvestment of Dividends and Capital Gains Distributions
Unless specific instructions to the contrary are given as to the
method of payment of dividends and capital gains distributions, dividends
and distributions are automatically reinvested in full and fractional
shares of the Fund at the net asset value per share next determined after
the close of the New York Stock Exchange on the ex-dividend date of such
dividend or distribution. Shareholders may elect to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or
by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends and/or 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.
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<PAGE> 78
Systematic Withdrawal Plans-Class A and Class D Shares
A Class A or Class D shareholder may elect to make systematic
withdrawals from an Investment Account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A or Class D shares of the Fund
having a value, based upon cost or the current offering price, of $5,000
or more, and monthly withdrawals are available for shareholders with Class
A or Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's Investment
Account to provide the withdrawal payment specified by the shareholder.
The shareholder may specify either a dollar amount or a percentage of the
value of his Class A or Class D shares. Redemptions will be made at the
net asset value next determined after the close of the New York Stock
Exchange (currently 4:00 p.m., New York time) on the 24th day of each
month or the 24th day of the last month of each quarter, whichever is
applicable. If the 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 Class A or Class D shares of the Fund,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated
at any time, without charge or penalty, by the shareholder, the Fund, the
Fund's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions,
the shareholder's original investment may be correspondingly reduced.
Purchase of additional Class A or Class D shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept
purchase orders for Class A or Class D shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to
at least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which
the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Reg), CBA(Reg) 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
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under
the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second
MLAM-advised mutual fund if the
28
<PAGE> 79
shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, but does not hold Class A shares of the second
fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares
will be exchangeable with shares of the same class of other MLAM-advised
mutual funds. For purposes of computing the CDSC that may be payable upon
a disposition of the shares acquired in the exchange, the holding period
for the previously owned shares of the Fund is "tacked" to the holding
period of the newly acquired shares of the other fund as more fully
described below. Class A, Class B, Class C and Class D shares also will be
exchangeable for shares of certain MLAM-advised money market funds
specifically designated below as available for exchange by holders of
Class A, Class B, Class C or Class D shares. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the shareholder
for 15 days. It is contemplated that the excxhange privilege may be
applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding
Class A or Class D shares") for Class A or Class D shares of another
MLAM-advised mutual fund ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any,
between the sales charge previously paid on the outstanding Class A or
Class D shares and the sales charge payable at the time of the exchange on
the new Class A or Class D shares. With respect to outstanding Class A or
Class D shares as to which previous exchanges have taken place, the
"sales charge previously paid" shall include the aggregate of the sales
charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal
to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D
shares of the Fund generally may be exchanged into the Class A or Class D
shares of the other funds or into shares of the Class A and Class D money
market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares
outstanding ("outstanding Class B or Class C shares") offers to exchange
its Class B or Class C shares for Class B or Class C shares, respectively,
of another MLAM-advised mutual fund ("new Class B or Class C shares") on
the basis of relative net asset value per Class B or Class C share,
without the payment of any CDSC that might otherwise be due on redemption
of the outstanding shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's CDSC schedule
if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares
is "tacked" to the holding period of the
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<PAGE> 80
new Class B or Class C shares. For example, an investor may exchange Class
B shares of the Fund for those of Merrill Lynch Special Value Fund, Inc.
("Special Value Fund") after having held the Fund Class B shares for two
and a half years. The 2% sales charge that generally would apply to a
redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Special Value Fund and receive
cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three
year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than
five years.
Shareholders also may exchange shares of the Fund into shares of a
money market fund advised by the Manager or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market
fund which were acquired as a result of an exchange for Class B or Class C
shares of the Fund may, in turn, be exchanged back into Class B or Class C
shares, respectively, of any fund offering such shares, in which event the
holding period for Class B or Class C shares of the fund will be
aggregated with previous holding periods for purposes of reducing the
CDSC. Thus, for example, an investor may exchange Class B shares of the
Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years
and three years later decide to redeem the shares of Institutional Fund
for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of
such redemption the shareholder exchanged such shares for Class B shares
of a fund which the shareholder continued to hold for an additional two
and a half years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:
Funds Issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. .......High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc. .................. A high level of current income, consistent
with prudent investment risk, by
investing primarily in debt securities
denominated in a currency of a country
located in the Western Hemisphere (i.e.,
North and South America and the
surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund ..A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Arizona income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
investment grade Arizona Municipal Bonds.
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<PAGE> 81
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 Arkansas Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series Fund,
whose objective is to provide as high a
level of income exempt from Federal and
Arkansas income taxes as is consistent
with prudent investment management.
Merrill Lynch Asset Growth Fund,
Inc. .................... High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the
combination of which will be varied both
with respect to types of securities and
markets in response to changing market
and economic trends.
Merrill Lynch Asset Income Fund,
Inc. .................... A high level of current income through
investment primarily in United States
fixed income securities.
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,
Inc. .................... Capital appreciation and, secondarily,
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.
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<PAGE> 82
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 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.
Merrill Lynch Colorado Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Colorado income taxes as is consistent
with prudent investment management.
Merrill Lynch Connecticut Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Connecticut income taxes as is consistent
with prudent investment management.
Merrill Lynch Corporate Bond Fund,
Inc. .................... Current income from three separate
diversified portfolios of fixed income
securities.
Merrill Lynch Dragon Fund, Inc. .Capital appreciation primarily through
investment in equity and debt securities
of issuers domiciled in developing
countries located in Asia and the Pacific
Basin.
Merrill Lynch EuroFund .........Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
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<PAGE> 83
Merrill Lynch Federal Securities
Trust .................... High current return through investments 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 Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal income taxes as is
consistent with prudent investment
management while serving to offer
shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes through
investment in a portfolio primarily of
intermediate-term investment grade
Florida Municipal Bonds.
Merrill Lynch Florida Municipal Bond
Fund ..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property
taxes.
Merrill Lynch Fund For Tomorrow,
Inc. .................... Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic
and cultural changes as they affect
consumer markets.
Merrill Lynch Fundamental Growth
Fund, Inc. ............... Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited
an above-average growth rate in earnings.
Merrill Lynch Global Allocation
Fund, Inc. ............... High total 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.
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<PAGE> 84
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, Inc.
(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.
Merrill Lynch Global SmallCap Fund,
Inc. .................... Long-term growth of capital by investing
primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
Merrill Lynch Global Utility Fund,
Inc. .................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt
securities issued by domestic and foreign
companies primarily engaged in the
ownership or operation of facilities used
to generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch Growth Fund for
Investment and Retirement ......Growth of capital and, secondarily, income
from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the Fund believes to
be undervalued.
34
<PAGE> 85
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 International Equity
Fund ..................... Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of issuers
located in countries other than the
United States.
Merrill Lynch Latin America Fund,
Inc. .................... Capital appreciation by investing primarily
in Latin American equity and debt
securities.
Merrill Lynch Maryland Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Maryland income taxes as is consistent
with prudent investment management.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund ...A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide 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 to provide 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 Series Trust,
a series fund, whose objective is to
provide as high a level of income exempt
from Federal and Michigan income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-term
grade Michigan Municipal Bonds.
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<PAGE> 86
Merrill Lynch Michigan Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management.
Merrill Lynch Minnesota Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
Minnesota income taxes as is consistent
with prudent investment management.
Merrill Lynch Municipal Bond Fund,
Inc. .................... Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate
Term Fund ................. Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income exempt
from Federal income taxes by investing in
investment grade obligations with a
dollar weighted average maturity of five
to twelve years.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund ...A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide 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 to provide as high a
level of income exempt from Federal and
New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal and
New Mexico income taxes as is consistent
with prudent investment management.
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<PAGE> 87
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 to
provide 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.
Merrill Lynch New York Municipal
Bond Fund ................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal, 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 to provide as high a
level of income exempt from Federal and
North Carolina income taxes as is
consistent with prudent investment
management.
Merrill Lynch Ohio Municipal Bond
Fund ..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide 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 to provide 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.
37
<PAGE> 88
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 to provide as high a
level of income exempt from Federal and
Pennsylvania income taxes as is
consistent with prudent investment
management.
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 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
Fund ..................... Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,..Capital appreciation through worldwide
Inc. 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.
38
<PAGE> 89
Merrill Lynch Texas Municipal Bond
Fund ..................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management by
investing primarily in a portfolio of
long-term, investment grade obligations
issued by the State of Texas, its
political subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income Fund,
Inc. .................... High current income through investment in
equity and debt securities issued by
companies which are primarily engaged in
the ownership or operation of facilities
used to generate, transmit or distribute
electricity, telecommunications, gas or
water.
Merrill Lynch World Income Fund,
Inc. .................... High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets ....Preservation of capital, liquidity and the
Trust highest possible current income
consistent with the foregoing objectives
from the short-term money market
securities in which the Trust invests.
Merrill Lynch Retirement Reserves
Money Fund (available only
for exchanges within
certain retirement plans)....Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in a
diversified portfolio of short-term money
market securities.
Merrill Lynch U.S.A. Government
Reserves .................. Preservation of capital, current income and
liquidity available from investing in
direct obligations of the U.S. Government
and repurchase agreements relating to
such securities.
Merrill Lynch U.S. Treasury
Money Fund ................ Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio of
short-term marketable securities which
are direct obligations of the U.S.
Treasury.
39
<PAGE> 90
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund ....A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such obligations.
Merrill Lynch Institutional Fund ..A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high quality portfolio
of money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund ............ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
exempt from Federal income taxes,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
Merrill Lynch Treasury Fund .....A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up
to 10% of its total assets in repurchase
agreements secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the
exchange. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities
dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or
terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering
of their shares at any time and thereafter may resume such offering from
time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
40
<PAGE> 91
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 and Class C shares will be lower
than the per share dividends and distributions on Class A and Class D
shares as a result of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C
shares; similarly, the per share dividends and distributions on Class D
shares will be lower than the per share dividends and distributions on
Class A Shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Determination of Net Asset Value".
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax
on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions
of the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in
futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the shares are held
as a capital asset).
Dividends are taxable to shareholders even though they are reinvested
in additional shares of the Fund. Not later than 60 days after the close
of its taxable year, the Fund will provide its shareholders with a written
notice designating the amounts of any ordinary income dividends or capital
gain dividends. Generally, distributions by the Fund, whether from
ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund
pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one
of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of
the year in which such dividend was declared.
41
<PAGE> 92
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 Fund's election described in this paragraph but may not
be able to claim a credit or deduction against such U.S. tax for the
foreign taxes treated as having been paid by such shareholder. The Fund
will report annually to its shareholders the amount per share of such
withholding taxes. For this purpose, the Fund will allocate foreign taxes
and foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with
the 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, Class B, Class C and Class D shareholders
during the taxable year or such other method as the Internal Revenue
Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's
basis in the Class D shares acquired will be the same as such
shareholder's basis in the Class B shares converted, and the holding
period of the acquired Class D shares will include the holding period for
the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales
charge paid to the Fund on the exchanged shares reduces any sales charge
the shareholder would have owed upon purchase of the new shares in the
absence of the exchange privilege. Instead, such sales charge will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
begin-
42
<PAGE> 93
ning 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 the
distributions from such a company and on gain from the disposition of the
shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund
as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will
allow it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular year in
excess of the distributions received from such PFICs. Alternatively, 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, would
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 received from PFICs and its
proceeds from dispositions of PFIC stock.
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
43
<PAGE> 94
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 option or futures contract.
Special Rules for Certain Foreign Currency Transactions. In general,
gains from "foreign currencies" and from foreign currency options,
foreign currency futures and forward foreign exchange contracts relating
to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies
as a RIC. It is currently unclear, however, who will be treated as the
issuer of a foreign currency instrument or how foreign currency options,
foreign currency futures and forward foreign exchange contracts will be
valued for purposes of the RIC diversification requirements applicable to
the Fund.
Under Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that
are not "regulated futures contracts" and from unlisted options will be
treated as ordinary income or loss under Code Section 988. In certain
circumstances, the Fund may elect capital gain or loss treatment for such
transactions. Regulated futures contracts, as described above, will be
taxed under Code Section 1256 unless application of Section 988 is elected
by the Fund. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make
any ordinary income dividend distributions, and 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 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.
44
<PAGE> 95
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of
an investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
and other total return data in advertisements or information furnished to
present or prospective shareholders. Total return figures are based on the
Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for
Class A, Class B, Class C and Class D shares in accordance with a formula
specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based
on net investment income and any realized and unrealized capital gains or
losses on portfolio investments over such periods) that would equate the
initial amount invested to the redeemable value of such investment at the
end of each period. Average annual total return is computed assuming all
dividends and distributions are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum
sales charge in the case of Class A and Class D shares and the CDSC that
would be applicable to a complete redemption of the investment at the end
of the specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage
and as a dollar amount based on a hypothetical $1,000 investment for
various periods other than those noted below. Such data will be computed
as described above, except that (i) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than
average annual data, may be quoted, and (ii) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales
charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of
return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
45
<PAGE> 96
Set forth below is total return information for the Class A shares of
the Fund for the periods indicated.
Class B shares of the Fund had not been publicly issued during the
periods for which data are presented. Since Class C and Class D have not
yet been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares
also is not yet provided.
<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> <C>
One Year Ended June 30, 1994.............................................. 21.97% $1,219.70
Inception (September 1, 1989) to June 30, 1994............................ 12.34% $1,754.10
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended June 30, 1994.................................................. 28.73% $1,287.30
Year Ended June 30, 1993.................................................. 5.17% $1,051.70
Year Ended June 30, 1992.................................................. 17.02% $1,170.20
Year Ended June 30, 1991.................................................. (4.45)% $ 955.50
Inception (September 1, 1989) to June 30, 1990............................ 22.29% $1,222.90
Aggregate Total Return
(including maximum applicable sales charges)
Inception (September 1, 1989) to June 30, 1994............................ 75.41% $1,754.10
</TABLE>
In order to reflect the reduced sales charges in the case of Class A
shares or Class D, or the waiver of the CDSC in the case of Class B or
Class C shares applicable to certain investors, as described under
"Purchase of Shares" and "Redemption of Shares", respectively, the
total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver
of sales charges, a lower amount of expenses may be deducted.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on April 14, 1989. It has
an authorized capital of 400,000,000 shares of Common Stock, par value
$0.10 per share, divided into four classes, designated Class A, Class C
and Class D Common Stock, each of which consists of 100,000,000 shares.
Class A, Class C and Class D Common Stock represent an interest in the
same assets of the Fund and are identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution of such shares and have exclusive
voting rights with respect to matters relating to such account
46
<PAGE> 97
maintenance and/or 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 rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund
and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates are issued by
the transfer agent only on specific request. Certificates for fractional
shares are not issued in any case. Shareholders may, in accordance with
Maryland law, cause a meeting of shareholders to be held for the purpose
of voting on the removal of Directors at the request of 25% of the
outstanding shares of the Fund. A Director may be removed at a special
meeting of shareholders by a vote of a majority of the votes entitled to
be cast for the election of Directors.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A
shares of the Fund based on the value of the Fund's net assets on June 30,
1994, and its shares outstanding on that date is as follows:
TABLE*
<TABLE>
<CAPTION>
Class A
------------
<S> <C>
Net Assets................................................................................ $401,995,747
=============
Number of Shares Outstanding.............................................................. 27,513,862
=============
Net Asset Value Per Share (net assets divided by number of shares outstanding)............ $14.61
Sales Charge (for Class A shares: 5.25% of offering price (5.54% of net amount invested))* 0.81
-------------
Offering Price............................................................................ $15.42
=============
</TABLE>
----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
Prior to June 30, 1994, Class B shares of the Fund had not been offered
to the public. Similarly, no Class C or Class D shares of the Fund had been
publicly offered prior to the date of this Statement of Additional
Information.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540,
has been selected as the independent auditors of the Fund. The selection
of independent auditors is subject to ratification by the Fund's
shareholders. The independent auditors are responsible for auditing the
annual financial statements of the Fund.
47
<PAGE> 98
Custodian
The Chase Manhattan Bank, N.A., Global Securities Services, 4 Chase
MetroTech Center, 18th Floor 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.
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 September 30, 1994.
48
<PAGE> 99
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, 1994, 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 four-year period then ended and the period
September 1, 1989 (commencement of operations) to June 30, 1990. These
financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at June 30, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such 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, 1994, 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 LLP
Princeton, New Jersey
July 29, 1994
49
<PAGE> 100
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Morocco Banking 5,000 Banque Marocaine du Commerce Exterieur $ 132,685 $ 194,661 0.0%
150,000 Wafa Bank 5,810,251 5,339,266 1.3
------------ ------------ ------
5,942,936 5,533,927 1.3
Building & 163,154 Groupe Omnium Nord Africain 6,686,860 6,805,645 1.7
Construction
Building Materials 10,000 Les Ciments de l'Oriental 340,025 342,603 0.1
Total Investments in Morocco 12,969,821 12,682,175 3.1
South Beverage 45,000 South African Breweries Ltd. 950,625 798,750 0.2
Africa
Mining 245,000 De Beers Consolidated Mines Ltd.(ADR)(b) 5,809,096 5,451,250 1.4
Total Investments in South Africa 6,759,721 6,250,000 1.6
Total Investments in Africa 19,729,542 18,932,175 4.7
<PAGE> 101
EUROPE
Austria Banking 20,500 Creditanstalt-Bankverein AG 786,450 1,311,633 0.3
Building & 4,000 Bau Holding AG 362,527 400,895 0.1
Construction
Oil 16,500 Unternehmensgruppe OMV AG 1,039,188 1,300,805 0.3
2,062 Unternehmensgruppe OMV AG (New Shares) 125,481 130,067 0.0
------------ ------------ ------
1,164,669 1,430,872 0.3
Textiles 18,000 Lenzing AG 916,404 2,015,034 0.5
Asch 3,600,000 Lenzing AG, Convertible Bond,
5.25% due 12/31/2001 324,793 322,148 0.1
------------ ------------ ------
1,241,197 2,337,182 0.6
Transportation 26,400 Jenbacher Transportsysteme AG 1,588,046 489,020 0.1
Utilities 12,500 Energie-Versorgung Niederosterreich AG(EVN) 989,417 1,529,083 0.4
Total Investments in Austria 6,132,306 7,498,685 1.8
Czech Banking 13,500 Komercni Banka 2,034,490 1,187,544 0.3
Republic
Electrical Equipment 9,206 Podnik Vypocetni Techniky(PVT) 1,903,926 1,068,958 0.3
Food 43,000 Ceska General Food 4,520,734 4,387,755 1.1
Paper 60,807 SEPAP 3,025,696 2,139,585 0.5
Total Investments in the Czech Republic 11,484,846 8,783,842 2.2
</TABLE>
<PAGE> 102
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
EUROPE Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Greece Banking 15,780 Credit Bank S.A. $ 613,712 $ 629,609 0.2%
84,650 Ergo Bank(Registered)S.A. 3,038,469 3,146,378 0.8
------------ ------------ ------
3,652,181 3,775,987 1.0
Beverage 52,500 Hellenic Bottling Co. S.A.(Bearer) 818,772 1,514,805 0.4
Building & 55,730 Michaniki S.A. 1,320,551 2,181,451 0.5
Construction 5,060 Michaniki S.A.(Preferred) 195,004 161,406 0.0
48,830 Titan Cement S.A. 1,960,315 1,568,877 0.4
------------ ------------ ------
3,475,870 3,911,734 0.9
Financial Services 45,130 Etba Leasing S.A. 1,640,708 981,829 0.2
Food 62,940 J. Boutari & Son S.A.(Bearer) 1,088,749 462,600 0.1
63,504 Delta Dairy S.A.(Ordinary) 1,671,986 2,000,336 0.5
41,172 Delta Dairy S.A.(Preferred) 1,170,377 985,638 0.2
6,600 Katselis Sons S.A. 56,182 44,213 0.0
------------ ------------ ------
3,987,294 3,492,787 0.8
Total Investments in Greece 13,574,825 13,677,142 3.3
Hungary Food 54,807 Pick Szeged Reszvenytarsasag(GDS)(a)(d) 2,800,401 3,256,084 0.8
Insurance 225,000 Pharmauti Gyogyszer es Elelmiszeripari
Reszvenytarsasag(d) 2,587,500 2,587,500 0.6
Retail Stores 1,342,000 FOTEX RT--Fotex Elso Amerikai--Magyar
Fotoszolgaltatasi Reszvenytarsasag 6,101,168 5,584,161 1.4
Total Investments in Hungary 11,489,069 11,427,745 2.8
Latvia Transportation 70,000 ++Baltic International USA, Inc. 470,400 297,500 0.1
70,000 ++Baltic International USA, Inc.
(Warrants)(c) 19,600 13,125 0.0
------------ ------------ ------
490,000 310,625 0.1
Total Investments in Latvia 490,000 310,625 0.1
<PAGE> 103
Poland Appliances & 89,000,000 Swarzedzkie Fabryki Mebli S.A. 2,102,193 650,156 0.2
Household Durables
Banking 27,000,000 Wielkopolski Bank Kredytowy 1,795,589 1,022,272 0.3
Electrical Equipment 15,000,000 Elektrim Towarzystwo Handlowe S.A. 1,916,544 564,588 0.1
Food 40,000 International Fast Food Corp. 267,500 205,000 0.1
Total Investments in Poland 6,081,826 2,442,016 0.7
Portugal Banking 66,600 Banco Comercial Portugues, S.A.(ADR)(b) 959,270 807,525 0.2
352,212 Banco Comercial Portugues, S.A.
(Registered) 4,850,549 4,380,962 1.1
77,000 Banco Totta E Acores, S.A. 1,657,285 1,410,560 0.4
------------ ------------ ------
7,467,104 6,599,047 1.7
Beverage 29,100 Uniao Cervejaria, S.A.(UNICER) 790,773 716,749 0.2
Building & 72,600 Efacec S.A. 1,363,120 1,028,202 0.3
Construction 72,600 Efacec S.A.(New Shares) 1,238,401 1,028,202 0.3
82,300 Soares da Costa S.A. 1,477,775 1,519,813 0.4
172,200 Sociedade de Empreitadas Somague, S.A. 1,342,194 1,643,535 0.4
------------ ------------ ------
5,421,490 5,219,752 1.4
Leisure & 3,500 Estoril-Sol S.A. 26,263 25,905 0.0
Entertainment
Retail 62,600 Jeronimo Martins S.A. 2,895,368 4,047,028 1.0
10,000 Sonae Investimentos S.A. 112,457 166,872 0.0
------------ ------------ ------
3,007,825 4,213,900 1.0
Total Investments in Portugal 16,713,455 16,775,353 4.3
Russia Telecommunications 39,450 Petersburg Long Distance Corp.(ADR)(b) 301,256 325,462 0.1
Total Investments in Russia 301,256 325,462 0.1
<PAGE> 104
Turkey Banking 5,098,000 Yapi Kredi Bankasi A.S. 1,914,651 425,447 0.1
Beverage 502,400 Ege Biracilik Ve Malt Sanayii A.S. 472,057 1,193,311 0.3
Food 650,000 ++Kerevitas Gida Sanayi Ve Ticaret A.S. 474,164 1,272,669 0.3
Multi-Industry 766,000 Dogan Sirketler Grubu Holding A.S. 927,803 248,326 0.1
Retail 507,000 Migros Turk A.S. 357,126 1,448,339 0.4
Steel 12,500,000 Izmir Demir Celik Sanayii A.S. 948,829 712,165 0.2
Total Investments in Turkey 5,094,630 5,300,257 1.4
Total Investments in Europe 71,362,213 66,541,127 16.7
LATIN
AMERICA
Argentina Automobiles 267,991 Compania Interamericana de Automoviles S.A.
(CINA) 4,032,563 2,953,809 0.7
Banking 138,000 Banco de Galicia y Buenos Aires S.A. 1,408,096 1,375,771 0.3
252,148 Banco Frances del Rio de la Plata S.A. 1,426,566 1,894,900 0.5
------------ ------------ ------
2,834,662 3,270,671 0.8
Energy 1,551,800 Astra Compania Argentina de Petroleo S.A. 3,240,628 3,078,721 0.8
205,000 Transportadora de Gas del Sur S.A.(d) 2,815,251 2,434,375 0.6
------------ ------------ ------
6,055,879 5,513,096 1.4
Telecommunications 200,000 Telecom Argentina Stet--France Telecom S.A. 983,748 1,038,076 0.3
50,000 Telecom Argentina Stet--France Telecom S.A.
(ADR)(b) 3,065,372 2,637,500 0.7
34,472 Telefonica de Argentina S.A.(ADR)(b)(d) 1,095,078 2,007,994 0.5
------------ ------------ ------
5,144,198 5,683,570 1.5
Total Investments in Argentina 18,067,302 17,421,146 4.4
</TABLE>
<PAGE> 105
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
LATIN
AMERICA Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Brazil Automotive 91,300 ++Clark Automotive Products Corp. S.A. $ 1,006,260 $ 947,237 0.2%
Banking 679,339,024 Banco Bradesco S.A. 4,552,110 3,874,507 1.0
48,967,626 Banco Nacional S.A. 970,334 993,410 0.2
------------ ------------ ------
5,522,444 4,867,917 1.2
Beverage 5,644,200 Companhia Cervejaria Brahma PN(Preferred) 1,094,100 1,307,078 0.3
574,872 ++Companhia Cervejaria Brahma S.A.
(Warrants)(c) 14,956 733 0.0
------------ ------------ ------
1,109,056 1,307,811 0.3
Electrical Equipment 10,763,900 Light--Servicios de Eletricidade S.A. 3,549,779 2,455,611 0.6
Mining 29,037,000 Companhia Vale do Rio Doce S.A. PN(CVRD)
(Preferred) 2,704,603 3,012,068 0.7
Oil & Related 52,873,333 Petroleo Brasileiro S.A. 7,250,168 5,302,512 1.3
Retail 1,500,000 Mesbla S.A. 350,350 310,048 0.1
Steel 6,970,300,000 Usinas Siderurgicas de Minas
Gerais--Usiminas S.A. 5,007,302 7,523,923 1.9
Telecommunications 42,000 Telecomunicacoes Brasileiras S.A.--Telebras
(ADR)(b)(d) 1,471,188 1,606,500 0.4
54,205,810 Telecomunicacoes Brasileiras S.A.--
Telebras ON 1,682,509 1,566,309 0.4
240,591 Telecomunicacoes Brasileiras S.A.--
Telebras PN(Preferred) 13,688 9,532 0.0
------------ ------------ ------
3,167,385 3,182,341 0.8
Utilities 14,942,400 Centrais Eletricas Brasileiras S.A.--
Eletrobras (Preferred) 2,723,730 3,374,494 0.8
Total Investments in Brazil 32,391,077 32,283,962 7.9
<PAGE> 106
Chile Apparel 6,890,201 Bata Chile S.A. 1,945,911 1,896,941 0.5
Utilities 17,000 Compania de Telefonos de Chile S.A.(ADR)(b) 2,037,586 1,453,500 0.4
Total Investments in Chile 3,983,497 3,350,441 0.9
Mexico Banking 380,500 Grupo Financiero Banamex Accival, S.A.
de C.V.--Banacci 3,682,726 2,424,425 0.6
Beverage 50,000 Fomento Economico Mexicano, S.A. de C.V.
(FEMSA)(ADR)(b)(d) 195,000 204,375 0.0
447,500 Fomento Economico Mexicano, S.A. de C.V.
(FEMSA)(Ordinary) 1,780,336 1,848,083 0.5
61,900 Grupo Embotellador de Mexico, S.A. de C.V. 1,747,469 1,562,975 0.4
------------ ------------ ------
3,722,805 3,615,433 0.9
Building & 155,000 Grupo Tribasa, S.A. de C.V.(ADR)(b) 3,974,192 3,429,375 0.9
Construction 806,500 Tolmex, S.A. de C.V.'B' 5,928,905 8,160,162 2.0
------------ ------------ ------
9,903,097 11,589,537 2.9
Capital Goods 394,875 Cementos Mexicanos, S.A. de C.V.(Class B)
(ADR)(b)(d) 2,952,927 2,615,028 0.6
89,437 Cementos Mexicanos, S.A. de C.V.(Class B) 1,607,850 1,162,681 0.3
------------ ------------ ------
4,560,777 3,777,709 0.9
Electrical 287,800 Grupo Empresarial Fenix, S.A. de C.V.
(ELEKTRA)'L'Shares 2,404,684 2,644,534 0.7
Financial Services 66,700 Grupo Financiero Bancomer, S.A. de C.V.
(ADR)(b)(d) 2,224,175 1,467,400 0.4
75,500 Grupo Financiero (GBM) Atlantico, S.A.
de C.V. 1,528,241 1,510,000 0.4
195,250 ++Servicios Financieros Quadrum, S.A. de C.V.
(ADR)(b) 2,452,895 3,001,969 0.7
------------ ------------ ------
6,205,311 5,979,369 1.5
Food 1,600,000 Grupo Herdez, S.A. de C.V.'A' 1,450,009 1,864,307 0.5
Glass Manufacturing 56,000 Vitro, S.A. de C.V. 387,158 355,162 0.1
21,000 Vitro, S.A. de C.V.(ADR)(b) 442,658 399,000 0.1
------------ ------------ ------
829,816 754,162 0.2
<PAGE> 107
Health & 225,000 Kimberly-Clark de Mexico, S.A. de C.V. 3,291,367 4,168,142 1.0
Personal Care
Leisure 825,700 Grupo Carso, S.A. de C.V.'A' 6,725,536 7,477,578 1.9
105,000 ++Grupo Carso, S.A. de C.V.(ADR)(b)(d) 2,035,998 1,837,500 0.5
80,000 Grupo Posadas, S.A. de C.V.(ADR)(b)(d) 1,172,100 1,320,000 0.3
93,000 Grupo Situr, S.A. de C.V.(ADR)(b)(d) 1,700,594 2,418,000 0.6
458,000 Grupo Situr, S.A. de C.V.'B'(Ordinary) 1,419,439 1,202,419 0.3
------------ ------------ ------
13,053,667 14,255,497 3.6
Metals 450,000 Grupo Sidek, S.A. de C.V. 2,041,234 1,922,124 0.5
94,700 Grupo Simec, S.A. de C.V.(ADR)(b) 1,632,457 1,834,812 0.5
745,000 Grupo Simec, S.A. de C.V.(Ordinary) 670,192 723,024 0.2
------------ ------------ ------
4,343,883 4,479,960 1.2
Retail 2,375,000 Cifra, S.A. de C.V.'C' 4,796,743 5,534,661 1.4
Utilities 331,250 Telefonos de Mexico, S.A. de C.V.(ADR)(b) 19,736,780 18,508,594 4.6
Total Investments in Mexico 77,981,665 79,596,330 20.0
Panama Beverage 49,700 Panamerican Beverages, Inc.(Class A) 1,529,728 1,199,012 0.3
Total Investments in Panama 1,529,728 1,199,012 0.3
Peru Banking 138,774 Banco de Credito de Peru S.A. 94,494 253,122 0.1
Mining 61,268 Southern Peru Copper Corp. S.A. 200,896 243,060 0.1
Total Investments in Peru 295,390 496,182 0.2
Venezuela Building & 59,555 Corporacion Ceramica Carabobo CA--S.A.C.A.
Construction (Class A) 170,883 49,380 0.0
79,777 Corporacion Ceramica Carabobo CA--S.A.C.A.
(Class B) 131,693 70,156 0.0
------------ ------------ ------
302,576 119,536 0.0
Building Materials 32,236 Venezolana de Cementos S.A.C.A.(VENCEMOS) 42,076 46,167 0.0
Utilities 1,549,014 C.A. La Electricidad de Caracas
S.A.I.C.A.--S.A.C.A. 4,219,681 2,483,093 0.6
Total Investments in Venezuela 4,564,333 2,648,796 0.6
Total Investments in Latin America 138,812,992 136,995,869 34.3
</TABLE>
<PAGE> 108
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
MIDDLE Shares Held/ Value Percent of
EAST Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Israel Financial Services 633,600 Ampal-American Israel Corp. $ 7,841,524 $ 4,276,800 1.1%
543,600 ++Ampal-American Israel Corp.(Warrants)(c) 0 271,800 0.1
------------ ------------ ------
7,841,524 4,548,600 1.2
Total Investments in Israel 7,841,524 4,548,600 1.2
Pakistan Banking 190,060 Bank of Punjab 500,391 442,840 0.1
Electrical Equipment 198,875 Karachi Electric Supply Corp. Ltd. 130,550 338,185 0.1
Total Investments in Pakistan 630,941 781,025 0.2
Total Investments in the Middle East 8,472,465 5,329,625 1.4
PACIFIC
BASIN/ASIA
Australia Media/Publishing 458,300 Nine Network Australia Ltd. 949,114 1,422,460 0.4
Merchandising 265,000 Amway Asia Pacific Ltd. 7,549,106 9,208,750 2.3
Paper & Pulp 438,800 Spicers Paper Ltd. 808,666 801,139 0.2
Total Investments in Australia 9,306,886 11,432,349 2.9
China Appliances & 676,000 Shenzhen China Bicycles'B'Co.(Holdings)Ltd. 501,114 542,269 0.1
Household Durables
Total Investments in China 501,114 542,269 0.1
<PAGE> 109
Hong Kong Apparel 3,172,000 Top Form International Ltd. 909,258 459,651 0.1
Automotive 1,744,000 Sime Darby(Hong Kong)Ltd. 2,993,417 2,685,160 0.7
Banking 186,000 Hong Kong & Shanghai Banking Corp.
Holdings PLC 2,012,703 2,033,510 0.5
Broadcasting & 1,772,000 Ming Pao Enterprise Corp. Ltd. 870,697 1,375,598 0.3
Publishing
Diversified 1,360,000 Jardine Matheson Holdings, Ltd. 9,627,936 10,469,660 2.6
Electrical Equipment 358,000 Johnson Electric Holdings Ltd. 897,892 838,375 0.2
Financial Services 11,005,000 Winton Holdings Ltd. 3,849,116 3,417,260 0.8
Food 9,039,000 C.P. Pokphand Co. Ltd.(Ordinary) 2,895,870 2,455,932 0.6
Multi-Industry 1,500,000 Jardine Strategic Holdings, Ltd. 5,455,767 5,686,376 1.4
Real Estate 2,200,000 Cheung Kong Holdings Ltd. 10,484,759 9,606,676 2.4
2,616,984 Hong Kong Resorts International Ltd. 3,065,333 2,454,798 0.6
5,894,000 Sun Hung Kai Properties Ltd. 3,575,674 2,974,072 0.7
------------ ------------ ------
17,125,766 15,035,546 3.7
Textiles 7,740,000 United Success International Holdings Ltd. 1,029,241 731,039 0.2
Utilities 2,510,000 The Hong Kong and China Gas Co. 5,090,848 4,806,314 1.2
Utilities--Electric 975,500 China Light & Power Co., Ltd. 5,056,996 4,985,412 1.2
Total Investments in Hong Kong 57,815,507 54,979,833 13.5
India Aluminum 60,000 Hindalco Industries Ltd.(GDS)(a)(d) 831,833 1,770,000 0.4
26,500 Hindalco Industries Ltd.(Ordinary) 496,362 781,524 0.2
30,000 ++Hindalco Industries Ltd.(Warrants)(c) 134,167 412,500 0.1
------------ ------------ ------
1,462,362 2,964,024 0.7
Broadcasting & 555,000 Videocon International Ltd.(ADR)(b)(d) 4,908,750 4,095,900 1.0
Publishing
Building & 31,250 The Associated Cement Co. Ltd. 2,499,847 3,915,591 1.0
Construction
Business & Public 65,000 Western Paques(India)Ltd. 233,861 518,093 0.1
Services
Chemicals 360,500 Mardia Chemicals Ltd. 1,567,246 1,724,055 0.4
<PAGE> 110
Energy 482,000 Bombay Suburban Electric Supply Co. Ltd. 3,020,772 3,211,797 0.8
$ 140,000 Bombay Suburban Electric Supply Co. Ltd.,
Convertible Debentures, 15.00%
due 3/01/1995 267,793 267,814 0.1
------------ ------------ ------
3,288,565 3,479,611 0.9
Total Investments in India 13,960,631 16,697,274 4.1
Indonesia Broadcasting & $ 745,000 P.T. Surya Citra Television, 4.00%
Publishing due 7/01/1997 745,000 741,275 0.2
Tobacco 420,000 P.T. Gudang Garam 2,010,276 1,819,606 0.5
Total Investments in Indonesia 2,755,276 2,560,881 0.7
Korea Automotive 27,026 Dong Ah Tire Industries 1,248,434 1,661,847 0.4
Banking 330,000 Bank of Seoul 3,820,202 3,218,012 0.8
69,507 Bank of Seoul(New Shares) 491,307 677,801 0.2
------------ ------------ ------
4,311,509 3,895,813 1.0
Financial Services 69,050 Hanyang Securities Corp. 1,619,850 1,200,870 0.3
Food 15,560 Lotte Confectionery Corp. 1,412,542 1,700,969 0.4
Pharmaceuticals 66,012 Choong Wae Pharmaceutical Corp. 2,678,277 3,247,298 0.8
14,138 Choong Wae Pharmaceutical Corp.(New Shares) 506,305 507,563 0.1
------------ ------------ ------
3,184,582 3,754,861 0.9
Retail Stores 12,132 Shinsegae Department Store 390,439 1,175,372 0.3
Telecommunications 6,817 Korea Mobile Telecommunications Corp. 1,328,813 3,544,840 0.9
Utilities 118,470 Korea Electric Power Corp. 4,008,319 4,417,386 1.1
Total Investments in Korea 17,504,488 21,351,958 5.3
Malaysia Building & 561,000 IJM Corp. BHD 2,018,065 1,874,885 0.5
Construction
Financial Services 1,053,333 Commerce Asset-Holdings BHD 2,206,151 3,742,828 0.9
1,000 Idris Hydraulic BHD 3,068 1,767 0.0
1,653,000 Public Bank BHD 'Foreign' 1,642,679 3,146,505 0.8
------------ ------------ ------
3,851,898 6,891,100 1.7
<PAGE> 111
Steel 2,484,000 Maruichi(Malaysia)Steel Tube BHD 5,701,653 6,631,761 1.6
Telecommunications 228,000 Leader Universal Holdings BHD 339,992 1,217,425 0.3
Total Investments in Malaysia 11,911,608 16,615,171 4.1
</TABLE>
<TABLE>
CONSOLIDATED SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
PACIFIC BASIN/
ASIA Shares Held/ Value Percent of
(concluded)Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
New Beverage 1,000,000 D.B. Group Ltd. $ 384,967 $ 469,892 0.1%
Zealand
Transportation 1,600,000 Ports of Auckland Ltd. 1,991,529 2,046,112 0.5
Total Investments in New Zealand 2,376,496 2,516,004 0.6
Philip- Beverage 216,000 San Miguel Corp.'B' 501,254 1,088,060 0.3
pines
Electric Utilities 44,679 Manila Electric Co. (MERALCO)'B' 165,929 562,655 0.1
Telecommunications $ 20,000,000 Philippine Long Distance Telephone Co.,
10.625% due 6/02/2004 20,390,000 19,750,000 4.9
Total Investments in the Philippines 21,057,183 21,400,715 5.3
Singapore Banking 561,269 ++United Overseas Bank Ltd. (Warrants) (c) 1,307,919 2,302,547 0.5
Total Investments in Singapore 1,307,919 2,302,547 0.5
Sri Lanka Building & 262,500 Lankan Tiles 337,398 362,199 0.1
Construction
Diversified 90,625 Aitken Spence 518,247 559,903 0.1
Total Investments in Sri Lanka 855,645 922,102 0.2
<PAGE> 112
Thailand Banking 754,600 Bangkok Bank Ltd.'Foreign' 5,061,874 5,728,086 1.4
Insurance 159,000 Ayudhya Insurance Co.'Foreign' 1,187,126 1,715,142 0.4
Telecommunications 14,300 United Communication Industry Public
Co. Ltd. 130,577 270,803 0.1
Total Investments in Thailand 6,379,577 7,714,031 1.9
Total Investments in the
Pacific Basin/Asia 145,732,330 159,035,134 39.2
<CAPTION>
SHORT-TERM
SECURITIES Face Amount
<S> <C> <C> <C> <C> <C> <C>
United Commercial Paper* $ 13,510,000 General Electric Capital Corp.,
States 4.30% due 7/01/1994 13,510,000 13,510,000 3.3
Total Investments in Short-Term Securities 13,510,000 13,510,000 3.3
Total Investments $397,619,542 400,343,930 99.6
============
Other Assets Less Liabilities 1,651,817 0.4
------------ ------
Net Assets $401,995,747 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rate shown is the
discount rate paid at the time of purchase by the Fund.
++Non-income producing security.
(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)Restricted securities. The value of the Fund's investment in restricted securities
was approximately $27,621,000, representing 6.87% of net assets.
</FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 113
<TABLE>
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$397,619,542) (Note 1a) $400,343,930
Foreign cash 2,473,712
Cash 197,741
Deposit for trade settlement 334,401
Receivables:
Capital shares sold $ 1,074,539
Dividends 501,775
Securities sold 438,349
Interest 226,736 2,241,399
------------
Deferred organization expenses (Note 1g) 4,362
Prepaid registration fees and other assets (Note 1g) 63,164
------------
Total assets 405,658,709
------------
Liabilities: Payables:
Securities purchased 1,925,708
Capital shares redeemed 1,176,574
Investment adviser (Note 2) 339,563 3,441,845
------------
Accrued expenses and other liabilities 221,117
------------
Total liabilities 3,662,962
------------
Net Assets: Net assets $401,995,747
============
Net Assets Common Stock, $0.10 par value, 200,000,000 shares authorized $ 2,751,386
Consist of: Paid-in capital in excess of par 365,509,472
Undistributed investment income-net 564,507
Undistributed realized capital gains on investments and foreign currency
transactions--net 30,521,564
Unrealized appreciation on investments and foreign currency transactions--net 2,648,818
------------
Net assets--Equivalent to $14.61 per share based on 27,513,862 shares of
capital outstanding $401,995,747
============
Maximum offering price per share ($14.61/.935) $ 15.63
============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 114
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended June 30, 1994
<S> <C> <C> <C>
Investment Dividends (net of $75,801 foreign withholding tax) $ 5,002,484
Income Interest and discount earned (net of $329,092 foreign withholding tax) 1,111,136
(Notes 1c & Other income 2,509
1d): ------------
Total income 6,116,129
------------
Expenses: Investment advisory fees (Note 2) 3,033,147
Custodian fees 633,035
Transfer agent fees (Note 2) 205,494
Printing and shareholder reports 107,754
Accounting services (Note 2) 101,404
Foreign tax expense 96,715
Registration fees (Note 1g) 93,793
Professional fees 75,061
Directors' fees and expenses 30,870
Amortization of organization expenses (Note 1g) 26,165
Other 24,370
------------
Total expenses 4,427,808
------------
Investment income--net 1,688,321
------------
Realized & Realized gain (loss) from:
Unrealized Investments--net $ 37,400,204
Gain(Loss) on Foreign currency transactions--net (1,010,111) 36,390,093
Investments & ------------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (12,722,686)
Transactions Foreign currency transactions--net 84,801 (12,637,885)
- --Net(Notes ------------ ------------
1b, 1d & 3): Net realized and unrealized gain on investments and foreign currency transactions 23,752,208
------------
Net Increase in Net Assets Resulting from Operations $ 25,440,529
============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 115
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 1,688,321 $ 1,546,983
Realized gain (loss) on investments and foreign currency transactions--net 36,390,093 (1,811,821)
Change in unrealized appreciation/depreciation on investments and foreign currency
transactions--net (12,637,885) 6,852,494
------------ ------------
Net increase in net assets resulting from operations 25,440,529 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 Share- ------------ ------------
holders Net decrease in net assets resulting from dividends and distributions to shareholders (5,710,936) (9,634,920)
(Note 1h): ------------ ------------
Capital Share Net increase in net assets derived from capital share transactions 239,981,410 18,914,752
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase in net assets 259,711,003 15,867,488
Beginning of year 142,284,744 126,417,256
------------ ------------
End of year* $401,995,747 $142,284,744
============ ============
<FN>
*Undistributed investment income--net $ 564,507 $ (221,318)
============ ============
</FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 116
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Sept. 1, 1989++
For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 1994 1993++++ 1992 1991 1990
<S> <C> <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) .11 .12 .15 .24 .24
Realized and unrealized gain (loss) on investments
--net(1) 3.23 .42 1.59 (.75) 1.88
-------- -------- -------- -------- --------
Total from investment operations 3.34 .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 $ 14.61 $ 11.62 $ 11.92 $ 10.43 $ 11.58
======== ======== ======== ======== ========
Total Based on net asset value per share 28.73% 5.17% 17.02% (4.45%) 22.29%+++
Investment ======== ======== ======== ======== ========
Return:**
Ratios to Expenses 1.46% 1.71% 1.64% 1.77% 1.71%*
Average ======== ======== ======== ======== ========
Net Assets: Investment income (loss)--net .63% (.04%) 1.73% 1.98% 2.69%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $401,996 $142,285 $126,417 $111,947 $104,033
Data: ======== ======== ======== ======== ========
Portfolio turnover 66.85% 91.72% 71.05% 84.74% 64.53%
======== ======== ======== ======== ========
<FN>
+++Aggregate total investment return.
(1)Foreign currency transaction amounts have been reclassified to conform to the
1994 presentation.
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average number of shares outstanding during the year.
</FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 117
NOTES TO CONSOLIDATED 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-diver-
sified, open-end management investment 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 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 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) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the Fund
enters into such contracts. Premium or discount is amortized over
the life of the contracts.
<PAGE> 118
The Fund may also 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-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet deliv-
ered, or committed or anticipated to be purchased by the Fund.
(c) Income Taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment 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 trans-
action 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 fluctua-
tion 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.
<PAGE> 119
(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 Limitada, a wholly-owned subsidiary, which primarily
invests in Chilean securities. Intercompany accounts and transac-
tions have been eliminated.
(j) Reclassification--Certain 1993 amounts have been reclassified
to conform to the 1994 presentation.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management, L.P. ("MLAM"). Effective
January 1, 1994, the investment advisory business of MLAM was
reorganized from a corporation to a limited partnership. Both prior
to and after the reorganization, ultimate control of MLAM was vested
with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned sub-
sidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of 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.
<PAGE> 120
During the year ended June 30, 1994, MLFD earned underwriting
discounts of $589,253 and Merrill Lynch, Pierce, Fenner & Smith
Inc. ("MLPF&S") earned dealer concessions of $9,594,931 on sales
of the Fund's shares. MLPF&S also received $116,527 in commissions
on the execution of portfolio security transactions during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, FDS, MLFD, MLPF&S, and/or ML & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1994 were $404,119,381 and $178,087,326,
respectively.
Net realized and unrealized gains (losses) as of June 30, 1994 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $37,399,996 $2,724,388
Short-term investments 208 --
Foreign currency transactions (1,010,111) (75,570)
----------- ----------
Total $36,390,093 $2,648,818
=========== ==========
As of June 30, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $2,724,388, of which $43,106,966 related
to appreciated securities and $40,382,578 related to depreciated
securities. The aggregate cost of investments at June 30, 1994 for
Federal income tax purposes was $397,619,542.
<PAGE> 121
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
June 30, 1994 Shares Amount
Shares sold 20,121,319 $316,594,559
Shares issued to shareholders in reinvestment
of dividends & distributions to shareholders 332,847 4,929,176
----------- ------------
Total issued 20,454,166 321,523,735
Shares redeemed (5,183,789) (81,542,325)
----------- ------------
Net increase 15,270,377 $239,981,410
=========== ============
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 & distributions to shareholders 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
========== ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
5. Commitments:
At June 30, 1994, the Fund entered into forward exchange contracts
under which it had agreed to sell foreign currencies with values of
approximately $89,000.
6. Subsequent Event:
On April 19, 1994, a second class of shares, Class B, was created
by action of the Fund's Board of Directors. The Class B Shares com-
menced operations on July 1, 1994. Class A Shares are sold with a
front-end sales charge and Class B Shares may be subject to a
contingent deferred sales charge.
<PAGE> 122
<TABLE>
<CAPTION>
<S> <C>
====================================================== ======================================================
TABLE OF CONTENTS Statement of
Additional Information
Page
----
Investment Objective and Policies............... 2
Management of the Fund.......................... 15
Directors and Officers........................ 15
Management and Advisory
Arrangements................................ 16
Purchase of Shares.............................. 18
Redemption of Shares............................ 23
Portfolio Transactions and Brokerage............ 24
Determination of Net Asset Value................ 26
Shareholder Services............................ 27
Dividends, Distributions and Taxes.............. 41
Performance Data................................ 45
General Information............................. 46 (ART)
Description of Shares......................... 46
Computation of Offering Price per Share....... 47
Independent Auditors.......................... 47
Custodian..................................... 48
Transfer Agent................................ 48
Legal Counsel................................. 48
Reports to Shareholders....................... 48
Additional Information........................ 48
Security Ownership of Certain Beneficial
Owners...................................... 48
Independent Auditors' Report.................... 49
Consolidated Financial Statements............... 50
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
Code #10894-1094
====================================================== ======================================================
</TABLE>
<PAGE> 123
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Contained in Part A:
Consolidated Financial Highlights for the four years ended June 30,
1994 and for the period September 1, 1989 (commencement of
operations) to June 30, 1990.
Contained in Part B:
Consolidated Schedule of Investments as of June 30, 1994.
Consolidated Statement of Assets and Liabilities as of June 30,
1994.
Consolidated Statement of Operations for the fiscal year ended June
30, 1994.
Consolidated Statements of Changes in Net Assets for the fiscal
years ended June 30, 1993 and 1994.
Consolidated Financial Highlights for the four years ended June 30,
1994 and for the period September 1, 1989 (commencement of
operations) to June 30, 1990.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
1(a) - Articles of Incorporation of the Registrant.(e)
(b) - Articles of Amendment to Articles of Incorporation of the
Registrant.(c)
(c) - Articles of Amendment to Articles of Incorporation of the
Registrant.(e)
(d) - Form of Articles Supplementary to Articles of
Incorporation of the Registrant.(e)
2 - B-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.(e)
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.(e)
</TABLE>
C-1
<PAGE> 124
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
(c) - Letter Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc. with respect to the Merrill Lynch
Mutual Fund Adviser program.(d)
(d) - Form of new Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
(e) - Form of Class C Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
(f) - Form of Class D Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
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 LLP, independent auditors for
the Registrant.
12 - None.
13 - Certificate of Merrill Lynch Asset Management, Inc.(a)
14 - None.
15(a) - Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(e)
(b) - Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.
(c) - Class D Shares Distribution Plan and Class D Shares
(c) Distribution Plan Sub-Agreement of the Registrant.
16 - Schedule of computation of each performance quotation
provided in the registration statement in response to Item
22.(b)
17 - Financial Data Schedule for the Year Ended June 30, 1994
relating to Class A Shares.
</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.
(e) Filed as an Exhibit to Post-Effective Amendment No. 7 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
C-2
<PAGE> 125
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 September 30, 1994
--------------- ------------------
<S> <C>
Class A Common Stock, par value $0.10 per share............. 529
Class B Common Stock, par value $0.10 per share............. 41
Class C Common Stock, par value $0.10 per share............. 0
Class D Common Stock, par value $0.10 per share............. 0
</TABLE>
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
C-3
<PAGE> 126
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.
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 Asset Growth Fund, Inc., Merrill
Lynch Asset 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, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Growth Fund
for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate
Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. 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,
C-4
<PAGE> 127
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 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 P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281.
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, 1992, for his or its own account or in the capacity
of director, officer, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice
President of substantially all of the investment companies described in
the preceding paragraph, and Messrs. Durnin, Giordano, Harvey, Kirstein,
Monagle and Ms.Griffin 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
</TABLE>
C-5
<PAGE> 128
<TABLE>
<CAPTION>
Position(s) with Other Substantial Business,
Name the Managers Profession, Vocation or Employment
------ ----------------- -----------------------------------
<S> <C> <C>
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 President Executive Vice President of FAM; Executive
Vice 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
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 G eneral Counsel, Director and Secretary of
Princeton Services; Director of MLFD
Ronald M. Kloss........... Senior Vice President and Senior Vice President and Controller of FAM;
Controller Senior Vice President and Controller of
Princeton Services
Stephen M.M. Miller....... Senior Vice President Executive Vice President of Princeton
Administrators L.P.
Joseph T. Monagle, Jr. ... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gerald M. Richard......... Senior Vice President and Treasurer Senior Vice President and
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener........ Senior Vice President Senior Vice President of FAM; 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>
C-6
<PAGE> 129
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 Fund, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and
officer of MLFD. The principal business address of each such person is
P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the address
of Messrs. Crook, Aldrich, Breen, Graczyk, Fatseas, and Wasel is One
Financial Center, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with MLFD with Registrant
----- ----------------------- ----------------------
<S> <C> <C>
Terry K. Glenn...................... President and Director Executive Vice President
Arthur Zeikel....................... Director President and Director
Philip L. Kirstein.................. Director None
William E. Aldrich.................. Senior Vice President None
Robert W. Crook..................... Senior Vice President None
Kevin P. Boman...................... Vice President None
Michael J. Brady.................... Vice President None
William M. Breen.................... Vice President None
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....................... Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
C-7
<PAGE> 130
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.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-8
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective Amendment to
its Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this 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
14th day of October 1994.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC.
(Registrant)
By /s/ Arthur Zeikel
----------------------------------
(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.
<TABLE>
<CAPTION>
Signature Title Date(s)
--------- ----- --------
<S> <C> <C>
/s/ Arthur Zeikel President and Director October 14, 1994
-------------------------------- (Principal Executive
(Arthur Zeikel) Officer)
/s/ Gerald M. Richard Treasurer (Principal October 14, 1994
-------------------------------- Financial and Accounting
(Gerald M. Richard) Officer)
Donald Cecil* Director October 14, 1994
--------------------------------
(Donald Cecil)
Edward H. Meyer* Director October 14, 1994
--------------------------------
(Edward H. Meyer)
Charles C. Reilly* Director October 14, 1994
--------------------------------
(Charles C. Reilly)
Richard R. West* Director October 14, 1994
--------------------------------
(Richard R. West)
*By /s/ Arthur Zeikel October 14, 1994
--------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
--------- ---------
<S> <C> <C>
1(a) - Articles of Incorporation of the Registrant.(e)
(b) - Articles of Amendment to Articles of Incorporation of
the Registrant.(c)
(c) - Articles of Amendment to Articles of Incorporation of
the Registrant.(e)
(d) - Form of Articles Supplementary to Articles of
Incorporation of the Registrant.(e)
2 - B-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.(e)
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.(e)
(c) - Letter Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. with respect to the
Merrill Lynch Mutual Fund Adviser program.(d)
(d) - Form of new Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
(e) - Form of Class C Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
(f) - Form of Class D Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc.
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 LLP, independent auditors
for the Registrant.
12 - None.
13 - Certificate of Merrill Lynch Asset Management, Inc.(a)
14 - None.
15(a) - Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement of the Registrant.(e)
(b) - Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.
(c) - Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.
16 - Schedule of computation of each performance quotation
provided in the registration statement in response to
Item 22.(b)
17 - Financial Data Schedule for the Year Ended June 30,
1994 relating to Class A Shares.
</TABLE>
<PAGE> 133
----------
(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.
(e) Filed as an Exhibit to Post-Effective Amendment No. 7 to Registrant's
Registration Statement under the Securities Act of 1933, on Form N-1A.
<PAGE> 134
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between DEVELOPING
CAPITAL MARKETS FUNDS, INC., a Maryland Corporation (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its shares
for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class A shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
Distributor as the principal underwriter and distributor of the Fund to sell
Class A shares of common stock in the Fund (sometimes herein referred to as
"Class A shares") to
<PAGE>
eligible investors (as defined below) and hereby agrees during the term of this
Agreement to sell Class A shares of the Fund to the Distributor upon the terms
and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class A 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 A 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 A
shares from the Fund shall not apply to Class A shares issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding Class A shares of any such
company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class A shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right also shall not apply to Class A shares issued
by the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class A shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
(a) The Distributor shall have the right to buy from the Fund the Class
A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A shares
of the Fund placed with the Distributor by eligible investors or securities
dealers. Investors eligible to purchase Class A shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so purchased from
the Fund shall be the net asset value, determined as set forth in Section 3(d)
hereof, used in determining the public offering price on which such orders were
based.
3
<PAGE>
(b) The Class A shares are to be resold by the Distributor to eligible
investors at the public offering price, 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 public offering price(s) of the Class A shares, i.e., the price
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class A shares, plus a sales charge not to exceed 5.25% of the
public offering price (5.54% of the net amount invested), subject to reductions
for volume purchases. Class A shares may be sold to certain Directors, officers
and employees of the Fund, directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and to certain other persons described in the prospectus
and statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the public offering price does not equal
an even cent, the public offering price may be adjusted to the nearest cent. All
payments to the Fund hereunder shall be made in the manner set forth in Section
3(f).
4
<PAGE>
(d) The net asset value of Class A shares shall be determined by the
Fund or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class A
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 A shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class A shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A 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 A shares from eligible
investors. 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 A
shares pursuant to the instructions of the Distributor. Payment shall
5
<PAGE>
be made to the Fund in New York Clearing House funds. The Distributor agrees to
cause such payment and such instructions to be delivered promptly to the Fund
(or its agent).
Section 4. Repurchase or Redemption of Class A shares by the Fund.
(a) Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(d) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund. All
payments by the Fund hereunder shall be made in the manner set forth below. The
redemption or repurchase by the Fund of any of the Class A shares purchased by
or through the Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repurchase within
seven business days after the date of the confirmation of the original purchase,
the right to the sales charge
6
<PAGE>
shall be forfeited by the Distributor and the selected dealer which sold such
Class A shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor in New
York Clearing House funds on or before the seventh business day subsequent to
its having received the notice of redemption in proper form. The proceeds of any
redemption of shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class A 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
7
<PAGE>
distribution of Class A 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 the prospectus and statement of additional
information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class A shareholders, all necessary action to fix the
number of authorized Class A shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor may
reasonably be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A 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.
8
<PAGE>
(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 A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A 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 eligible investors and selected dealers, the collection
9
<PAGE>
of amounts payable by eligible investors and selected dealers on such sales, and
the cancellation of unsettled transactions, as may be necessary to comply with
the requirements of the National Association of Securities Dealers, Inc. (the
"NASD"), as such requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class A shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class A shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class A shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class A shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required regis-
10
<PAGE>
tration 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 A 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 which are to be used in connection
with the offering of Class A shares to selected dealers or eligible 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 A shares for sale to eligible investors and any
expenses of advertising incurred by the Distributor in connection with such
offering.
(c) The Fund shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement
11
<PAGE>
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 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 A shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of
12
<PAGE>
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
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
13
<PAGE>
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 of any additional counsel retained by
them, but in case the Fund does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Class A
shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Fund in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of
14
<PAGE>
additional information, as from time to time amended, or the annual or interim
reports to Class A 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. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until August __, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors
15
<PAGE>
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 12. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. 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
16
<PAGE>
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.
Section 14. This Agreement supersedes the prior Distribution Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
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___________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS 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 A shares of common stock, par value $0.10 per share (herein
referred to as "Class A shares"), of the Fund and as such has the right to
distribute Class A 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 A shares are registered under the Securities Act of 1933,
as amended. You have received a copy of the Class A shares Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution Agreement.
The terms "Prospectus" and "Statement of Additional Information" used herein
refer to the prospectus and statement of additional information, respectively,
on file with the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the Securities Act of 1933,
as amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class A shares of the Fund for resale to investors identified in the Prospectus
and Statement of Additional Information as eligible to purchase Class A shares
("eligible investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible investors, you
shall act as dealer for your own account and in no transaction shall you have
any authority to act as agent for the Fund, for us or for any other member of
the Selected Dealers Group, except in connection with the Merrill Lynch Mutual
Fund Adviser program and such other special programs as we from time to time
agree, in which case you shall have authority to offer and sell shares, as agent
for the Fund, to participants in such program.
1
<PAGE>
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------ -------------- ------------- ----------
<S> <C> <C> <C>
Less than $10,000 ................. 5.25% 5.54% 5.00%
$10,000 but less
than $25,000 ..................... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000 ..................... 4.75% 4.99% 4.50%
$50,000 but less
than $100,000 .................... 4.00% 4.17% 3.75%
$100,000 but less
than $250,000 .................... 3.00% 3.09% 2.75%
$250,000 but less
than $1,000,000 .................. 2.00% 2.04% 1.80%
$1,000,000 and over** ............. 0.75% 0.76% 0.65%
</TABLE>
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as set
forth in the current Prospectus and Statement of Additional Information.
2
<PAGE>
The term "purchase" refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class A shares of the Fund or Class A shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of Class A, Class B, Class C and Class D shares of the Fund
and of any other investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by the
purchaser or you, with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to such
confirmation.
The reduced sales charges are applicable to purchases aggregating
$10,000 or more of Class A shares or of Class D shares of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention may
be included under a subsequent letter executed within 90 days of such purchase
if the Distributor is informed in writing of this intent within such 90-day
period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant to
the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to eligible investors qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
3
<PAGE>
4. You shall not place orders for any of the Class A shares unless you
have already received purchase orders for such Class A 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 A 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 A shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class A shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class A shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
7. If any Class A shares sold to you under the terms of this Agreement
are repurchased by the Fund or by us for the account of the Fund or are tendered
for redemption within seven business days after the date of the confirmation of
the original purchase by you, it is agreed that you shall forfeit your right to,
and refund to us, any discount received by you on such Class A shares.
8. No person is authorized to make any representations concerning Class
A 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 A 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
4
<PAGE>
solicitation material is our sole responsibility and not the responsibility of
the Fund, and you agree that the Fund shall have no liability or responsibility
to you in these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class A shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class A 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 A
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class A shares, if necessary.
14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
5
<PAGE>
15. Your first order placed pursuant to this Agreement for the purchase
of Class A shares of the Fund will represent your acceptance of this Agreement.
16. This Agreement supersedes any prior Selected Dealers Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
(Authorized Signature)
Please return one signed copy of this agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
By:____________________________________________________
Address: [800 Scudders Mill Road]
[Plainsboro, New Jersey 08536]
Date: _________________, 1994
6
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 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 C
shares in order to promote the growth of the Fund and facilitate the
distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
Distributor as the principal underwriter and distributor of the Fund to sell
Class C shares of common stock in
<PAGE>
the Fund (sometimes herein referred to as "Class C shares") to the public and
hereby agrees during the term of this Agreement to sell shares of the Fund to
the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class C shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class C shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class C
shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class C
shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class C shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right also shall not apply to Class C shares issued
by the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class C shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class C Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class C shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class C shares needed, but not more than the Class C shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class C shares shall be those
persons so identified in the currently effective prospectus and statement of
additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class C shares. The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section 3(c) hereof.
3
<PAGE>
(b) The Class C shares are to be resold by the Distributor to investors
at net asset value, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The net asset value of Class C shares of the Fund shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the prospectus and statement of additional information and
guidelines established by the Board of Directors.
(d) The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class C shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class C shares.
(e) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund
4
<PAGE>
(or its agent) will confirm orders upon their receipt, will make appropriate
book entries and, upon receipt by the Fund (or its agent) of payment therefor,
will deliver deposit receipts or certificates for such Class C shares pursuant
to the instructions of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund.
(a) Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be paid to redeem
or repurchase the Class C shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(c) hereof, less any
contingent deferred sales charge ("CDSC"), redemption fee or other charge(s), if
any, set forth in the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the manner set forth
below.
5
<PAGE>
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class C shares
of the Fund, and this shall include, upon request by the Distributor, one
certified copy of all
6
<PAGE>
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
prospectus and statement of additional information as the Distributor shall
reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the shareholders, all necessary action to fix the number
of authorized shares and such steps as may be necessary to register the same
under the Securities Act to the end that there will be available for sale such
number of Class C shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
7
<PAGE>
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund hereunder
are not to be deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other investment companies
so long as the performance of its obligations hereunder is not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class C shares; provided, that the Fund shall approve the forms of
agreements with dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers to be used
during the continuous offering of the shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class C shares only to such selected dealers that are members in good standing
of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class C
shareholders (including but not limited to the expense of setting in type any
such registration statements,
9
<PAGE>
prospectuses, statements of additional information, annual or interim reports or
proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class C shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class C shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class C Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder may be paid from amounts recovered by it
from the Fund under such Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of quali-
10
<PAGE>
fying the Fund as a broker or dealer in such states of the United States or
other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5(c) hereof and the cost and expenses payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class C shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to Class C
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i)
11
<PAGE>
is the indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it and satisfactory to the Distributor or such
controlling person or persons, defendant or defendants in the suit. In the event
the Fund elects to assume the defense of any such suit and retain such counsel,
the Distributor or such controlling person or persons, defendant or defendants
in the suit shall bear the fees and expenses, as incurred, of any additional
counsel retained by them, but in case the Fund does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the reasonable fees
and expenses, as incurred, of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or Directors in connection with
the issuance or sale of any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the
13
<PAGE>
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. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until August __, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of
14
<PAGE>
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 12. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agree-
ment 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
15
<PAGE>
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______________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By______________________________________
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Developing Capital Markets Fund, Inc., a Maryland
corporation (the "Fund"), pursuant to which it acts as the distributor for the
sale of Class C shares of common stock, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Fund and as such has the right to
distribute Class C shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of 1940, as
amended, and its Class C shares being offered to the public are registered under
the Securities Act of 1933, as amended. You have received a copy of the Class C
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Fund and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information" as
used herein refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission which is part
of the most recent effective registration statement pursuant to the Securities
Act of 1933, as amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class C shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class C shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Fund,
to participants in such program.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum ini-
1
<PAGE>
tial and subsequent purchase requirements are as set forth in the current
Prospectus and Statement of Additional Information of the Fund.
3. You shall not place orders for any of the Class C shares unless you
have already received purchase orders for such Class C shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class C shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class C shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class C shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class C shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
5. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such with- holding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning Class
C shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C shares
through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall
2
<PAGE>
have no liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
7. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class C shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem advisable
in respect of all matters pertaining to the continuous offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us herein. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not in any way
whatsoever constitute, a waiver by you of compliance with any provision of the
Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the states in which we
believe the Class C shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.
12. All communications to us should be sent to the address below. Any notice
to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
(Authorized Signature)
Please return one signed copy of this Agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
By:____________________________________________________
Address: [800 Scudders Mill Road]
[Plainsboro, New Jersey 08536]
Date:___________________, 1994
4
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 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 Class D shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
Distributor as the principal underwriter and distributor of the Fund to sell
Class D shares of common stock in the Fund (sometimes herein referred to as
"Class D shares") to the
<PAGE>
public and hereby agrees during the term of this Agreement to sell Class D
shares of the Fund to the Distributor upon the terms and conditions herein set
forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Fund shall not apply to Class D shares issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding Class D shares of any such
company by the Fund.
(c) Such exclusive right also shall not apply to Class D shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2
<PAGE>
(d) Such exclusive right also shall not apply to Class D shares issued
by the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class D shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
(a) It is contemplated that the Fund will commence an offering of its
Class D shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class D shares needed, but not more than the Class D shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class D shares shall be those
persons so identified in the currently effective prospectus and statement of
additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class D shares. The price which
the Distributor shall pay for the Class D shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section 3(d) hereof,
used in determining the public offering price on which such orders were based.
(b) The Class D shares are to be resold by the Distributor to investors
at the public offering price, as set forth in Section 3(c) hereof, or to
securities dealers having agreements
3
<PAGE>
with the Distributor upon the terms and conditions set forth in Section 7
hereof.
(c) The public offering price(s) of the Class D shares, i.e., the price
per share at which the Distributor or selected dealers may sell Class D shares
to the public, shall be the public offering price as set forth in the prospectus
and statement of additional information relating to such Class D shares, but not
to exceed the net asset value at which the Distributor is to purchase the Class
D shares, plus a sales charge not to exceed 5.25% of the public offering price
(5.54% of the net amount invested), subject to reductions for volume purchases.
Class D shares may be sold to certain Directors, officers and employees of the
Fund, directors and employees of Merrill Lynch & Co., Inc. and its subsidiaries,
and to certain other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced sales charge,
upon terms and conditions set forth in the prospectus and statement of
additional information. If the public offering price does not equal an even
cent, the public offering price may be adjusted to the nearest cent. All
payments to the Fund hereunder shall be made in the manner set forth in Section
3(f).
(d) The net asset value of Class D shares shall be determined by the
Fund or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class D shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class D shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class D shares. The Fund (or its
agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class D shares pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New York
Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class D Shares by the Fund.
(a) Any of the outstanding Class D shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class D
shares so tendered in accordance with its obligations as set forth in Article
VII of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class D shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(d) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund. All
payments by the Fund hereunder shall be made in the manner set forth below. The
redemption or repurchase by the Fund of any of the Class D shares purchased by
or through the Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repurchase within
seven business days after the date of the confirmation of the original purchase,
the right to the sales charge shall be forfeited by the Distributor and the
selected dealer which sold such Class D shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the seventh
business day subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of shares shall be paid by the Fund
as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii)
the balance shall be paid to or for the account of the shareholder, in each case
in accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class D shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class D shares
of the Fund, and this shall include, upon request by the Distributor, one
certified copy of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of additional information
as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class D shareholders, all necessary action to fix the
number of authorized Class D shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class D shares as the Distributor may
reasonably be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be
8
<PAGE>
obligated to sell any specific number of Class D shares. The services of the
Distributor to the Fund hereunder are not to be deemed exclusive and nothing
herein contained shall prevent the Distributor from entering into like
arrangements with other investment companies so long as the performance of its
obligations hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
9
<PAGE>
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class D shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class D shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class D shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class D shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class D
shareholders (including but not limited to the expense of setting in type any
such registration statements,
10
<PAGE>
prospectuses, statements of additional information, annual or interim reports or
proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class D shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class D shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder in connection with account maintenance
activities may be paid from amounts recovered by it from the Fund under such
plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of quali-
11
<PAGE>
fying the Fund as a broker or dealer in such states of the United States or
other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5(c) hereof and the cost and expenses payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class D shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such
12
<PAGE>
controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or
13
<PAGE>
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 of any additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Directors in
connection with the issuance or sale of any of the Class D shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Fund in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class D shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity may
be sought against
14
<PAGE>
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. Merrill Lynch Mutual Fund Adviser Program. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
shall become effective as of the date first above written and shall remain in
force until August __, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority
15
<PAGE>
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 12. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. 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.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MERRILL LYNCH DEVELOPING CAPITAL MARKET
FUNDS, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Developing Capital Markets Fund, Inc., a Maryland
corporation (the "Fund"), pursuant to which it acts as the distributor for the
sale of Class D shares of common stock, par value $0.10 per share (herein
referred to as "Class D shares"), of the Fund and as such has the right to
distribute Class D shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of 1940, as
amended, and its Class D shares being offered to the public are registered under
the Securities Act of 1933, as amended. You have received a copy of the Class D
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Fund and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission which is part
of the most recent effective registration statement pursuant to the Securities
Act of 1933, as amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class D shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Fund,
to participants in such program.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5 hereof and
instructions which we or the Fund shall forward from time to time to you. All
1
<PAGE>
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
3. The sales charges for sales to the public, computed as percentages
of the public offering price and the amount invested, and the related discount
to Selected Dealers are as follows:
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------ -------------- ---------- -----------
Less than $10,000 ........... 5.25% 5.54% 5.00%
$10,000 but less
than $25,000 ............... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000 ............... 4.75% 4.99% 4.50%
$50,000 but less
than $100,000 .............. 4.00% 4.17% 3.75%
$100,000 but less
than $250,000 .............. 3.00% 3.09% 2.75%
$250,000 but less
than $1,000,000 ............ 2.00% 2.04% 1.80%
$1,000,000 and over** ....... 0.75% 0.76% 0.65%
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as set
forth in the current Prospectus and Statement of Additional Information.
2
<PAGE>
The term "purchase" refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing Class D shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class D shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class D shares of the Fund or Class D shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase Class D
shares of the Fund at the offering price applicable to the total of (a) the
public offering price of the shares then being purchased plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of Class A, Class B, Class C and Class D shares of
the Fund and of any other investment company with an initial sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$10,000 or more of Class A shares or of Class D shares of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention may
be included under a subsequent letter executed within 90 days of such purchase
if the Distributor is informed in writing of this intent within such 90-day
period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant to
the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
3
<PAGE>
4. You shall not place orders for any of the Class D shares unless you
have already received purchase orders for such Class D shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class D shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class D shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class D shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
7. If any Class D shares sold to you under the terms of this Agreement
are repurchased by the Fund or by us for the account of the Fund or are tendered
for redemption within seven business days after the date of the confirmation of
the original purchase by you, it is agreed that you shall forfeit your right to,
and refund to us, any discount received by you on such Class D shares.
8. No person is authorized to make any representations concerning Class
D shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class D shares
through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no
4
<PAGE>
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.
9. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class D shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class D shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class D
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
5
<PAGE>
15. Your first order placed pursuant to this Agreement for the purchase
of Class D shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By__________________________________
(Authorized Signature)
Please return one signed copy of this agreement to:
[MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
P.O. Box 9011
Princeton, New Jersey 08543-9011]
Accepted:
Firm Name: [Merrill Lynch, Pierce, Fenner & Smith Inc.]
By:____________________________________________________
Address: [800 Scudders Mill Road]
[Plainsboro, New Jersey 08536]
Date:_________________, 1994
6
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Developing Capital Markets Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 8 to
Registration Statement No. 33-28248 of our report dated July 29, 1994
appearing in the Statement of Additional Information, which is a part of
such Registration Statement, and to the reference to us under the caption
"Consolidated Financial Highlights" appearing in the Prospectus, which
also is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 12, 1994
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 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 is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class C
shares of common stock, par value $0.10 per share (the "Class C shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters
<PAGE>
into related agreements pursuant to Paragraph 3 hereof ("Sub-Agreements") for
providing account maintenance activities with respect to Class C shareholders of
the Fund. Expenditures under the Plan may consist of payments to financial
consultants for maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such account
maintenance activities including the costs of making services available to
shareholders including assistance in connection with inquiries related to
shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of .75% of average daily net assets of the Fund
relating to Class C shares to compensate MLFD and securities firms with which
MLFD enters into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will relate to the sale,
promotion and marketing of the Class C shares of the Fund. Such expenditures may
consist of sales commissions to financial consultants for selling Class C shares
of the Fund, compensation, sales incentives and payments to sales and marketing
personnel, and the payment of expenses incurred in its sales and promotional
activities, including advertising expenditures related to the Fund and the costs
of preparing and distributing promotional materials. The distribution fee may
also be used to pay the financing costs of carrying the unreimbursed
expenditures described in this Paragraph 2. Payment of the distribution fee
described in this Paragraph 2 shall be subject to any limitations set forth in
any applicable regulation of the National Association of Securities Dealers,
Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
2
<PAGE>
5. This Plan shall not take effect until it has been approved by a vote
of at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class C voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of
payments provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class C
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 4 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
3
<PAGE>
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_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 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. Maryland corporation (the "Fund"),
pursuant to which it acts as the exclusive distributor for the sale of Class C
shares of common stock, par value $0.10 per share (the "Class C shares"), of the
Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a distribution fee from the
Fund at the annual rate of .75% of average daily net assets of the Fund relating
to Class C shares for providing sales and promotional activities and services
related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class C shares of the Fund and incur expenditures
in connection with such activities and services of the types referred to in
Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities
and services with respect to the sale of the Class C shares of the Fund, and
incur distribution expenditures, of the types referred to in Paragraph 2 of the
Plan.
<PAGE>
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 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 is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class D
shares of common stock, par value $0.10 per share (the "Class D shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class D shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities with
<PAGE>
respect to Class D shareholders of the Fund. Expenditures under the Plan may
consist of payments to financial consultants for maintaining accounts in
connection with Class D shares of the Fund and payment of expenses incurred in
connection with such account maintenance activities including the costs of
making services available to shareholders including assistance in connection
with inquiries related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote
of at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class D voting
securities of the Fund.
2
<PAGE>
8. The Plan may not be amended to increase materially the rate of
payments provided for in Paragraph 1 hereof unless such amendment is approved by
at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund, and by the Directors of the
Fund in the manner provided for in Paragraph 5 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for approval
and annual renewal in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
10. The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Paragraph 3 hereof, for a period of
not less than six years from the date of the Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 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 D
shares of common stock, par value $0.10 per share (the "Class D shares"), of the
Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement,
MLFD shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the fee
during such period referred to in Paragraph 3 of the Plan.
<PAGE>
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
2
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000849402
<NAME> MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-30-1994
<PERIOD-START> JUL-01-1993
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 397619542
<INVESTMENTS-AT-VALUE> 400343930
<RECEIVABLES> 2241399
<ASSETS-OTHER> 3073380
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 405658709
<PAYABLE-FOR-SECURITIES> 1925708
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1737254
<TOTAL-LIABILITIES> 3662962
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 368260858
<SHARES-COMMON-STOCK> 27513862
<SHARES-COMMON-PRIOR> 12243485
<ACCUMULATED-NII-CURRENT> 564507
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 30521564
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2648818
<NET-ASSETS> 401995747
<DIVIDEND-INCOME> 5002484
<INTEREST-INCOME> 1111136
<OTHER-INCOME> 2509
<EXPENSES-NET> 4427808
<NET-INVESTMENT-INCOME> 1688321
<REALIZED-GAINS-CURRENT> 36390093
<APPREC-INCREASE-CURRENT> (12637885)
<NET-CHANGE-FROM-OPS> 25440529
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 902496
<DISTRIBUTIONS-OF-GAINS> 4808440
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20121319
<NUMBER-OF-SHARES-REDEEMED> 5183789
<SHARES-REINVESTED> 332847
<NET-CHANGE-IN-ASSETS> 259711003
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1060089)
<OVERDISTRIB-NII-PRIOR> 221318
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3033147
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4427808
<AVERAGE-NET-ASSETS> 303314712
<PER-SHARE-NAV-BEGIN> 11.62
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> 3.23
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.61
<EXPENSE-RATIO> 1.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
